Managerial accounting techniques to help them thrive

Globally Hotels operators and managers are relying on managerial accounting techniques to help them thrive in the highly competitive and economy recession. The critical aspect of focusing on increasing revenue, minimise cost, align incentive to performance, maximise profits level without decline in the quality of services rendered by Hoteliers are becoming evolving issues in the hospitality industry.

The essence of this project is uncover how management accounting is use to provide specialised internal information to the Managers in Lagos Airport Hotel, Lagos Nigeria that are responsible for directing and controlling operations within the hotels. The types of information provided by management accounting information systems and how it help the management in their strategic planning (Short or Long term), measurement performance, attained the organisational strategic objectives of increasing the owners wealth.

SECTION 1-

DESCRIPTION OF COMPANY:

LAGOS AIRPORTS HOTELS LIMITED

Lagos Airport Hotel Limited, is a subsidiary of Odu’a Investment Company,The hotel began operation in 1942 under the ownership and management of Joseph Harold, a Brition . The hotel name was then Grand Hotel which was later changed Ikeja Arms was incorporated in 1961, having started business as an owner managed hotel with 5 rooms in 1942 under the name “Grand Hotel”, Lagos.with 5 rooms. It was renamed “Ikeja Arms Inn” in 1956 acqiured in 1959 by the Government of Western region of Nigeria comprises of Oyo, Ogun, Ondo, Osun and Ekiti States in 1959 and incorporated as Lagos Airport Hotel in 1961.

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As at today the hotels had grown from 5 rooms in 1942 to 277 rooms consist of of , presidential suites , Monarchical Suite, Executive Suites, Presidential Suites, Executive/Business Suites, Standard/Executive Double, six conference halls well-secured car parks, two international Restaurants four Bars and an Olympic-sized Swimming Pool.

The hotel under the leadership of Alhaji  Adebayo Jimoh , has over five hundred highly professional staff with additional two subsidiaries hotels namely Lafia Hotel and Premier Hotel Ibadan.

The hotel strategic vision is to be the preferred choice for customers in the Nigeria’s hospitality industry. and mission statement is to passionately deliver efficient and catering services at competitive and affordable prices. In Peat survey 2009 the Airport is rated among the best top hotels in Nigeria and among the first leading hospitality companies in Lagos State. is rated among the best top 20 hotels in Nigeria.

SECTION 2

COST BEHAVIOUR ANALYSIS

HOTEL BUSINESS OPERATION AND COST BEHAVIOUR ANALYSIS

HOTEL ACCOUNTING STRUCTURE AND LAGOS AIRPORT HOTEL EXPERIENCE

The hotel business operation globally is characterised with a number of different cyclical sales revenue cycles which includes daily operating cycle, weekly , seasional cycle and general business cycle(Reccession). The Lagos airport hotels is not expempted from the above cyclical business patterned. Significantly, these various cyclical operation in hotel create a unique difficulties in forecasting revenue and cost.

Secondly , hospitality operation are “People oriented and people- driven”, it is more difficult to effectively automate and control cost than it is on other non hospitality business sector

2.1 COST BEHAVIOUR AND ANALYSIS

Lagos Airport Hotel operations tend to be highly departimised with separate operating division/unit that provide accommodation/lodging, Restaurants & Bar services, Conference & Banquest, Etc . Consequently the hotel accounting systems are designed to allow an independent evaluation of each operating department or division.

To this end, cost directly traceable to a department are identified as direct cost, typically major direct cost in hotels includes cost of sales(foods &drinks), salary &wages, operating supplies e.g Soap, Toilet tissue paper etc . After direct costs are determined they are deducted from revenue to isolate contributory income which represent the dept’s or division contribution to support undistributed general overheads.

As in their practice indirect cost are not easily traceable to a department and referred to as “undistributed costs”

One of the arguments in favour of allocating indirect expenses to department is that aithough department managers are not responsible for controlling those costs, they should be aware of what portion of them is related to their department since this could have an impact on departmental decision making such as establishing room rates, foods and other service selling prices at a level that covers all costs not just direct cost.

When this type of Full -cost accounting is implemented in a responsibility accounting system , it allows a manager to know the total minimum revenue that must be generated to cover all costs even though the control of some of those costs is not their responsility.

Nevertheless there are mistake as regard the direct costs, controllable costs, indirect costs and non controllable cost. The assertion that say direct costs are generally more easily controlled than indirect costs but (Salome 2009) argued that “in the long run all costs are controllable by someone at sometimes”

2.2 RELEVANT & NON RELEVANT COST CONCEPT AND APPLICATION IN HOTEL

The theory of relevant and non relevant cost is widely used in hospitality cost management( ) the application is use for variety of decision making.

A relevant cost is one that affect decision and such a cost must be in the future and different between alternatives. For example The Lagos airport is considering to introduce online booking with ATM Payment portal, the relevant cost would be the cost of web solution, ATM Machine, the cost of training employees on the new solutions and any change in maintenance and material supply costs on the new solution/machine. As long as no change is necessary in the number of staff required, the hotel labor cost would not be relevant cost and it would make no difference to the decision

On cost behaviour Most hotels have a high proportion of fixed cost which are not expected to change in the short run of an operating period og a year or less and will not vary with increases or decrease in sales revenue, examples are management salaries, insurance or committed cost of an advertising campaign ,So this type of costs are not relevant for decision making

Variable cost on the hand change in direct proportion to a change in sales revenue for example the more foods and drink sold, the more cost of sales incurred

The usefulness of relevant cost , non relevant cost, fixed , variable, sunk cost etc in hotel business help the managers in making the following types of decision

Allocation of indirect costs to revenue unit/dept

Which types of equipment should they buy

Whether to sell below total cost?

Whether hotel should be close during off season? As the cost of low -activity characterises hotel sectors

Which investment/business should they buy

Make or buy decision making

Alot more

In the airport hotel activity -based costing is not broadly used while target costing has squat adoption level. But standard costing is most popular costing used in the hotel

2.3 MANAGEMENT ACCOUNTING SYSTEM AND DECISION MAKING IN HOTEL – A RELATIVE ILLUSTRATIVE STUDY OF LAGOS AIRPORT HOTEL

The business success of the business depends to a very large extent upon the capacity of top management to develop the appropriate strategies in a number of issues which conform to the business corporate strategic goals

The hotels have typically diverse level of decision making. Management at each level takes decision that are within its capability and responsibility

For each level of decision making management accounting system has been found to provide appropriates information required for management decision making.

To be specific the management accounting information system was found to be helpful to the hotel management to formulate and execute

Strategies concerned with volume and capacity

Strategies for assessing the relative profitability of division/ department or revenue area

Strategies for pricing in condition of hotel space capacity

Strategies for selecting product/service range where there are capacity or other constraints.

Marginal costing is used by the hotels for cost structure and pricing decision. The marginal costing is mainly used for short-term planning, while activity based costing is the favoured costing method for long term strategic planning.

The cost -volume -profit approach to decision (e.g Breakeven analysis) are widely produces to assist management in decision making . this assist them in evaluating current and future events regarding sales revenue inflow and cost outflow

Cost volume profit analysis(CVP) cost are separated into variable and fixed componenets. They are then used to make informed and rational decision

TABLE – SHOWING Break even sales

Break even sales equitation for Loding unit for 2009(See Financal hilghlight week6 project outline)

The fixed costs(FC) are N197,702 , sales revenue N568,900 and variable cost (VC) are N63,968 .what is breakeven sales revenue?

The break even point(BEP)

= Fixed cost

(Sales revenue – Variable cost)

= 197,702

(2053-230)

BEP = 108 Rooms per day.

Fig2: Break even revenue

FC / 1-(variable cost/sales revenue)

197702/ 1- (N63,968/N568,900)

197,702/88.7% = N222,888

CVP analysis is a logical extension of breakeven analysis in hotels business it is used to make the following decision among others.

At what level of sales revenue will operating income be TARTGETD INcme may be 700,000,000

How much must sales revenue increase to cover a new fixed cost

If room rates are changes, what will be the effect on rooms sold?

Whether to give bulk discounts or not?

New investment decision

SECTION 3

BUDGETING PROCESSING REVIEW

BUDGETING AND BUDGETARY PROCESS OVERVIEW IN HOTEL INDUSTRY

The objectives of organisation will be faciliatated by the implementation of an efficient budgeting, this because the whole essence of budgeting is to ensure that the allocation of resources is palnned to avoid waste and promote profitability

For hotel managers to make meaningful decision about future, a manager must look ahead(Budget) Antril. P & Mclaney.E (2009)

Martin & Micheal (2004) argued that for hotel or restaurant operators or manger the budget might be no more than looking ahead to tomorrow, estimating how many guests per night , estimating how many customers will eat in the restaurant etc

Budgets not expressed in monetary terms could involve numbers of guest to be served, number of rooms to be occupied, number of employees required, or some other unit as opposed to monetary value

Agara(2007), Martin& Micheal (2004) identified the three main purposes of budgeting in hotels business

To provide organised estimates of future unit sales, sales revenues, expenses, net income, staffing requirements or equipment needs, broken down by operating period and department

To provide management with long-term and short term goals.

To provide a method of control so that actual results can be evaluated against budget plans and adjustments, if necessary can be made

The budgetary cycle or process is a five part process that involved the follows

Establish attainable goals or objective

Plan to achieve these goals or objectives

Compare actual results with those planned , and analyse the difference(variance)

Take corrective action required

Improve the effectiveness of budgeting

The starting point in budgeting is to forecast sales revenue, in hotel operation in forecasting the mnager usually considered past actual sales revenue and trends, current anticipated trends and the economic, competitive and limiting factors.

Once the sales revenue had been forecast, direct operating expenses can be calculated based on anticipated sales level and undistributed expenses allocated or deducted to arrive at the net income.

The various types of budgets include fixed, flecible, capital budget, operating , departmental,master budget etc

Zero based budgeting (ZBB) this budget is found useful for controlling and controlling hotel operation, as the name implies no expenses can be budgeted for or incurred unless they are jusitified in advance. ZBB requires each department head to jusitify in advance the entire annual budget froma zero base. The department manager responsible for the cost prepare the analysis. After each department or division is anakysed , management ranks all decision unit and the final budget is allocated according to this ranking

The variance analysis is useful tools for budgetary control as it is used for isolating the cause of difference between budgeted and actual figures.

SECTION 4:

FIRM PERFORMANCE ANALYSIS4.0 LAGOS AIRPORT HOTELS FINANCIAL STATEMENT AND PERFORMANCE ANALYSIS

The financial report present merely a stewardship report . if the information is to have real meaning both to the management and other users of the report, it must be subjected to a process of analysis and interpretation.

To do this, various stastics yardstick or analytical tools like ration analysis, comparative analysis, common size vertical analyisi , trend analysis/ percentage can be used.

Ratio analysis is concerning with expressing relationship between inputs and output, the objective of ratio analysis is to construct a framework of such relationship which are important for the success of the company.

One part of this framework bring together all these aspect of the business which contribute to profitability both fot the company and owners, another part of the framework assesses the liquidity of the hotel, the remaining part reflect the hotel’s standing or viability for the future.

Table : Lagos Airport Hotel financial performance Anaysis for 5 years

2009

2008

2007

2006

2005

Profitability Ratio

Gross profit Ratio or Margin

63.5%

46.5%

51.8%

68%

67.6

Net profit ratio or margin

17.2%

1.3%

4.3%

17.4%

15.7%

Return on Capital employed

63.7%

3.9%

12.3%

43.1%

61.1%

Liquidity / Investment Ratio

Current Ratio

1.2:1

1.3:1

1.34:1

1.37:1

2.05:1

Gearing Ratio

103%

91.4%

91.7%

93.5

49%

Total Debt to shareholder fund

193%

169%

171%

166%

156.8%

Earning per share

2.47

0.14

0.42

1.5

1.25

Comments:

Gross profit ratio which indicates the gross margin on sales in a period is steadly show a sign of improved 2009 from downward slope that occurred between 2008 & 2007, however the gross profit ratio needs improvement

The net income ratio and return on capital which indicates a relative efficiency of the hotels business and overall profitability of the business is worrisome even with 17.3% for net return 63.7 ROCE for 2009 the performance is still far below expected returns level and it glaring that the hotel has been performance in term of profitability badly. For the hotel to remain operation for the nearest features it must be profitable and liquid. The strategy to adopt here is for the hotel’s managemenet to reduce its operational cost, improve revenue per guests,rates of occupany and innovate a new products or service that can improve revenue and profitability stream.

The liquidity position of the hotel is far below ratio 2:1 recomended for healthy company, liquidity ratio measure the ability of a firm to meet its short -term obligations and reflect short term financial strength of the firm while the gearing ratio is extremely high as the company operation is funded from debts and depend on borrowed fund for expansion which is very vulerabilty to earning of shareholders and poses a possibility of take -over or bankcruptcy.

The overall trend analysis for the hotel(see apendix2) provides uselful insight into some of the factors that might contributed to this aweful financial position

Interestingly, many individual operating ration are specifically available for hospitality industries which focus on internal operation like rooms/accommodation, Foods & Beverage analysis and decision making. Some of these analysis includes but not limited to income per guests for each division, costs per guest by items, foods and or beverage cost percentage, labor cost percentage average foods or beverage dollar/Naira by meals period and by revenue areas, seat turnover by meals period etc

In the rooms or lodgimg division average rate per occupied room, revenue per available room (REVPAR) , Occupancy percentage, annual revenue per room, labour cost percentage etc

The internal analysis of the above influenced the management decision making in term of improve sales level, directing efforts into selling higher priced rooms rather than lower priced, increasing rate of occupancy percentage or average room rate.

On the impact of success critical factor(CSF) on the financial performance, the monetary indicators, grosss operating profit per available room was used

SECTION 5 : CAPITAL INVESTMENT ANALYSIS

5.0 CAPITAL BUDGETING TECHNIQUES IN HOTEL INDUSTRY

The largest investment that hotel or food seervice business has to make is in the land and building (Martin& Micheal 2004) . The hotels management also make frequent investment decision for items such as equipment, furniture purchases and replacement. Due to elongated life time and colossal of capital outlays entail for capital investment, management espoused a more pragmatic approach and use appropriate capital investment control methodology to ensure right capital investment decision making

There are hazard in making capital investment, the hazards can be seldom be eliminated but there are techniques available that allow the manager to reduce some of the quesswork

The Lagos Airport hotels use Payback period and net present value, rn as a tools to guide investment decision

A Case study of capital investment decision making in Lagos Airport Hotel

A typical capital investment decision techniques is the Lagos airport hotel was contemplating of improve the restaurant services and planning to purchase a new type of oven and other modern kitchen apparatus. Or invest in Cinema or Casio Opertaion The hotel management is provided with two alternative investment option to choose from with their annual net cash inflows over the five -year investment period

Year

Otption1- Restaurant Improvement

Option2- New Cinema &Casio Centre

1

1,200,000

630,000

2

1,290,000

870,000

3

1,320,000

1,275,000

4

1,230,000

1,725,000

5

615,000

1,815,000

The initial investment outlay of N4,950,000

NPV is at 12%, Would either of them be a good investment for the hotel?

Solution

Option 1 -Restaurant improvement

Net cash flows

Cumulative net cash flows

Year 0

Cost investment

(4,950,000)

(4,950,000)

Year1

Net Saving

1,200,000

(3,750,000) (-4,950,000 + 1,200,000)

Year 2

Net saving before Dep

1,290,000

(2,460,000) (-3,750,000 +1,290,000)

Year 3

Net saving before Dep

1,320,000

(1,140,000 ) (-2,460,000+ 1,320,000)

Year4

Net saving before Dep

1,230,000

90,000 (-1,140,000 +1,230,000)

Year5

Net saving before Dep

615,000

705,000 ( 90,000+ 615,000)

Option 1 Payback period = 3 years, 11 months plus 4 days

Option 2 -New Cinema & CASINO CENTRE

Net cash flows

Cumulative net cash flows

Year 0

Cost investment

(4,950,000)

(4,950,000)

Year1

Net Saving before Dep

630,000

(4,320,000) (-4,950,000 + 630,000)

Year 2

Net saving before Dep

870,000

(3,450,000) (-4,320,000 +870,000)

Year 3

Net saving before Dep

1,275,000

(2,175,000 ) (-3,450,000+ 1,275,000)

Year4

Net saving before Dep

1,725,000

(450,000) (-2,175,000 +1,725,000)

Year5

Net saving before Dep

1,815,000

1,365,000 ( -450,000+ 1,815,000)

Option 2 Payback period = 4 years, 3 months

The analysis above showed option 1 have a shorter pay back period and logic of using pay back period is that projects that can recoup their cost quickly are economically more attractive than those with longer payback(Antrill & Mclaney 2009) so Option 1 is to be selected based on pay period methods.

The major drawback o9f pay back period is that it ignore cash flow after the payback period and it does not take time value of money(Effect of inflation/ interest /risk etc) into consideration

NET PRESENT VALUE(NPV)

Net present value methods of appraisal consider all of the costs and benefits of each investment opportunity and make a logical allowance for the timing of those costs and benefits

The NPV is consider better among all other investment appraisal techniques because of cashflow timming recognition, uses of all relevant cash flow and meet the objective of the business which to increase owners’ wealth

LAGOS AIRPORT HOTEL USING NPV METHOD

OPTION1 -Restaurant Improvement

NPV

Option 2 – New Cinema & Casino centre

Time

Cash flow

N

NPV (12%)

Cash flow

N

NPV

Year0

(4,950,000)

(4,950,00)

(4,950,000)

(4,950,00)

Year1

1,200,000

0.8929

1,071,480

630,000

562,527

Year 2

1,290,000

0.7972

1,028,388

870,000

693,564

Year 3

1,320,000

0.7118

939,575

1,275,000

907,545

Year 4

1,230,000

0.6355

781,665

1,725,000

1,096,238

Year 5

615,000

0.5066

311,559

1,815,000

919,479

-817,333

-770,647

Here we must ask how can management decide which option or project is acceptable, judging by NPV decision which stated that

If the NPV is positive the project should be accepted, if it is negative the project should be rejected

If there are two (or more) competing projects/options that have positive NPVs, the project with higher (or highest) should be selected.

In this case of Lagos Airport hotel non of the two option is Negative and it should be rejected unless management has other non financial benefits attached with options which may still at long run contribute to the actualisation of the hotels strategic goals.

SECTION 6:

COMPETITIVE ANALYSIS

COMPETITIVE ANALYSIS

As usual for business environment in the hotel industry is a highly competitvive, and Lagos Hotels Limited found itself in a such competitive based marketing segment with more than 5000 operators in the market. Significantly the hotels has the followings 7 majors/ market leaders to complete with

Sheraton Hotels & Tower, Pretoria Hotels, Federal Palace Hotels, Lagos Hilton Hotel, Excellence Hotel, PVC Hotels and Reassurance Hotels

The core keys advantages of competitors in Comparism with Lagos airport range from their location advantage(Most of them located in Victoria and ikoyi areas of Lagos that accommodation the major businesses in Nigeria) International Operations advantage, 21st century well designed architectural building , modern facilities & luxury, Branding, high Price advantages, innovation program (Customer Loyalty Program) etc

The major advantages of Lagos airport is strategic location in the ikeja but with old building structures

Next to Lagos is Victoria Island, which takes while to get to, about 2hrs, this is because of the amount of traffic and chaos on the roads, also some of the roads are in a bit of a mess, pot holes that can swallow you without trace. Victoria island is modern, and the Hotel Eco is very good, but costs £250 GBP per night – note the Sheraton in Lagos is also modern and costs £300-350 per night, bottled water in the Eco was £4, but if you are spending £250 a night – who cares, you must keep drinking water in this heat. These hotels do cost more than a London Hotel, but then there is no where else decent apart from Lagos Airport Hotel. Note the Airport Hotel was £100 per night, I booked at the desk where ther is a written price sheet on the wall, you will have to put down a security deposit but you do get this back at the end of your stay.

SECTION 7: BALANCED SCORECARD

APPLICATION OF BALANCED SCORED CARD FRAMEWORK (A CASE STUDY OF LAGOS AIRPORT HOTEL)

Balanced scorecard as the name suggested offers a more balanced view of a firm’s or of a manager’s performance by intergrating both financial and non financial information in a coherent fashion .This overcomes one of the obvious defects of traditional performance measurement systems which places undue emphasis on historical financial information.

For long term – effective and efficient performance, especially in hotel enterprise, the information related to service quality, introduction of new products, service, additional supply, entrance on new market, the competitor performance and human capital relation management is vital.

Goardana & Mateja also empaciated the need for balanced score card application in hotel indsutry ” The hotel’s operations are oriented towards people and to that end their financial performance depends on the behaviour and manners of hotels employees, the development of new products and service and as the most important , guest satisfaction”

In Lagos airport hotel use it to implement strategies of a change/ restructing in management programme undergo in 2009

Apart from using it to create a link between the performance measurement indicators and hotel strategies, Management use it to communicate strategy to both managers and staff.

At operational level the Balance scored card are use to align employess efforts with those reuired for successful strategic implementation However, successful implementation of a balanced scorecard is not a trivial matters especially for hotels like Lagos Airport Hotels that is Government owned which make some top management appointment political in nature. Apart from this balanced scored concept is simple but it implementation is found to be time consuming and costly task especially to hotel like Lagos Airport with weak financial resources and manpower to support the practice of this new management concept in the longrun.

Table: Lagos Airport Hotel – Balanced scorecard

Hotel Management Balanced Scorecard

Managing the day to day activities of a hotel can be facilitated with the help of KPIs. KPIs, on a BSC are the means to attain the end of ‘Measuring Performance’. Such tool can be used when umpteen external and internal forces have a bearing on the organi

Perspective

Performance

Financial Perspective

53.63%

Customer Perspective

65.56%

Efficiency

29.67%

Staff perspective

65.78%

Total Performance

54.85%

Scorecard includes 4 categories, 17 indicators

Strategy tree and scorecard details :

Perspective

Goal

Weight

(x of 10)

Description

Performance

(%)

Measure

unit

Target

Values

Financial Perspective

3

53.63%

Wage Costs as a % of total sales

3

It refers to wage cost as a % of total sales of the hotel.

40%

%

0%

Annual operating profit per room

3

It refers to annual operating profit per room available in the hotel.

10000

$

25000

Food cost as a % of food sales

2

40%

%

0%

% increase in labor costs

2

20%

%

0%

Total Performance in group

Financial Perspective

53.63%

Customer Perspective

3

65.56%

Number of positive feedbacks

3

It refers to number of positive feedbacks received from the customers (on a scale of 1 to 10).

9

Score

10

Number of complaints received

2

It refers to number of complaints received from the customers regarding the services provided by hotel (on a scale of 1 to 10).

3

Score

10

Response rate

3

Metric is not available in trial version

1

minutes

1

Frequent customers as a % of total customers

2

Metric is not available in trial version

30%

%

100%

Total Performance in group

Customer Perspective

65.56%

Efficiency

2

29.67%

% of room booked through reservation channels

2

It refers to % of room booked through reservation channels maintained by the hotel.

25%

%

100%

Internet bookings

2

indicates the % of bookings received through internet services.

30%

%

100%

Room occupancy

2

Metric is not available in trial version

60%

%

100%

Rate of sales inquiry conversion

2

Metric is not available in trial version

30%

%

60%

Average length of stay

2

Metric is not available in trial version

2

days

4

Total Performance in group

Efficiency

29.67%

Staff perspective

2

65.78%

Staff turn