Finance in the Hospitality Industry

Finance in the Hospitality Industry

Mudassar Mehmood (Nelson College London, UK)
DOI: 10.4018/978-1-7998-2204-2.ch011

Abstract

By the end of this chapter, it is expected that one will be able to 1) establish various sources of funding that are available to a business in the hospitality industry in the international market, 2) evaluate the advantages and disadvantages of these sources of finance, 3) establish the sources that are available or unavailable for the hospitality business as compared to other industries, 4) evaluate an investment in hospitality industry using various capital budgeting techniques, 5) develop financial statement for businesses in hospitality industry, and 6) evaluate the financial performance of companies in hospitality industry using ratio analysis.
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Sources Of Finance In The Hospitality Industry

Hospitality industry remains one of the significant contributors to economies around the world. According to the United States Department of Labour, the sector employs about 16.716 million people in the U.S. (Bureau of Labour Statistics, 2019). Compared to other sectors, it may be one of the few that record the highest growth rates and comprises bars and nightclubs, restaurants, food and service management, gambling, events, visitor and tourist attractions (Ogbeide, 2014). It also includes self-catering and holiday parks.

In consideration of businesses at multiple levels, finances are needed. The guiding question for investors or finance personnel is:

  • Why do need finance for our business?

  • What are the channels where we can get the funding?

  • What risks are associated with acquiring finance?

Business Finance Needs

Finance is a standard prerequisite when considering a business, regardless of the sector (Gray, 1996). Even in hospitality, the company require finance for:

  • I.

    Initial investment and or expansion

  • II.

    Acquiring assets

  • III.

    Maintaining cash flow and liquidity

  • IV.

    Restructuring of the company

  • V.

    Acquiring other businesses and mergers

Once a business is established, it is the intent of the investor for the entity to become a going concern or to achieve its intended goal. In all instances, finances are required to meet needs in the organization such as payment of suppliers, salaries and allowances, levies and permits not forgetting utilities and bills. As such, without finances, operations in the business will be restricted and strained, and it will not be in a position to exploit opportunities (growth and new ventures), as well as actualize its mission and vision. A business with a sound financial backbone will have the flexibility needed to perform at an optimal level (Chibili, 2016).

It is prudent, therefore, to ensure that managers put available finances into proper use and align them with the interests of the shareholders. Managers need to understand what the returns will be for each investment and other alternatives that need to be considered before deciding to embark on an investment. Equally of importance is the assessment of risks that come from such an investment. Some present good potential for returns, but have more risk exposure. Others have a considerably lower risk, but returns are equally lower (Brigham & Houston, 2019). The challenge for a manager is to find an investment for which the risks can be managed, and exposure of the company limited.

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