Tying it All Together

Chapter 12Tying it All TogetherCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedReviewHospitality Industry Financial ChallengesReading, Interpreting, and Analyzing Financial Statements and Management ReportsManaging Working CapitalGrowing the BusinessCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedReviewKnowing the Sources, Types, and Costs of CapitalInvestment AnalysisThe Investment PackageCrafting and Negotiating the DealCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedHospitality Financial ChallengesLabor intensiveFluctuating sales volumeLow profitabilityCapital intensiveReliance on discretionary incomesA multi-faceted industryCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedAccounting StandardsDevelop StandardsFinancial Accounting Standards Board (FASB)Securities and Exchange Commission (SEC) Generally Accepted Accounting Principles (GAAP)Govern all accounting and financial reportingCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedUniform Systems of AccountsUniform System of Accounts for the Lodging IndustryUniform System of Accounts for RestaurantsUniform System of Financial Reporting for ClubsOther systems:TimeshareCondominiumHealth, racquet, and sports clubsSpasCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedIncome StatementPresents operating results over a specific period of timeSections of the income statement:Revenues or SalesOperating ExpensesFor hotel properties:Departmental expensesUnallocated expensesCapital Expenses or Fixed CostsNet Income or Profit and LossCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedBalance SheetProvides a snapshot of a company’s financial positionCategories of accounts:AssetsCurrent AssetsFixed AssetsLiabilitiesCurrent LiabilitiesLong Term LiabilitiesEquityAssets = Liabilities + EquityCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedStatement of Cash FlowThree sections:Cash Flow from OperationsCash Flow from Investing ActivitiesCash Flow from Financing ActivitiesCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedManagement ReportsDaily Revenue ReportDaily Payroll Cost ReportRooms Revenue ForecastFood and Beverage Menu AbstractAccounts Receivable Aging ScheduleCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedTypes of AnalysisVertical AnalysisUsed to analyze variable expensesAll accounts are sized using either:Total revenue orDepartmental RevenueVariable expenses should increase or decrease with the level of salesCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedSample Vertical AnalysisShae'sIncome StatementFor the month ended June 30, 2008Revenues:AmountPercent Food $ 890,000 78.20 Beverage 220,000 19.33 Others 28,100 2.47 Total Revenues $ 1,138,100 100.00 Cost of Sales: Food $ 320,400 36.00 Beverage 48,400 22.00 Others 15,455 55.00 Total Cost of Sales $ 384,255 33.76 Gross Profit: Food $ 569,600 50.05 Beverage 171,600 15.08 Others 12,645 1.11 Total Gross Profit $ 753,845 66.24 Accounts are divided by total revenues $1,138,100Cost of Sales is divided by its respective revenue amountEX: Food$320,400 / $890,000 = 36%Copyright © 2007 by John Wiley & Sons, Inc. All rights reservedTypes of AnalysisHorizontal AnalysisTracks and Analyzes:Income StatementBalance SheetFocuses on both $$ and % changesAnalyzes changes over timeMonth to MonthYear to YearCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedSample Horizontal AnalysisDanforth HotelsHorizontal Analysis for the Balance SheetsAs of December 31(in millions)20072008$ change% changeCash $ 82 $ 298 $ 216 263.4Accounts Receivable 288 269 (19)-6.6Marketable Securities 100 112 12 12.0Inventory 193 158 (35)-18.1Other current assets 64 90 26 40.6 Total Current Assets 727 927 200 27.5Furniture, Fixture & Equipment, net 3,641 3,520 (121)-3.0Management and Franchise Contracts, net 383 347 (36)-9.4Goodwill 1,230 1,230 - 0.0Long term Investments 568 599 31 5.5Other long term assets 260 328 68 26.2 Long Term Assets 6,082 6,024 (58)-1.0 Total Assets $ 6,809 $ 6,951 $ 142 2.1Copyright © 2007 by John Wiley & Sons, Inc. All rights reservedImportant RatiosOccupancyRooms Sold / Rooms AvailableAverage Daily RateRooms Revenue / Rooms SoldRevPARRooms Revenue / Rooms AvailableFood Cost PercentFood Cost / Food RevenueBeverage Cost PercentBeverage Cost / Beverage RevenueCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedImportant RatiosPayroll Cost PercentPayroll Cost / Departmental or Total RevenueProfit MarginProfit / Departmental or Total RevenueAccounts Receivable TurnoverTotal Revenue / Average Accounts ReceivableInventory TurnoverDepartmental Revenue / Cost of Goods SoldReturn on InvestmentCash Flow / EquityCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedManagement ApplicationsEmployee schedulingLabor cost controlFood and beverage pricingRevenue managementProfit flexingCost-volume-profit analysisCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedWorking CapitalAmount of working capital is impacted by:Mix of cash and credit salesCredit card transaction processingAccounts receivablesFood and beverage turnoverVendor termsGrowthCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedWorking CapitalWays to minimize working capitalCash discountsInventory turnoverGood credit ratingManaging accounts payablesTracking transactionsCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedCash ForecastAssists in determining the amount of working capitalManagement estimates cash inflows and projects cash needs for 90 daysAlerts management to probable cash shortages or surpluses in advanceCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedShareholder ValueShareholder Value = Market ValueMarket ValuePublic CompanyCurrent market price of common stock multiplied by number of shares outstandingPrivate CompanySale price of the company on the open marketCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedBenefits of GrowthClear career paths for employeesAttract qualified employeesIncrease market shareLimit new competitionDiversify riskCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedGrowth StrategiesIncrease sales and Productivity of Existing PropertiesExpansion of Physical FacilitiesFranchisingManagement ContractsMergers and AcquisitionsCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedTypes of CapitalDebtFixed obligation or liability of the business that must be paid back, with interest, over a specified period of time.EquityOwnership in the business that does not require immediate repayment, but requires a return on the capital invested.Copyright © 2007 by John Wiley & Sons, Inc. All rights reservedCost of CapitalCost of DebtInterest expense the borrower pays the lenderCost of EquityPortion of cash flow the sponsor of a deal allocates to the investorCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedWeighted Average Cost of Capital or WACCAmount of interest expense and cash flow allotted to equity investors divided by the amount of capitalTakes into consideration:Capital mixTax effectInterest portion of debt service treated as an expense for tax purposes in the USCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedWACC CalculationWACC = wd kd (1-T) + we ke Weight of debt = wd Cost of debt = kd (1-T) Tax rate of business = T Tax effect = (1-T) Weighted cost of debt = wd kd (1-T) Weight of equity = we Cost of equity = ke Weighted cost of equity = we ke Copyright © 2007 by John Wiley & Sons, Inc. All rights reservedMarket ValuePresent value of the sum of future cash flow factoring in:The amount of annual cash flow projectedThe timing of when the cash flow will be receivedThe risk associated with the generation of the cash flowThe WACC required to finance the projectCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedInvestment Analysis ToolsPayback PeriodAmount of time a project requires to pay back the initial equity investmentAdvantageEasy to calculateDisadvantagesDoes not include the time value of moneyIgnores cash flow after the required payback periodCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedInvestment Analysis ToolsNet Present Value (NPV)Calculates the difference between an asset’s present value and purchase priceAdvantagesTakes into account all cash flowsTakes into consideration the TVMDisadvantageDifficult to compare multiple investment opportunities with different costsCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedInvestment Analysis ToolsInternal Rate of Return (IRR)Discount rate that makes the NPV of an investment equal to zeroAdvantageCompare multiple deals with varying sales prices and costsDisadvantagesAssumes cash flows generated by the project are reinvested at the IRR calculatedMultiple IRRs when cash flows go from negative to positiveCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedNeed for the Investment PackageFirst step in gaining approval for funding is the preparation of a professional investment packageInvestment package should tell the story and sell the project to capital sourcesCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedParts of the Investment PackageExecutive summaryFact sheetBusiness planSource and use of fundsPhotographs or renderingsThird-party confirmationProject budgetQualifications of the project teamInvestment analysisPersonal financial dataCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedLender Evaluation of theInvestment PackageHow strong is this project and is it really feasible?Is the project team really qualified?What is the risk of this venture failing?Investment package should clearly state risks and how they will be minimizedCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedOwner/Equity Investor Evaluation of the Investment PackageHow much equity is the sponsor group investing in the deal?What annual ROI can I expect to receive?What’s the payback period?What is the net present value of the deal?What is my projected IRR?Copyright © 2007 by John Wiley & Sons, Inc. All rights reservedOwner/Equity Investor Evaluation of the Investment PackageHow much is the sponsor group making on the deal?What is the exit strategy?The shorter and more clearly defined the exit strategy, the more likely the outside investor will be to invest in the dealCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedTerms of Lender ImportancePrincipalInterest ratePoints chargedCollateralPersonal guaranteeCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedTerms of Investor ImportanceAmount of equity they are asked to investPercentage ownership they will receiveProbability of achieving their IRR hurdle rateExit strategyDecision making power on when to execute the exit strategyCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedNegotiating SkillsBorrowers must:Learn about the person they will be negotiating withDress professionallyState the benefits of the ventureAddress any objections raisedClose the dealThink like an owner and act like a manager!Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved