Unit 2 Finance in the Hospitality Industry

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This Unit 2 Finance in the Hospitality Industry will enable learners to develop practical understanding of the accounting techniques used to control costs and profits, and to support managers in making effective short-term decisions.

Unit abstract

Learners will gain understanding of the sources of funding and income generation for business and services industries. They will also understand business in terms of the elements of cost and how to analyse business performance by the application of ratios. Learners will have opportunities to investigate control systems, income generation and methods of measuring and analysing performance. On completion of the unit, learners will be able to evaluate business accounts and apply the concept of marginal costing. Learners must ensure that their evidence relates to the hospitality industry

Learning outcomes

1 Understand sources of funding and income generation for business and services industries

  • Funding: sources eg retained profits, loans, banks, investors, small business schemes, franchise, hire purchase, sponsorship, lease schemes, creditors, debt factoring
  • Income generation: methods eg sales, commission, sub-letting, sponsorship, grants, tracking mechanisms

2 Understand business in terms of the elements of cost

  • Elements of cost: sales; materials; consumables; labour; overheads; capital; gross and net profits; discount costing
  • Selling prices: product and service costing; formula to achieve a specific gross profit percentage; differential gross/net profit margins; marginal costing; effect of competition; freelance; commission; peak/off-peak trading
  • Control of stock and cash: methods eg storage, purchasing, cash, security, reconciliation, stock-taking
  • Taxation: income tax; Value Added Tax (VAT); corporation tax; schedules; rates; personal/capital allowances; post-tax profits, implications

3 Be able to evaluate business accounts

  • Trial balance: source; structure eg summary of accounts from sales, purchase and nominal ledgers
  • Final accounts: types eg sole trader, partnerships, limited company, trading account, profit and loss account, balance sheet, adjustments for depreciation, accruals, prepayments, bad debt provision; format eg vertical, double-entry, appropriation account; assets/liabilities eg capital, fixed, current, notes to accounts
  • Profit and cash budgets: purpose; types eg profit, cash flow, operating, master; variance analysis to include sales (volume and average spend), cost variances (raw material, labour, overhead), profit variances (gross and net)

4 Be able to analyse business performance by the application of ratios

  • Sales profitability ratios:gross and net profit; Return On Capital Employed (ROCE)
  • Liquidity ratios:current; acid test
  • Efficiency ratios: debtors and creditors payment periods; stock turnover
  • Financial ratios: interest earned; gearing

5 Be able to apply the concept of marginal costing

  • Costs categorisation and contribution: fixed and variable costs; contribution calculation eg product/customers, cost/profit/volume relationship
  • Application: break-even; profit/loss potentials; setting selling price and discounting


Essential requirements

Adequate access to computer and appropriate financial software is essential. When giving presentations, learners must also have access to the latest technological equipment and software. Tutors must develop suitable banks of case study materials based on real situations for demonstration and practice by learners. These must be in the context of the hospitality industry and include examples from different aspects of the industry, such as the front office, food and beverage costs, service costs etc

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