Hospitality Financial Management PDF
Preview Hospitality Financial Management
H O S P I T A L I T Y F I N A N C I A L MANAGEMENT H O S P I T A L I T Y F I N A N C I A L MANAGEMENT Agnes L. DeFranco & Thomas W. Lattin J O H N W I L E Y & S O N S , I N C . Thisbookisprintedonacid-freepaper.(cid:1)(cid:1) Copyright(cid:2)2007byJohnWiley&Sons,Inc.Allrightsreserved. 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Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsinprintmay notbeavailableinelectronicbooks.FormoreinformationaboutWileyproducts,visitourwebsiteat www.wiley.com. LibraryofCongressCataloging-in-PublicationData: DeFranco,AgnesL.,1961– Hospitalityfinancialmanagement/byAgnesDeFranco&ThomasLattin. p.cm. Includesindex. ISBN-13:978-0-471-69216-4(cloth) ISBN-10:0-471-69216-6(cloth) 1. Hospitalityindustry—Finance. I. Lattin,ThomasW. II. Title. TX911.3.F5D442006 647.94068(cid:1)1—dc22 2006007280 PrintedintheUnitedStatesofAmerica 10 9 8 7 6 5 4 3 2 1 CONTENTS Preface ix Acknowledgments xi 1 Finance and the Hospitality Industry 1 Introduction 5 HospitalityIndustryFinancialChallenges 6 ChapterStructure 8 ChapterTopics 9 2 Financial Reporting 15 Financial Reporting 17 AccountingastheLanguageofBusiness 17 FinancialStatements 21 ManagementReports 25 AccountingSystem—CP3System 38 3 Analyzing Financial Statements 53 Analysis of FinancialStatements 56 ReadersofFinancialStatements 56 TypesofAnalyses 57 ManagementDecisionMaking 74 ReadersofFinancialStatementsBeware! 78 4 Managing Working Capital and Controlling Cash 91 Managing WorkingCapitaland ControllingCash 94 WorkingCapital 94 Cash 97 5 Growing the Business 112 The Need for Growth 115 ShareholderValue 115 OtherBenefitsofGrowth 118 vi CONTENTS GrowthStrategies 120 IncreaseSalesandProductivityofExistingProperties 120 ExpansionofPhysicalFacilities 122 FranchiseBrandRights 123 SecureAdditionalManagementContracts 124 MergersandAcquisitionsofCompetitors 125 GoingPublic 125 6 Financing Growth 134 The Need for Capital 138 Capital 139 LoanTerminology 145 TypesofLoans 147 SourcesofLoans 150 Equity 153 HotelFinancingTrendsand Schemes 158 TheGoldenAgeofHotelFinancing 159 SavingsandLoans 159 InvestmentTaxCredits 159 InfluxofForeignCapital 159 AcceleratedDepreciation 160 RealEstateTaxShelters 160 TheTaxReformActof1986 160 TheResolutionTrustCorporation(RTC) 160 NewFinancingSchemes 161 7 The Time Value of Money 177 Conceptof Time Value of Money 179 TimeValueofMoney 179 MarketValue 180 CalculatingTimeValueofMoney 182 TimePeriodandCompounding 205 8 Investment Analysis 221 InvestmentAnalysis 223 WeightedAverageCostofCapital(WACC) 224 DiscountRate 225 CapitalizationMethodofValuation 226 InvestmentAnalysisTools 227 FactorsAffectingToolsofInvestmentDecisions 236 9 Hospitality Industry Applications of Time Value of Money Concepts and Skills 247 Time Value of Money Applications 250 LoanQuestions 250 EquityQuestions 256 CONTENTS vii UseofSensitivityAnalysis 258 HospitalityApplications 259 UsingROI,NPV,andIRR 271 10 The Investment Package 286 The Need for an InvestmentPackage 289 ExecutiveSummary 291 FactSheet 291 BusinessPlan 294 SourceandUseofFunds 295 PhotographsorRenderings 297 Third-partyConfirmation 298 ProjectBudget 298 QualificationsofProjectTeam 301 InvestmentAnalysis 302 PersonalFinancialData 302 EvaluationoftheInvestmentPackage 302 Lenders:Debt 303 Owner/Investor:Equity 304 11 Crafting and Negotiating the Deal 315 The New BusinessVenture 318 TheBusinessEntity 319 TheDebtandEquityMix 325 NegotiatingLoans with Lenders 325 Principal 327 InterestRate 328 PointsCharged 328 AdditionalCollateral 328 PersonalGuarantees 329 OtherLenderIssues 329 DealSponsor’sGoals 330 Negotiatingthe EquityInvestment 331 AmountofEquity 332 PercentageofOwnership 332 InvestorHurdleRates 333 ExitStrategyandDecision-makingPoweronWhentoSell 333 NegotiatingSkills 333 BePrepared 333 BeProfessional 334 UseProvenSellingSkills 334 12 Tying It All Together 345 Introduction 348 HospitalityIndustryFinancialChallenges 348 viii CONTENTS Financial Reporting 349 Analysis of FinancialStatementsand ManagementReports 350 AnalysisofFinancialStatements 350 AnalysisofIndustryReports 351 ApplicationsofFinancialAnalyses 351 Managing WorkingCapital 351 Growingthe Business 352 ShareholderValue 352 IncreasingShareholderValue 352 OtherBenefitsofGrowth 353 GrowthStrategies 353 FinancingGrowth 356 TypesofCapital 356 CostofCapital 356 MixofCapital 356 InvestmentAnalysis 357 TheTimeValueofMoney 357 InvestmentAnalysisMethods 358 FavorableorUnfavorable? 358 FactorsImpactingtheAnalysis 359 HospitalityIndustryApplications 359 DebtandEquityNegotiations 359 The InvestmentPackage 360 WhatLendersWanttoKnow 360 WhatEquityInvestorsWanttoKnow 361 Craftingand Negotiatingthe Deal 362 BusinessDecisionstoMake 363 NegotiatingtheLoan 363 NegotiatingtheEquityInvestment 363 NegotiatingSkills 363 Index 365 PREFACE O ur goal in writing this book is to present a practical approach to hos- pitality financial management that provides students with a clear de- scription of the financial management concepts, skills, and tools they need to become successful managers or entrepreneurs in the hospitality indus- try. The target audienceforthisappliedfinancebookisundergraduatestudents taking a hospitality financial management course. However, it can also be used as a supplementary text in a graduate-level hospitality financial management course. Hospitality Financial Management is entrepreneurial in nature and em- phasizes that to succeed in the world of business, whether you work for a large or small company, a public or private company, for othersoryourself,youmust always think like an owner while acting like a manager. The more you assume that the money you are spending, collecting, and investing is your own, the better business decisions youwill makeandthe morefinancialrewardsyouwill earn. The unique and colorful image incorporated in the cover of this text is a photograph of the Portland Head Light, a famous and historic lighthouse in Cape Elizabeth, Maine, which was first lit in 1791. We chose this scenicland- mark because it symbolizes the essence and entrepreneurial spirit of the hos- pitality industry and small business. Pedagogical Features That Help Students FEATURE STORY: Each chapter begins with a Feature Story, based on a real- world restaurant, hotel, or small business, that relates to the financialconcepts presented within the chapter. An additional Feature Story is also included within the body of the chapter.
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