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Foundations of Financial Analysis in hospitality industry

This article presents some of the fundamental accounting concepts and methods of financial
analysis that will be used throughout the book and also throughout the career of any
hospitality manager. These are not only fundamental accounting concepts but important
management tools used to operate a business on a daily basis.
The concepts and terms are explained in a direct and fundamental way. The typical
detailed and complicated accounting explanations are missing because they will do no
good if they are not understood. The information in this article will form a solid financial
foundation, one that will enable students to expand in terms of knowledge and application
as they work through problems and deal with business situations. It will focus on
hospitality industry operations, but the methods of financial analysis presented are useful
and applicable to any business operation.
Methods of Financial Analysis
Analyzing financial reports and statements requires a fundamental understanding of
where numbers come from, how they are organized and presented, what they mean, what
they measure, and how they are used. This section discusses two concepts of working with
numbers to analyze financial statements.
Two Important Tools
First, we will talk about two important ways numbers are used in business. They are used
to measure financial performance and to provide a management tool to use in operating
the business.
To Measure Financial Performance
Numbers provide a way to determine how a business is performing. Measuring financial
performance is historical in nature and uses the actual numbers or results from business
operations. It tells us what the business has produced, and it compares and evaluates that
performance to specific measures. It is looking back through the rearview mirror at operations.
The three main financial statements are all used in measuring financial performance.
The Profit and Loss (P&L) Statement shows the revenues, expenses, and profits for a
specified time period. Each month, accounting period, quarter, or year, the numbers produced
by an operation are recorded in the P&L statement and tell whether the business
revenue and profits are improving, declining, or staying the same.
The Balance Sheet shows the assets, liabilities, and owner equity of a business at a
specific time. These numbers tell us whether the business is getting financially stronger
by increasing assets or owner equity or if it is struggling and increasing liabilities. The
numbers also tell us how the business is capitalized or started—with more debt than
owner equity or with more owner equity than debt.
The Statement of Cash Flows shows how much cash is generated by a business and
how effectively it is used in operating the business over a specified time period. Cash and
liquidity are critical to the success of a business, and the numbers included in the Statement
of Cash Flows tells us how cash is being acquired and used.
To Provide a Management Tool
Numbers provide a way for managers to plan for varying levels of business volume. This
can take the form of forecasting revenues, scheduling wages, implementing cost controls,
expanding business operations, or preparing the annual budget. Numbers give managers
feedback on their operations and then assist them in making appropriate changes.
This aspect of using numbers is very valuable to a business because it is the process
of taking the information numbers provided and applying them back to operating the
The Financial Management Cycle
Second is the Financial Management Cycle. It is important to understand this process and
how numbers are generated and used in business operations. This cycle deals with the
flow and use of numbers in business operations.
1. Operations produce the numbers. All the activities involved in the daily operations
produce the numbers that measure performance. In a hotel, the daily operations
provide products and services to guests, including the rooms department, food and
beverage outlets, gift shop, and any other department that produces a sales transaction
with a guest. Numbers used in financial analysis have to come from somewhere,
and that is the daily operation of the business.
2. Accounting prepares the numbers and provides financial reports and statements. At the
end of the day, week, or month, the numbers resulting from all operations and activities
are collected, summarized, and reported by the accounting department. These
reports describe the operations and activities and are distributed to the appropriate
managers for their review and use.
3. Accounting and operations analyze the numbers. Operations management and accounting
management work together to review and analyze the reports. They look for
changes, the cause of the change, and the result of the change to understand operations
and determine ways to change and improve. Together they have operational
experience and financial analysis experience and can identify any changes or
improvements that need to be made to ensure that productive operations continue.
4. Operations applies the numbers back to the business. After reviews and discussions, the
operations managers make any necessary changes to operations to correct or
improve them. The ability to analyze quickly and accurately and then make any
necessary changes is an important part of any business operation. It enables the
business to constantly improve by being more productive or creating more value
in the products and services that it provides.

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