Chapter 1 introduction

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Chapter 1

Introduction to Financial Management

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Financial Management & Accounting

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Introduction

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Branches of finance

General Accounting:

– Financial accounting: recording of revenues, expenses, assets and liabilities

– Cost accounting: recording, classification and reporting of cost data by department, function, responsibilities, etc.-> support to operations’ control

– Tax accounting: preparation and filling of tax forms (income, property tax, payroll, excise, etc.)

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Branches of finance

Financial Management:

– Provide management with key information to enhance controls and support business decisions

– Forward looking: preparation of budget and treasury planning

– Performance reports: actual results vs. budget, etc.

– Ad hoc analysis: return on investments, incremental analysis, etc.

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Branches of finance

Auditing:

– Review and evaluation of financial records, documents, and control systems

– Often external / independent

– Ensure that financial records are properly kept

– Issue recommendations to strengthen financial controls

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Principles of Accounting

Generally Accepted Accounting Principles (GAAP)

– Include the standards, conventions, and rules accountants follow

– Provide guidelines for accounting methods

– Provide uniform basis for preparing financial statements Enable comparisons Ensure thoroughness

– Accepted through common usage

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Principles of Accounting

• Principle of sincerity (objective evidence): accounting records should reflect in good faith the reality of the company's financial status

• Principle of consistency: use of a similar method for the accounting treatment of an item and for all similar items that follow

• Principle of the permanence of methods: allows coherence and comparison of the financial information published by the company

• Principle of non-compensation: not compensation of a debt with

an asset, a revenue with an expense, etc.

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Principles of Accounting

• Principle of prudence: accounting records should show the reality "as is"  (not prettier!!)ex.: revenue is recorded only when it is certain / provision is booked for an expense which is probable

• Principle of continuity: assumption that the business will not be interrupted. This principle mitigates the principle of prudence: assets do not have to be accounted at their disposable value, but it is accepted that they are at their historical value

• Principle of periodicity: each accounting entry is allocated to a

given period, and split accordingly if it covers several periods

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Principles of Accounting

• Principle of matching: necessity to relate expenses to revenues -> accrual accounting

• Principle of Full Disclosure: all information and values pertaining to the financial position of a business must be disclosed in the records or in footnotes

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Principles of Accounting

Cash vs. Accrual Accounting

Cash Accounting–Recognition of transaction at the point of cash movement–Not in line with GAAP–Acceptable if use does not materially affect the results–Used by very small businesses

Accrual Accounting–Recognition of revenue when earned (eg. issue of invoice, service rendered, etc.)–Recognition of costs when incurred (eg. collection of invoice, service of goods received, etc.)–Also when no transaction has happened (eg. depreciation, prepaid insurance premium, etc.)

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Financial Aspects of Hospitality Industry

Source of revenues–Rooms 68%–Food 21%–Beverages 4%–Telecommunication 1%–Rentals, events, conferences & others 6%

Costs and expenses–Salaries & benefits 44%–Operating expenses 30%–Fees, taxes and insurances 11% –Other cost of sales 9%–Utility costs 6%

see exhibit 1 / page 4

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Financial Aspects of Hospitality Industry

– Revenue often subject to seasonality (throughout week, month, year…)

– Limited inventories (in comparison to manufacturing industries); generally < 5% of total assets vs. 30% for manufacturing firms

– Labor intensive (highest cost element)

– Requires large investments in fixed assets

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