The Slarak Safari hotel offers various hospitality services to its esteemed customers. The main services that it offers these individuals are housing and accommodation, which is offered by the rooms department. It also offers meals and drinks through its “food and beverage” department. The “others departments” offers small services that vary depending on the requirements of the customer. In general, the business aims at providing high-quality products and services to its customers.
Analysis of Liquidity of Business Based on the Statement of the Cash Flow
From the cash flow statements, the company had negative balances in YTD1, of $206,993 and also in YTD2 of $252,905. These deficits indicate that the company is having liquidity problems since it cannot easily access finances for use in its short-term expenses. The business has a positive operating cash flow, which indicates that it is generating finances from its daily activities. However, the business has high expenses in investments and activities and finance activities, which result in it having negative cash flow. To remedy this problem, the business should reduce its rate of investments. It should also restructure its bank loan so that it can reduce the amount that it is required to repay per day (Maher, Stickney, & Weil, 2011). Finally, it should reduce the dividends that it pays its shareholders. Therefore, shareholders and other stakeholders should prepare to earn low or no dividends in the short term so as to enable the business to survive through its current cash constraint.
Summary of Financial Position and Performance Achievements for Year 2.
When comparing net income between year and year 2, it increased from $309,944 to $508,753, which was a 64.14% increase. The Net Profit Margin for the business (a proportion of net income as a percentage of total revenue) was 2.48% in year 1 and 4.14% in year 2. In general, the increase in these percentages showed that the business was more efficient in year 2 than in year 1. However, a 4.14% share of revenues being the net income is low for a normal business.
The company should increase the share net income by eliminating all its non-essential expenses. In addition, it can also increase its sales from the “rooms department” since this section has high-profit margins for the company. When compared to other departments, rooms department contributes 65.69% of the revenue, while food and beverage department and other department contribute 27.21% and 7.1% respectively.
Sales Mix Percentage
The sales mix was shared by rooms division, food and beverage division, and other departments division. The share of revenue for the rooms division, food and beverage division, and other departments division were 65.69%, 27.21%, and 7.10% respectively. Accordingly, rooms division had the highest revenue contribution for the business. The share of expenses for the rooms division, food and beverage division, and other departments division were 18.92%, 20.33%, and 6.17% respectively. Therefore, room division also had the highest expense share of expenses. The room division is the most rewarding segment of the company since the share of revenue earned from this division is very high, at 65.69%, when compared to its share of expenses in terms of revenue, which is 18.92%. In the food and beverage segment, and the other departments segments the margins of revenue and expenses are almost similar. For the food and beverage segment, the percentage of revenue that it contributes is 27.21% and its share of expense in terms of revenue is 20.33%. In the other department segment, its revenue contribution is 7.10% and the expense as a share of revenue is 6.17%.
In terms of sales mix, Slarak Safari should increase the portion that is assigned to departments that have largest contributions to revenue and profit. Since the room’s department has the highest contribution in terms of revenue and profits, Slarak Safari should ensure that this department has the highest sales. The second highest sales should be from the “food and beverage department” since it has the second highest contribution. The least share in the sales mix should be for “other department” since this segment has the least contribution (Wild, Shaw & Chiappetta, 2010).
Divisional Sales Revenue
The share of revenue from the “rooms department” is 65.69%, the sales revenue for “food and beverage” share is 27.21%, and the share of revenue of “other departments” is 7.1%. From the shares, the “rooms division” is the main contributor. The second major contributor is “food and beverage”, and the last is the “other departments” segment. The “room’s department” segment share of divisional sales as a percentage of expenses is 18.92%. The “food and beverage” segment expenses as a share of revenue is 20.33%. The “other departments” share segment is 6.17%.
In terms of divisional revenue, the business should increase the share of revenue earned from “food and beverage” and “other departments” segments. The company has a high overdependence on the “room” department, which is risky. In order to spread the business risk, the company should increase the revenue earned from the aforementioned segments (Kieso, Weygandt, & Warfield, 2016).
Controllable Operating Expense
In year 2, the controllable room expense were $2,325,346, while in year 1 they were $2,622,411. The controllable room expense decreased by $297,065 during this period, which was an 11.33% decrease. The food and beverage expense increased by $14020 from $2,484,689 in year 1 to $2,498,709 in year 2. This was an increase of 0.56%. The “other departments” segment had a decrease of $104,446 that was a reduction from $862, 308 to $757,862. This was a decrease of 12.11%. In the undistributed expenses, there was a 10.13% decrease in marketing and sales expense, which declined from $1,725,288 in year 1 to $1,550,460 in year 2. The administrative and general segment had an increase of 1.35%. In this segment, expenses increased from $1,757,148 in year 1 to $1,780,879 in year 2. Finally, the property, operations, and maintenance segment had a decline of 5.71%, which was a decline from $469,437 in year 1 to $442,626 in year 2.
In the management fee segment, the base management fee declined from $250,350 in year 1 to $245,829 in year 2, which was a 1.81% decline. The managerial incentive fee increased from $181,735 in year 1 to $205,457 in year 2, which was a 13.05% increase. The controllable expenses for room department as a share of total revenue was 18.92%. The share of the “food and beverage” department is 20.33%, while that of “other” departments is 6.17%.
The business should reduce the share of expensed incurred in the food and beverage department and also in the “other department” segment. The departmental expenses were 20.33% and 6.17% for “food and beverage” departments and “other departments” segment. The “marketing and sales” expense was $1,550,460 in year 2, which was a reduction from the previous year 1 that was $1,725,288. Since the reduction in marketing was accompanied by a reduction in sales, the business should increase this expense so that it can have more revenues (Weydandt, Kimmel, & Kieso, 2015).
Gross Operating Profit
The gross operating profit for year 2 was 23.88%. It is calculated by dividing total income by total revenue (2,935,107/12,290,988= 5.52%). In year one, the business had a gross operating profit of 20.74% while in year two it was 23.88%. The gross operating profit rose from $2,596,221 in year one to $2,935,107 in year two. Since year 2 had less revenues than year 1, the increase in the gross operating profit indicated increased efficiency and on the part of the business. In particular, the total undistributed expenses reduced from $3,773,965 in year 2 to $3,951,873 in year 1. The departmental expenses reduced from $5,969,408 in year 1 to $5,581,917 in year 2. During this period, the revenues decreased from $12,517,502 in year 1 to $12,290,988 in year 2. The decline in expenses was greater than that of revenues.
The marketing and sales expenses reduced by 10.13% from $1,725,288 in year 1 to $1,550,460 in year 2. In general, the expenses reduced due to increased efficiency by the company. However, this reduction in expense led to a reduction in total revenue earned by the business. Therefore, the business should increase this cost since a reduction in sales and marketing leads to a reduction in total revenue earned by the business.
Administrative and General
The administrative and general expense in year 2 increased from $1,725,288 in year 1 to $1,780,879 in year 2. This was an increase of 1.35%. Since the increase occurred at a time when the business revenue was decreasing, there was some level of inefficiency in this department. In this regard, the business should find more efficient methods for its administrative and general expense department.
Property Operations and Maintenance
The property and operations and maintenance expense reduced from $469,437 in year 1 to $442,626 in year 2. This reduction represented a decline of 5.71% for this department. Accordingly, this reduction showed an increase in efficiency for the business. To elaborate, despite the reduction in revenue, the business still increased its profits during this period.
To sum up, the management of a company must implement innovative ways of ensuring that it increases its remains efficient so that it can be able to make maximum profits. In particular, the business should ensure that it controls its expenses by using proper accounting methods. In addition, the company must also develop appropriate sales mix that will enable it to make maximum profits. Generally, this process entails the company identifying the products that have to contribute the highest revenues and those with the least cost. Using these values, a business can be able to identify the products which have the highest level of contributions and priorities them in the sales process. The formation of an appropriate sales mix will enable the business to make maximum profits.
Kieso, D., Weygandt, J., and Warfield, T. (2016) Intermediate accounting (16th Ed.) Hoboken, NJ: Wiley.
Maher, M., Stickney, C., and Weil, R., (2011) Managerial accounting: An introduction to concepts, methods and uses (11th Ed.), New York, NY: South-Western College Publishers.
Weydandt, J., Kimmel, P., and Kieso, D., (2015) Accounting principles (12th Ed.), Hoboken, NJ: Wiley.
Wild, J., Shaw, K., and Chiappetta., B., (2010) Fundamental accounting principles (20th Ed.), New York, NY: McGraw-Hill.