Accounting and Financial Management

Peter Harris, Marco Mongiello

• Publisher: Routledge
• Year: 2012
• Topic: Business
• eBook ISBN:
  9781136431531
• Subtopic: Hospitality, Travel & Tourism Industry
• Index: Business

Accounting and Financial Management: developments in the international hospitality industry presents new and innovative research and developments in the field of accounting and financial management as it relates to the work of managing enterprises and organisations in the international hospitality industry.

The content contains contributions from a rich source of international researchers, academics and practitioners including, university and college lecturers, professional accountants and consultants and senior managers involved in a wide range of teaching, scholarship, research, and consultancy in the hospitality industry worldwide. The material is drawn from their work and experience and relates directly to the management of hospitality undertakings. Therefore the up to date case studies and examples used are taken from a wide ranging of companies across the industry including large international chains such as Sheraton, Holiday Inn, and Intercontinental.

Divided into three parts: Performance Management, Information Management and Asset Management the book tackles the following issues amongst others:
* Performance management in the international hospitality industry
* Benchmarking: measuring financial success
* The profit planning framework
* Making room rate pricing decisions
* Hotel asset management UK and US perspectives
* Lowering risk to enhance hospitality firm value

Accounting and Financial Management: developments in the international hospitality industry presents current developments drawn from a combination of live fieldwork and practical experience and therefore will content will appeal to a wide-ranging readership including practising managers and financial controllers in hospitality organisations, professional accountants and consultants, postgraduate candidates studying for master's degrees in hospitality management, and final year undergraduate students of hospitality management who elect to take an accounting option.

PART 1

• • • •

Performance Management

This part of the book opens with two reviews of performance measurement literature and practices in the hospitality industry; the first refers to the independent hotels, chapter 1, and the second embraces the broader range of productivity measures, chapter 2. The first two chapters serve as an introduction to the core topic of performance management, which is subsequently addressed in a strategic perspective and with reference to traditional and more innovative performance management techniques. The strategic perspective is presented in chapter 3, where an extensive literature review comprises contributions from the generic and the hospitality industry literature. Evidence of the use of budgeting as a traditional technique of performance management is then provided in chapter 4, while the last two chapters introduce theoretical reflections on benchmarking in the hospitality industry, chapter 5, and propose an innovative performance management methodology, corroborated by first evidence of application, chapter 6.

1 Performance measurement in independent hotels

2 Productivity in the restaurant industry: how to measure productivity and improve process management

3 Performance management in the international hospitality industry

4 Budgetary practice within hospitality

5 Benchmarking: measuring financial success in the hotel industry

6 Developing a benchmarking methodology for the hotel industry

CHAPTER 1

• • • •

Performance measurement in independent hotels

Mine Haktanir

Introduction

Performance measurement is an important component of decision-making processes. As the overall objective of all forms of organization is to provide satisfaction for their stakeholders, developing appropriate performance measures and interpreting the outcomes are vital issues. With the growth in international travel and therefore, increasing demand in hospitality businesses, performance measurement in the hospitality industry has gained particular importance as a tool for effective decision-making.

Accounting information systems provide formal means of gathering data to support and coordinate the decision-making of businesses in light of overall organizational goals. Although profitability is the most commonly used basis for defining success, other measures, including cost, revenue and asset and liability accounts, are utilized. The comparison of budgeted and actual results is recognized as forming the basis for evaluating overall performance and helping to monitor and control operations. In hospitality businesses, ratios, which facilitate benchmarking, are commonly used.

However, these traditional performance measures have been heavily criticized for encouraging short termism, lacking strategic focus, discouraging continuous improvement and for not being externally focused. In an attempt to overcome these criticisms, performance measurement frameworks have been developed, primarily to encourage a more balanced view. For example, Lynch and Cross (1991) described a pyramid of measures which integrates performance through the hierarchy of the organization. Fitzgerald et al. (1991) distinguished between the results and their determinants. Kaplan and Norton (1992) use the four perspectives of the balanced scorecard (BSC).

Although a number of studies (see Bolton, 1971; Stanworth and Gray, 1991; Jarvis et al., 2000; Marriott and Marriott, 2000) have explored the way performance measurement is perceived and employed in independently owned businesses, there appears to be insufficient detailed research into actual performance measurement practices of such organizations. When hotel businesses are considered, independently owned and managed hotels are considered as the traditional model of hotel operations and understanding the operational characteristics of hotel provision begins with them (Jones and Lockwood, 1989). They are a dominant feature of the hotel industry in many countries and the majority of establishments are independently owned and operated (Morrison, 1998). In contrast to this, they have received limited attention from researchers (Shaw and Willams, 1994; Main, 1995) where group hotels have been the core of research in the management control and performance measurement literature. With increasing pressure from customer expectations and growing competition, independent hotels must start to develop effective performance measurement systems in a strategic context. In particular, they require accurate information in terms of sales and costs for an effective decision-making mechanism (Adams, 1997). Objective financial data are not publicly available and access to performance data is severely restricted for independent, privately held companies (Jogaratnam et al., 1999). Therefore, this chapter largely focuses on the research that has been carried out on performance measurement in independent hotels.

Defining performance measurement

The term ‘performance measurement’ has been in existence for a long time as an important component of the decision-making process, yet it only gained popularity in 1990s, particularly in the development of new management accounting techniques.

Among the many definitions, one suggests performance measurement is ‘… the process of quantifying actions, where measurement is the process of quantification and action leads to performance’ (Neely et al., 1995:80). There is a range of reasons for utilizing performance measures, including:

• to indicate where more or less effort is required

• to monitor activities in units and/or divisions and through time for diagnosing problems and taking corrective actions

• to carry out planning, monitoring and control functions. Performance measures provide a realistic basis from which to construct plans

• to facilitate continuous improvement in key areas and to promote behaviour in ways that would help sustain competitive advantage

• to support improvements in resource allocation and better decision-making

• to specify responsibilities and to reinforce the accountability of employees and managers and, in particular, to detect inefficiencies with the help of management accounting information

• to provide regular information for staff appraisal, motivation and rewarding. Performance measurement is perceived as one means of motivating people towards achieving organizational goals.

Although there are several reasons for utilization of performance measures, overall it is considered to be an integral part of the management processes, to identify areas of poor performance or opportunities so that better plans can be developed.

Financial measures of performance

Information regarding end results of operations is provided by financial performance measures and there is evidence that, in many countries, financial performance measures are of primary importance. Accounting information systems provide a formal means of gathering data to support and coordinate the decision-making of businesses in light of overall organizational goals. They ‘provide quantitative and common yardsticks to evaluate achievement relative to a plan or to compare parts of the company’ (Emmanuel et al., 1990:222).

Profitability is the most commonly used basis for defining success, such that it is used in the lead tables of performances in Business Week, Management Today and similar journals. Profit sometimes is an absolute measure but more often is a ratio, such as earning per share, return on investment or return on shareholders’ funds, and is presented as a comparison with other companies over a period of time. Traditionally, businesses have relied upon accounting information, such as cost, revenue and asset and liability accounts, in order to explain the cause and effect relationship that determines the financial outcome of the operations. In recent years, responsibility accounting that provides financial information and forms the basis for the performance measurement and management control system in many organizations is recognized as a key to management control systems.

Budgets have consistently proved to be an important financial tool to represent a standard for effectiveness and efficiency measures. Performance reports are a common means of providing the key financial budgeted and actual information for each responsibility centre in order to control the organizations’ operations effectively. This comparison of budgeted and actual results is recognized as forming the basis for evaluating overall performance, helping control future operations and providing incentives for motivating the staff. The roles of budgets in organizations are diverse:

1 a system of authorization

2 a forecasting and planning tool

3 a means of communication and coordination

4 a motivational device

5 a means of performance evaluation and control

6 a basis for decision-making (Emmanuel et al., 1990).

Although financial performance measures provide objective results and are mainly utilized as a rewarding and motivational tool, there has been increasing recognition that the implementation of financial performance measures on their own were seen to provide a limited perspective on the performance of a company. The main shortcomings are:

• Short termism, in particular of profitability measures, is determined as a handicap for businesses. Measures of share/equity, asset return, bottom line profit and residual income emphasize a ‘short-termist’ approach. However, marketing/sales ratio and profit sales margin would emphasize a longer-term approach.

• The past information provided relative to ongoing operations is inappropriate in the dynamic business environment. Measures that are flexible and that can assist managers to make decisions for the current operations are highly important. It also encourages managers to keep minimum variance from the standard rather than continual motivation for improvement.

• Results, rather than ongoing managerial efforts, are reflected with financial measures. Better performance measures are required to cope with the emerging managerial techniques such as total quality management.

• Lack of strategic focus and failure to provide data on quality, responsiveness and flexibility.

• Failure to provide information on the external factors, such as what customers want and how the competitors are performing.

Operational measures of performance

Although financial measures of performance are of primary importance for the success of businesses, they can produce better performance information when used in conjunction with non-financial measures. They are valuable supplements to financial measures as they are expected to supply information that would improve the financial outcome and support and monitor the strategic initiatives.

New, non-financial measures are needed in order to cope with the changing operational environment, which primarily includes quality, just-in-time delivery and increase in product ranges. These new measures must be flexible, directly related to the strategy, non-financial, easily understood and highly responsive to the daily production situation. In addition, performance measurement systems require non-financial measures at operational levels, particularly to be used as a tool for motivating employees. It is also noted that ‘… day to day control of the manufacturing and distribution operations are better handled with non-financial measures’ (Maskell, 1989:33).

The financial systems were normally used as a feedback mechanism to report the outcomes and their variance with the planned – once the financial goals were met, some other criteria became important. Other systems that dealt with more critical or uncertain areas of performance, for instance customer satisfaction, cycle time improvement and quality, were used in a more interactive fashion by management.

Operational measures were used in service businesses to a large extent, such that the service quality, flexibility, resource utilization and innovation were the operational determinants of the competitiveness and financial performance outcomes in Fitzgerald et al.’s (1991) performance measurement framework for service businesses. Empirical work in certain businesses has resulted in either dominance of financial outcome measures rather than the means of achieving these outcomes, or more interest in operational measures, resulting in an imbalance between the two dimensions.

Performance measurement in the hospitality industry

The Uniform Systems of Accounts for the Lodging Industry (1996) is the commonly practised method of recording and analysing accounting data in hospitality businesses. The characteristics of the industry play an important role in utilizing an appropriate approach to accounting and...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Contents
• Foreword
• Preface
• Editors
• List of Contributors
• Part 1 Performance Management
• Part 2 Information Management
• Part 3 Asset Management
• Index