Introduction Thisreport will examine and critically evaluate the financial performance of theMerchant Hotel in the financial year ending 30th June 2013.
Keyfindings from the profit and loss account and balance sheet will be explainedthroughout this report, as well as the discussion of external factors which mayhave had an impact on the business. New terminology will used throughout thisreport and calculations can be located in the appendices at the end of thereport. Background of the HotelThe Merchant Hotel based in Warning Street Belfast, wasformerly known as the headquarters of the Ulster Bank in 1877 when it wasbuilt. However, it has since been developed into an AA5 Red Star Hotel, theonly hotel to achieve this status in Belfast. According to the (Merchant Hotel,2017) the hotel is situated in “the heart ofBelfast’s mercantile and commercial centre”, an excellent location as it isbased right in the centre of the Cathedral Quarter, where guests will travelfrom far to visit and stay. The exterior of the building is Italianate in style,which derives from high Victorian architecture, thus portraying an image ofluxury. The hotel is owned by the BeannchorGroup and was first developed in 2006 by Bill Wolsey. According to (DiscoverNorthern Ireland, 2017), The MerchantHotel was awarded Hotel Accommodation of the Year at the Northern IrelandTourism Awards 2012.
Moreover, it also achieved the award of Best UK Hotel inthe prestigious International Hotel Awards, thus highlighting its excellentsuccess achieved. In addition, theMerchant Hotel Limited is a private limited company which means that thecompany’s shares can only be sold to friends and family. The Academic Importance ofRatio AnalysisWilliamson et al.
(2005, p.85) depicts that “Ratio analysis is used for various purposes and byorganizations as a part of financial statement analysis”. Ratio analysishighlights a business’s financial performance through quantitative data.According to (Atrill and McLaney, 2008), calculating ratioscan give you an insight into the performance and position of a particularbusiness thus are extremely beneficial. Moreover,ratios are not hard to calculate however theymay be difficult to interpret; therefore further analysis must also be carriedout. For example, ratios can highlight the financial strengths and weaknessesof a business; however they cannot offer an explanation. Singh and Schmidgall(2002) agree with (Atrill and McLaney, 2008) highlightingthat financial ratios are essential to industry managers as they enable theanalysis of data in order to come to a decision.
There is a variety of performanceindicators which will be discussed throughout this report with regards to TheMerchant Hotel accounts. Theseinclude namely: · Profitability· Efficiency · Liquidity · Financialgearing Justification of the choiceof Performance Indicators”A performance indicator is a selection, or combination, ofaction variables that aims to define some or all aspects of a performance.Clearly, to be useful, performance indicators should relate to successfulperformance or outcome.” (Hughes and Bartlett, 2002). Moreover, (Graham and Harris, 1999) share similar views depicting that performanceindicators aid in the evaluation of past performances and enable the planningof future decisions. The particular performance indicators mentioned previouslywere chosen as they were the ones that were available for the author to examineand interpret. Moreover, they also give a vast insight in the Merchantsaccounts and allow for in depth analysis with regards to statistics.
Commentary on the findingsAccording to Beatham et al. (2004),businesses measure their performance in financial terms, profit, and turnover.This is also the case with regards to the Merchant Hotel. However,Brander-Brown and McDonnell (1995) place emphasis on both the financial and nonfinancial performance indicators which give a more detailed picture of thebusiness.
Therefore both internal and external factors which affect theMerchant Hotel must be considered in order to reflect a true picture of thehotels financial situation. Profitability Ratios Adedeji (2014) highlights that, the use of profitabilityratios aids in the determination of a company’s profitability. This informationallows managers to analyse and evaluate their business with regards to theirfinances.
Gross Profit Gross profit can be calculated by subtracting cost of salesfrom sales revenue (Atrill and McLaney, 2008). This ratio allows a business tosee how much profit they are making for every £1 of turnover. As calculated inAppendix 1, the Gross Profit% in 2012 was 80.73%.This increased to 81.09% in 2013 with an overall increase of 0.36%.
Salesrevenue increased by £757,616 from 2012 to 2013 meaning an increase of 7.4%.Therefore, overall Gross Profit increased by £650.000 between 2012 and 2013. Thesefigures show that the Merchant Hotel maintains a high gross profit marginindicating that they are in good financial health. According to (Novy-Marx,2013), businesses with a high gross profit margin tend to be the mostsuccessful in the industry. This therefore emphasises the Merchants efficiencyand ability to increases its sales.
Net profitNet profit is calculated by subtracting the total revenue from the total expenses. With regards to Net Profit in 2012, the Merchant had anegative figure of -108.20% as highlighted inAppendix 2. This then increased in 2013 to 2.96%, thus depicting a Net Profitdifference of 111.16%. From 2012 to 2013 Net Profit increased by £11,314,859which is a dramatic increase in just one year.
This may have been due to therecession which occurred in 2012 which had a major impact on businessesthroughout Belfast. This resulted in a loss of value in its tangible assetsaccounting for 11,702,245. Moreover in 2013 hotel’s alcohol licence alsodecreased in value to 140,000 as a result of depreciation. Additionally, thereasoning behind this negative net profit figure in 2012 may be due to the flagprotests which occurred in Belfast City Centre in December. This protest will have had a negative impact on TheMerchant Hotel’s net profit as its location is a short eight minute walk fromBelfast City Hall. Moreover, according to the (BBC, 2013) this flagprotest cost businesses between £10 million and£15million, with potential to cause even more damage to businesses financiallyin the future as a result of the discouragement by potential investors andtourists. Return on Capital Employed(ROCE)Thisratio measures the amount of profit generated by a business efficiently as aresult of its capital employed (Atrill and McLaney, 2008). Due to external factors affecting the profitabilityin 2012 the return on capital employed was very low averaging at -514.
44%.However, the Merchant improved this dramatically in 2013 as figures rose to21.39% as shown in Appendix 3. Although this is not a great amount of ROCE,information from 2013 highlights that shareholders are receiving some form ofreturn on their investment. This increase in ROCE from 2012 to 2013 maybe due to the Merchant Hotel reducing its costsor increasing its sales. As a result of their substantial loss of net profit in2012 as a result of the Flag Protest etc, the hotel may have made the executivedecision to advertise special offers in order to attract customs and increaseits revenue income to make up for the loss made previously.
Efficiency ratios Efficiency ratios measure how well a company can use its assets andmanage its liabilities effectively. The ratios which will be discussed in thisreport include stock turnover, trade receivables, trade payables, sales revenueper employee and also the average staff salary. Stock turnoverThis ratio is calculated by dividing the cost of sales by theaverage stock held.
When comparing the stock turnover of the Merchant Hotel in2012 and 2013, it can be seen from Appendix 4 that the turnover was quicker in2012 by one day. In 2012 the stock turnover took a total of 35.2 days whereasin 2013 it took 36 days. Atrill and McLaney (2006) highlight the importance of stockand the time taken to turn it over in order to make a profit. Therefore thequicker the Merchant turn their stock over the better.
In order to improvetheir stock turnover they could offer discounts in order to aid in the sellingof stock which is not as popular. This would then result in the increase oftheir gross profit. Trade receivables (DebtorPayment Period)This financial ratio measures the length of time it takes formoney owed to the business to be collected from its debtors. As shown inAppendix 5, with regards to the Merchant Hotel in 2012 it took an average of 74days in order to collect money owed to the business. This is a disadvantage tothe Merchant as it is such a long period of time and the longer it takessomeone to pay their debts, the less likely it is that they will pay it. Moreover,the company which owes the Merchant money could go into administration whichwould result in the Merchant losing out on capital. However in 2013 the hotelwere able to collect the money owed to them in a much shorter period of timeaveraging out at 47 days.
This is a great improvement for the Merchant as itminimises the risk of them not receiving the money owed to them. Sales revenue per employeeThis ratio highlights how much each employee contributes tothe business on average. From the calculation carried out in Appendix 6, it canbe seen that in 2012 each employee contributed £33,637. In 2013 this increasedto £35,790. This is advantageous to the Merchant as high revenue per employee isa positive sign suggesting that they are finding ways to gain more revenue fromtheir staff. Jafri (2010) depicts that innovative behaviour of employees andindependent thinking is the key to many successful organisations. Therefore itwould be beneficial to the Merchant Hotel to take time to train their staff particularlyfocusing on up selling, in order to make more profitable sales per employee. Average staff salary From the directors’ report it can be seen that in 2012 therewere 302 employees working within The Merchant Hotel.
In 2013 this increased to305 employees. The overall average that each employee received in 2012 totalledto £15,194.5 where as in 2013 the average was£14,876. However, the directors’ report did not disclose if the employee’s werepaid on an hourly basis or if the employees were part or full time staff. Thisundisclosed information may have gave an explanation as to why the averagesalary was higher in 2013 compared to 2012, even though there were more membersof staff working within The Merchant Hotel in 2013.
Moreover, this reduction instaff salary may be due to the management being more efficient in that theysent employees home during quieter periods or by reducing the number of staffin work during the week when it tends to be less busy.