Accounting helps people make better business decisions. Discuss.

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Accounting is the language of money that helps people make better business decisions.

Introduction

“Any difficult task seems easier if you break it down into manageable steps.” ―Claire B. May Gordon S. May

(http://www.goodreads.com/quotes/tag/accounting)

Accounting is a systematic recording of financial transactions pertaining to a business. Accounting also refersto the process of summarising, analysing and reporting these transactions. The financial statementsthat summarize a large company's operations, financial position and cash flows over a particular period are a concise summary of hundreds of thousands of financial transactions. (http://en.wikipedia.org/wiki/Accounting)

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Accounting is one of the key functions for any business; it may be handled by a bookkeeper and accountant at small firms or by finance departments with more number of employees at larger companies. (Needles, Belverd E.; Powers, Marian (2013)

The above paragraph is a definition of what accounting is. It is important to know what accounting is before evaluating the above given statement. In simple words, accounting is the systematic process of recording, analysing and summarising the financial transactions pertaining to a business.

The essay is divided into various parts, where in it discuss about how budgets, inventory, and yield management, helps the managers or supervisors to make better decisions. This will be explained by using relevant examples in the hotel industry!

Accounting helps people make better business decisions because, it is the only key to success for managers and supervisors to manage their, budgets, inventory and to maximise profits.

Budgeting

Now talking about budgeting, a budget is a quantitative expression of a plan for a definite period of time. It may include planned sales volumes, costs and expenses, assets, liabilities, cash flow etc. It expresses strategic plans of business units, activities or events in measureable terms. (http://en.wikipedia.org/wiki/Budget)

Considering the adverse economic conditions in today's business environment, the right decisions that have to be taken on the basis of "proper" information that have never been so important. Information needed for decision making lies in the domain of the management accounting system (MAS), which has to be appropriately developed and organized. Undoubtedly in the hotel industry the MAS differ substantially in comparison with other industries. Hotel enterprises have unique characteristics of their operations, as they bring together many activities that are essential for guest satisfaction.

Many authors emphasise that the hotel industry still does not have a properly developed MAS (Phillips 1999, Mia and Patiar 2001, Banker et al. 2000, Kavcic and Ivankovic 2006) that could provide useful information for decision making.

Budgeting, being a continuous process in the hotels. Questionnaires were distributed to top and middle management of hotel companies in Slovenia, i.e. middle-size and large hotels (with at least 100 rooms). The questionnaires were distributed at the beginning of the years 2004 and 2008, respectively. This study was designed to compare 2004 (as the year before the changes in the business environment occurred) and 2008 (as the year after major changes as a consequence of integration within the European Union occurred).

In 2004 the survey included, 52% of 4 star hotels, 38% of 3 star hotels, and 10% of 5 star hotels. The data from the year 2008 included 54% 4 star hotels, 38% 3 star hotels and 8% of 5 star hotels.

The results of the survey are as follows:

Results demonstrate that hotels with an already implemented long-term business strategy are more successful in comparison with those that have a short-term strategy, or are even without one.

Further, the results demonstrate that just a minority of Slovene hotels use standard costs for budgeting. Although an improvement in this field in the five-year period is noticeable. (Tourism and Hospitality Management, Vol. 17, No. 1, pp. 91-100, 2011 G. Ivankovii, M. Jerman)

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Using this example, it is understood that, budgeting and strategy planning in hotels, make it more successful. Thus the numbers were the ones which did the talking, which helped managers in the Slovenian hotels, to make better business decisions and in the improvement of the hotels and its businesses!

Inventory Management in hotels

The overseeing and controlling of the ordering, storage and use of components that a company will use in theproduction of the items it will sell as well as the overseeing and controlling of quantities of finished products for sale. A business's inventory is one of its major assets and represents an investment that is tied up until the item is sold or used in the production of an item that is sold. It also costs money to store, track and insure inventory. Inventories that are mismanaged can create significant financial problems for a business, whether the mismanagement results in an inventory glut or an inventory shortage.

(http://www.investopedia.com/terms/i/inventory-management.asp)

This is what inventory management is all about. Now let’s look at how inventory management is done in hotels and how it helps people in making better business decisions. The biggest inventory of a hotel is nothing but rooms.

Now let’s look at an example:

“M” hotel rooms are available at a date “n” periods from now. Reservations are made by customers for that date, which is at the peak of the high season. Typically, for such a time period, a policy of overbooking is exercised by the hotel management. Customers, however, may cancel their previously confirmed reservations at any time prior to their arrival, with no penalty. On the other hand, new requests for rooms for that particular date are generated anew. At the end of each period the hotel management reviews both the "inventory" level of remaining un- cancelled reservations and the total number of un- confirmed new requests. At that time a decision is made regarding the inventory level of confirmed reservations with which to start the next period. A decision is one of three actions:

  1. to keep the inventory at its present level (i.e., declining all new*requests)
  2. to increase the level of overbooking by confining some of the new requests and, if necessary, by trying to obtain some additional reservations (at some extra cost)
  3. to decrease the level of inventory by cancelling some of the previously confirmed reservations (incurring a penalty for each such cancellation)

Each occupied room on the target day carries a given profit while each un- honoured reservation at that time incurs a penalty. The problem is to find the optimal over-booking strategy that will maximize net profit.

(By: Steed, Emmett; Zheng GU. Journal ofRevenue& PricingManagement. Jan2005)

Yield Management

Yield management (Revenue Management in hotels)is avariable pricingstrategy, based on understanding, anticipating and influencingconsumerbehaviour in order to maximizerevenueorprofitsfrom a fixed, perishable resource (such asairline seatsor hotel room reservations or advertising inventory).

(Netessine, S. and R. Shumsky (2002))

As a specific, inventory-focused branch ofrevenue management, yield management involves strategic control of inventory to sell it to the right customer at the right time for the right price. Yield management is a large revenue generator for several major industries; Robert Crandall, former Chairman and CEO ofAmerican Airlines, gave Yield Management its name.

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(Cross, R. (1997) Revenue Management)

The revenue management concept has created a challenging environment and offering opportunities to the hotels to broaden their profit shares in the industry. Recent definition seeing revenue management as the application of information systems and pricing strategies to sell the right room to the right customer at the right time with the right price for the right length of stay (Buckhiester, 2007; Kimes & Wirtz, 2003).

Hotel corporate executives focus on room pricing in the annual budget process. Pricing decisions are needed throughout the year, however, when contract negotiations are made; when group contracts want to commit to a meeting, when select participants or when special discounts are needed to fill especially low occupancy periods. In other words, when hotel companies are preparing and reviewing annual budgets, many pricing decisions have already been made. The challenge, then, is to have an effective pricing process in place at all times which takes into account; customer needs, profits demands, brand integrity and macroeconomic factors. Based on the examination of hotel room pricing methods practised and/or proposed, a combination of the best models and ideas is recommended. The following concepts and approaches should work well together:

  1. Research the general market and competition. Identify property specific strengths.
  2. Calculate variable costs that include an allocation of undistributed expenses. No price should fall below this level.
  3. Segment markets and establish clear and logical fences for pricing strategies.
  4. Research what the guests of each market segment are willing to pay.
  5. Compare the quantitative model price results against the guest responses.
  6. Use revenue management in a way that does not confuse or alienate frequent guests.
  7. Use all these above mentioned techniques to set prices that are uniform across all distribution channels.

Until a broadly accepted pricing model or approach is found, the application of the seven recommended steps is likely to yield profitable room pricing.

(Che Ahmat, Nur'Hidayah; Radzi, SaIIeh Mohd; Mohd Zahari, Mohd Salehuddin; Muhammad, Rosmaliza; Aziz, Azdel Abdul; Ahmad, Nor Azmi. Journal of GlobalManagement. Jul2011)

Conclusion

Budgeting being a continuous process the in hotel industry, with the example of the hotels in Slovenia, based on the survey made; the outcome demonstrates that hotels with an already implemented long-term business strategy are more successful in comparison with those that have a short-term strategy, or are even without one.

The rooms in a hotel being a perishable commodity, the inventory management is of utmost importance in a hotel. It is the rooms which are the biggest revenue earners in a hotel. If a room is not sold for a particular night, the revenue to be earned for that particular night can never be earned. It is very important that a hotel closely looks at its inventory to better its performance in terms of sales.

Organising, planning and research of the market scenario, i.e. by selling the right room for the right person, for the right price, at the right time, for the right length of stay is the best and the probably the only way to maximise profits in a hotel.

This clearly evaluates the given statement, where in accountancy, through budgeting, inventory and revenue management has helped the hotels to make better improvements and profits in business. If there were no numbers to describe the position of the hotels, will it ever be possible to manage a hotel property in a better way? It is proved that it is highly impossible.

References:

  1. Bt trends – budgeting for guests
  1. Tourism and Hospitality Management, Vol. 17, No. 1, pp. 91-100, 2011 G. Ivankovii, M. Jerman: THE COMPARATIVE ANALYSIS OF BUDGETING IN THE SLOVENE HOTELS.
  1. Wikipedia for understanding the term budget.

http://en.wikipedia.org/wiki/Budget

  1. Investopedia.com for the definitions. http://www.investopedia.com/terms/i/inventory-management.asp
  1. .ON THEHOTELOVERBOOKING PROBLEM--ANINVENTORYSYSTEM WITH STOCHASTIC CANCELLATIONS.
  1. The "Killer Application" of RevenueManagement: Harrah's Cherokee Casino &Hotel.
  1. An examination ofhotelroom pricing methods: Practised and proposed. By: Steed, Emmett; Zheng Gu. Journal ofRevenue& PricingManagement. Jan2005, Vol. 3 Issue 4, p369-379. 11p., Database: Business Source Complete
  1. THE EFFECT OF FACTORS INFLUENCING THE PERCEPTION OF PRICE FAIRNESS TOWARDS CUSTOMER RESPONSE BEHAVIORS. By: Che Ahmat, Nur'Hidayah; Radzi, SaIIeh Mohd; Mohd Zahari, Mohd Salehuddin; Muhammad, Rosmaliza; Aziz, Azdel Abdul; Ahmad, Nor Azmi. Journal of GlobalManagement. Jul2011, Vol. 2 Issue 1, p22-38. 16p., Database: Business Source Complete
  1. http://www.goodreads.com/quotes/tag/accounting
  1. Netessine, S. and R. Shumsky (2002), "Introduction to the Theory and Practice of Yield Management"INFORMSTransactions on Education, Vol. 3, No. 1
  1. Cross, R. (1997) Revenue Management: Hard-Core Tactics for Market Domination. New York, NY: Broadway Books.
  1. "CIMA Official Terminilogy"
  1. Needles, Belverd E.; Powers, Marian (2013).Principles of Financial Accounting. Financial Accounting Series (12 ed.). Cengage Learning.