Angel Hotel: The Road to Growth

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Introduction

Angel Hotel has been operating for the past ten years. The main focus of the hotel is to combine resort services with fine dining. The hotel is known for its French cuisines and has also steadily developed a strong pedigree in providing Italian dishes. Aside from the food, Angel Hotel also offers first-class wine and beverages. These offerings plus the amenities of the company are considered Angel Hotel’s main strength. Several tourists have visited the hotel because it is situated perfectly. The sunset view and the classic rooms are a few of the reasons why Angel Hotel continues to exist.

Despite Angel Hotel’s perceived advantages, it has been experiencing occupancy reduction. From March to January, the hotel has recorded a decrease of 20% in occupancy. In addition, other guests prefer to ride a ferry and visit resorts elsewhere. One of the problems raised by agents to owners is the amenities of the hotel. Most visitors prefer casual resorts and look for advanced luxuries. Other clients are into large room spaces to accommodate more guests. Another item mentioned by the travel agents is the availability of spas and other amenities for relaxation.

The owners of the hotel decided to make some drastic changes to save its operations. It is expected that owners will view their financial capacity to ensure that there are enough resources to make the changes possible. The report will center on the budget that the company needs in the future. Moreover, the report will also present the possible ways for the company to raise its targeted budget and pricing models to determine the rate of return.

The Concept Budgeting

Luft and Shields (2003) pointed out that that budgeting is used for different purposes. Primarily, budgeting dictates the conduct and planning of activities undertaken by firms. Moreover, budgeting is used to allocate the available resources of firms. Budgeting is an important mechanism that is used to motivate employees. Aside from these functions, there are other roles that the budget plays in organizations. Shield (2003) identified budgeting as a tool that can guide firms in conforming to the prevailing social norms that affect the organizations.

Melkers (2001) pointed out that budgeting is a procedural process that needs to be approached by activity. Usually, organizations use the cyclical method of budgeting that includes stages such as budget development; provision of executive recommendation; appropriation of funds, and budget execution. In budget development, the framers identify the needs and priorities of the company. Then, specific costs are assigned to the endeavors that are considered facilitators of organizational success.

After the development has been completed, the budget will be subjected to be viewed by the executives. In this process, the loopholes are determined and several additions and subtractions are made. Usually, executives will provide their own version of the budget which is occasionally different from the first draft. The next process involves the finance department, which is the task to appropriate the funds. It is a normal practice to distribute the funds based on priorities and the availability of resources. The final phase is the execution of the budget that requires the participation of all entities in the organization.

The Importance of Budgeting

During budget deliberations, departments conduct their own meetings to discuss their necessities and projects that need to be implemented. In most organizations, these meetings are vital because such activities allow all employees to provide inputs that will be useful in the budget. After the departmental meeting, the heads will also converge to discuss their concerns with the framers of the budget. Conducting budget deliberations is one method of booting communications through the participation of all entities.

Coordination among departments is boosted when the budget is developed. Departments compare their priorities and are provided with helpful suggestions on their own priorities. Apparently, coordination is also observed in the execution of the budget. The success of the organization is dependent on the manner in which the budget is executed. Departments have to coordinate because most of the activities financed by the budget are intertwined; thus, it is imperative that the departments and all entities coordinate to ensure that the budget execution is efficiently undertaken.

It was previously mentioned that budgeting is used to motivate employees. Through the budget, the companies can provide increases in salary and the provision of benefits. Moreover, the companies can improve their workplace and make the areas conducive for working. It is also possible that the budget can boost the confidence of employees especially in dealing with decision-making processes. For Angel Hotel, such a meticulous process is needed. Budgeting will allow the firm to become more efficient in handling its resources.

The Budget System

Schmidt (1992) provided a method that will transform conventional budget systems into highly flexible budgeting approaches. This process responds to the unpredictable nature of businesses and the possible uncertainties that will occur within the operating cycle. Since budgeting is procedural, the shift also involves vital stages. The company needs to focus on its activities. The company needs to identify the expenses incurred for specific tasks and the kind of resources provided to the activities.

The company needs to determine the amount spent on adding value to products and services. This is considered a strategy that favors the consumers. Finally, the company is to ascertain the budget that is allocated to each customer. In this process, the first two stages are integrated using the point of view of the customers. The final stage pertains to the development of a strategy budget, which focuses on investments, expansion of business portfolios, and focus on the long-term effects of budgeting.

In reference to Angel Hotel, there are three aspects that can affect its budgeting process. First, the maintenance and operating expenses are considered the most common form of spending requirement. This section covers 45% of the total expenses generated by the company. Second, the personnel services include salaries and benefits of employees. Some 25% of the total budget is delegated for this endeavor. The third budget concern is the most important for Angel Resort. This concerns the capital outlay to be spent for the next years. At least 30% of the total budget will be allocated for this segment.

Budget Projections

Since this is a generic budget, the figures that will be presented are purely estimates based on industry reports. In the present year, Angel Hotel is expected to earn at least $50 million USD as its revenue. Of this amount, at least 60% will be considered as an expense. Angel Hotel’s operations next year will show a budget for the company worth $30 million. From this amount, $13.5 will go to operations, $9 million to capital outlay, and $7.5 million for the personnel. These figures will still be divided according to the different entries that are included in these general expense titles.

The budget for operations is mostly allocated for supplies and utilities. The hotel mainly uses its budget to purchase the needed supplies. These include food, accessories, toiletries, and other operationally related products. Angel Hotel has to distribute at least 40% of the operations budget for supplies. Utilities, however, are charged differently. Angel Hotel also recognizes that utility expenses are the hardest to control. In most instances, hotels allocate 25% of the budget for the utilities. The other portion of the budget is distributed to the maintenance of the existing amenities and for other expenses.

The budget for personnel services covers the salaries and benefits of the employees. At least 80% of the fund is provided for the employees. Aside from the salaries, employees are also given some bonuses for performance and other positive measures. In addition, the hotel gives 20% of the personnel budget for the training and improvement of the employees. This is important to ensure the competency of the personnel.

Capital outlay, as mentioned, is the most important concern that Angel Hotel needs to address. Most of its current problems are rooted in the hotel’s lack of amenities to serve diverse clients. The budget for the capital outlet is mostly dedicated to infrastructure development. The hotel can start expanding its rooms and adding other services such as spas. Building swimming pools are also suitable to provide a different alternative for clients. The other part of the capital outlay budget is for the acquisition of high-technology equipment. It was specified by the travel agents that several visitors prefer high-definition televisions, DVDs, and other luxuries.

Unlike other businesses, hotels require unbalanced budgets. Angel Hotel has to ensure that peak months are well-budgeted. The location of the hotel is the best determinant of seasons. Since it is in between Indonesia and Australia, the weather is tropical. Peak months include March, April, May, and December. Among the peak months, only December is not part of the summer season. During these months, the budget for operations is expected to double. These four months cover the majority of the budget for operations. The other months get the remaining budget for the year.

The budget for personnel is usually balanced for all the months. But since Angel Hotel is keen on improving their employees, then some adjustments have to be made. The months of September and October are considered as off-peak and therefore a good month to train the employees. The budget for capital outlay is spent for the first 3 months of the year. Only 40% of the capital outlay budget is allocated for the succeeding 9 months.

The Long-term Budget

For the next five years, it is important to determine the extent of the budget for Angel Resort. In the coming operation year, the company is allocating at least $30 million for its budget. Because of the plans that the owners have in terms of growth, the budget is expected to increase annually. At the same time, the allocation for the three segments mentioned will change. There are aspects that can affect the decision of budgeting. These include the investments that the hotel plans to build and the availability of funds. The revenue and inflow of cash are also valuable determinants of budget.

The breakdown of the increase is centered on priorities. In year 1, the budget is measured at $30 million. Year 2 will experience an increase of 10% in the budget, which will push the budget to $33 million. The third-year will be allocated with a 15% increase in the budget to $39 million. During the fourth year, 20% more will be added to the budget. This will increase the budget to 47% million. In the final year of the plan, the budget will increase by only 10%. It is evident that there is a decrease in terms of percentage. This is necessary because balance is the most important.

As stated, the budget for the second year is estimated at $33 million. Unlike the previous year, the breakdown for the budget is different. The $3 million increase will be excluded initially. For the $30 million, the breakdown will follow the percentages allocated during the previous year. Some $2 million will be distributed to capital outlay. The remaining $700,000 will be given to the operations budget and the remaining $300,000 will go to personnel services.

In the third year, the budget for Angel Hotel is valued at $39 million. This means that $9 million was added from the initial year. Angel Hotel will maintain a uniform distribution of budget in reference to the first $30 million. Of that initial amount, 45% will go to operations, 25% will go to personnel services, and 30% will be allocated for capital outlay. The remaining $9 million will be distributed according to priorities. At least $6 million will be added to the capital outlay segment. Moreover, the remaining $3 million will be distributed accordingly: $2.2 million for operations; and $800,000 for personnel. It is evident that the focus of the budget is more on infrastructure development.

The fourth will also provide more resources for the company. For the first $30 million, the aforementioned breakdown will be maintained. The rest of the budget will be given to the three segments based on necessities. Of the $17 million, $10 million will go to capital outlay. This budget will support the strategy of the company that will extend room sizes and builds other amenities. The operations will get $5 million of the budget. The increase is attributed to the expected maintenance of previous amenities acquired by the hotel. The other $2 million will go directly to the salaries and benefits of personnel.

The final year will provide a budget of $52 million. Angel Hotel will still maintain the distribution scheme for the first $30 million of the budget. Because of the massive increase, the distribution will also be different. Like the previous year, $10 million will go to the development of the hotel. The rest of the budget will provide $8 million for operations and $4 million for personnel. The increase in operations is expected because of expanded services.

Raising the Budget

There are different strategies that the company can pursue to ensure that the proposed budget will be sufficiently supported. The owners can issue bonds and generate funds from these financial instruments. These debt vehicles will allow the company to have the resources to push its expansion. But this strategy can be risky for the company. Debts are difficult to maintain especially in this industry. In addition, the hotel is expected to have a hard time securing its capacity to pay. Angel Hotel is in financial disarray and convincing creditors to accept its promise will be difficult.

In the event that Angel Hotel fails to secure enough resources through borrowings, the company can open to the public. Issuing stocks is a common strategy among expanding firms unwilling to make financial commitments. Angle Hotel can make an initial public offering in the Australian Stock Exchange (ASX). This will boost the capacity of Angel Hotel to finance its investment plans. Being a public company, however, is hounded by several risks. The owners of Angel Hotel have to agree to sell some of their ownership to various investors. Since Angel Resort is a traditional firm, this strategy is also difficult to achieve.

The most viable strategy available for the company is its retained earnings. These represent the net income of the company after one year of operations. This is the least risky among the three options provided. At the same time, Angel Hotel will not make commitments to creditors when borrowing and to investors when going public. Retained earnings can provide a modicum level of support to the company’s initial expansion activities.

The Value Financial Reporting

Financial reporting has been part of all organizations. Standards regarding financial reporting have been existent for decades. It is widely recognized that there is a need for standards to be established. These serve as frameworks and guidelines in reporting financial transactions and information. The importance of providing financial reports ranges from internal benefits to legal requirements. Financial reports are prepared using the resources of the firm and the necessary mechanisms. (Van Riper, 1994) Specific stakeholders also value the information that is presented in financial statements, which serve as a critical influence in their decision-making activities.

Beresford (1990) stated that the underlying cost of accounting standard from a company’s view is loss of control over operations. The management losses are flexibility and access to relevant information resulting in below par and inferior decision-making. Quality financial statements have several attributes and each facet has to be properly detailed. Financial statements have to accurately present the financial position of the company including the dates of the current and previous operating years.

The financial statements have to present the outcomes of the operations and the cash flows for the years ended. These attributes have to establish conformity to the GAAP. Although some firms decide to present the financial statements differently, the fundamental elements of the matter have to be present. Financial statements framed after the GAAP are sound and reliable (American Institute of Certified Public Accountants, 1992).

Business Strategies

At present, Angel Hotel is in the stage of expansion. Based on the strong competitive position strategy, Angel Hotel has already surpassed the share building stage. The phase is characterized by the establishment of a presence in the market. Angel Hotel has been operating for the past 10 years. This has allowed the hotel to establish a name among its clients. This name recall is an important aspect of the company. Angel Hotel can further improve its reputation and build on its current expansion. It is important for the hotel to emphasize its current strengths with its current development acting as support.

Angel Hotel, has undergone the stages of embryonic, growth, shakeout, and at the moment aiming towards maturity. The embryonic business strategy of Angel Hotel is aimed towards building a competitive advantage. Earlier, it was discussed that the intangible assets of the hotel chain have been providing great benefits. The growth business strategy of Angel Hotel is continuing its development and expands its operations. As stated in its projected budget, the company is poised to add different high-level amenities.

To stay competitive, Angel Hotel reduces its cost of delivering its services without decreasing the quality of services received by customers. Since Angel Hotel is expecting to experience substantial growth, it is predicted that maturity business strategy will be the next point of concentration. Angel Hotel has to adjust in reference to the strategies of its competitors. This is can be done by providing differentiated services and top-notch amenities. It will happen gradually but the progress has been promising.

The physical resources of Angel Hotel are being expanded to make it more competitive. The rooms that Angel Hotel builds are classy and reflect the uniqueness of the company. But the hotel plans to augment other forms of amenities and improve the technology it uses. The human resource of Angel Hotel is constantly developed to boost the delivery of services. In fact, training is held to improve the skills of the employees in dealing with customers and prospects. This is reflected in the annual budget of the company dedicated to personnel services. The company believes that its success is relative to the performance of its employees.

Angel Hotel has to provide additional value creation functions at lower cost, implement a value creation function that allows differentiation for pricing options, and aid the company to manage the industry competitors better. Aside from the rooms, the company can expand its alternatives. It was mentioned previously that the company plans to build spas. Aside from the beach, Angel Hotel is set to build its own swimming pool. Angel Hotel can also provide recreation sites for the customers. Facilities such as tennis courts, exclusive lounges, and restaurants will make the firm more versatile.

There is another suggestion that can help Angel in generating more income. The common trend among resorts is the penetration of casinos. But it has to be noted that there are legal impediments to the strategy. The hotel can start gradually and install slots machines and small card tables. Expansion of the casino services will come next. This is highly feasible and the possible revenue generated from this service is substantial.

Pricing Strategy

At present, Angel Hotel has 250 rooms and has equal rates. During the peak season, rooms are rented at $250 per night. On non-peak days, the rate per room is $230 per night. There are different strategies to improve this pricing model. Since the hotel is changing its rooms, there has to be a table of charges per class of room. Because of its long-term goals, the hotel will build three classes of rooms. There are tourist rooms, executive rooms, and presidential suites. Each room has a different rate per night and also rates when occupied during the day.

The tourist rooms are the same as the previous rooms. During peak season, the room rate is $300 a night. The rent period starts at 6 PM and ends at 6 AM. Room rates during the daytime are different during peak season. The rate is $220 which starts at 6 AM to 6 PM. There are also packages provided to clients who plan to occupy the room for more than 3 days. Each tourist room will charge $450 when rented for 3 days or more. During off-peak season, tourist room rates are at $250 at night and $200 during the daytime. Occupants who stay for more than 3 days will be charged $400 per day.

Executive rooms start at $350 per night of use. During the daytime, executive rooms are rented for $260. This is during peak season. Off-peak season charges visitors $320 at night and $230 at daytime. The hours for day and night are uniform for all rooms. Visitors who stay for more than 3 days are only asked to pay $550 per day of stay. During off-peak seasons, visitors who stay for more than 3 days are charged $500 per day.

There are 5 presidential suites that the hotel will build. Of the five, two will have the finest amenities. The three presidential suits charge $700 at night and $620 during the day during off-peak seasons. During peak seasons, the three rooms will cost $820 per night and $700 per day. Visitors, who stay for more than 3 days in the presidential rooms, are charged $1250/day during off-peak and $1450/day peak seasons. The two other presidential rooms are subject to some arrangement. The rent of the room starts at $5,000. There are several amenities available to the users. Each added service will increase the $5,000 base. There are no packages deals for this room and the rate is the same in all seasons.

Aside from the two fine dining restaurants, the hotel plans to add two more. There are different rates for the food served at the restaurants. The rate for the food and beverage ranges from $50 to $200. The restaurants offer French, Italian, Asian, and American dishes. The hotel will also expand the cocktail bar and add some live entertainment. As a premium, the hotel will charge entrance, which is consumable. The entrance fee for the cocktail bar ranges from $20 to $1000. This is dependent on the kind of live entertainment being offered on different nights by various artists.

It was mentioned that the hotel will add spas. The rate for this service ranges from $20 to $150. Spas offer the best products and services that will make the customer stay more enjoyable. There are also other amenities that clients can rent. The fee for using the amenities varies from sports equipment and other forms of recreation. The plans for a casino will start small. The minimum requirement is $100 and the bets range from $.25 at minimum and $20 maximum.

Benchmarking

Benchmarking is emerging in leading-edge companies as an information tool to support continuous improvement and to gain a competitive advantage. In order to benchmark effectively, a company needs a strong strategic focus and some flexibility in achieving management’s goals. Benchmarking provides cost savings in executing operations and supports the organization’s budgeting and strategic planning process. It has to be purposeful, externally focused, measurement-based, information-intensive, objective, and action generating. All practices performed have to be sincere intentions.

Performance measurement using the accounting perspective has been the traditional component of a quantitative approach to organizational performance measurement. The use of financial schemes has three significant functions. Assessing marketing performance is an increasingly important task for managers and other corporate stakeholders. The use of financial schemes has three significant functions. The first function is using financial measures of performance as tools of financial management.

The evaluation of its performance has to be done daily, weekly, monthly, and annually. All forms of information have to be properly documented. This data will be discussed to further create better strategies. Angel Hotel can also study the competition within the region. This will allow the company to improve its pricing models and expansion direction. The personnel also need to be evaluated by the company. Aside from the personnel, the systems within the firm have to be checked to ensure their efficiency.

References

American Institute of Certified Public Accountants. (1992) “Statement on Auditing Standards No. 69.” New York: AICPA.

Beresford, D. (1990). “Financial Reporting: Comparability and Competition.” New York: New York University.

Luft, J. and Shields, M. (2003). Accounting, Organizations, and Society. “Mapping management accounting: Graphics and guidelines for theory-consistent empirical research.”

Melkers, J. (2001). Government Finance Review. “Assessing the impact of performance budgeting: A survey of American States.”

Schmidt, J. (1992). Journal of Accountancy. “Is it time to replace traditional budgeting?”

Shields, M. (2003). Journal of Management Accounting Research. “Budgeting research: Three theoretical perspectives and criteria for selective integration.”

Van Riper, R. (1994). Setting standards for financial reporting: FASB and the struggle for control of a critical process. Westport, Connecticut: Quorum Books.

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