5.1 Primary Remarksshodhganga.inflibnet.ac.in/bitstream/10603/97785/15/15_chapter5.pdf · 1992. It...

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5.1 Primary Remarks

The data needs to be processed and analyzed after collection as described in the research

plan. All relevant data should be compared and analyzed, is the part of the scientific

study. Data processing includes editing, coding, and classification of the collected data;

so as to amenable to analysis. The data analysis implies the computation of certain

measures along with searching for patterns of relationship that exit among data-groups.

Thus, in the process of analysis, researcher needs to use certain scientific test to check

validity of hypothesis, whether; it is supporting or conflicting with the original or new

hypothesis.

5.2 Data Analysis

This paragraph confers procedures for objective determining, under various conditions,

whether sample results support a hypothesis about a parameter value, or whether the

sample results indicate that a hypothesis should be rejected.

Data analysis is based on primary and secondary data collected. The primary data have

been collected with the help of questionnaire and direct interview of hoteliers and

bankers. The secondary data have been collected from annual reports of hotels, financial

reports of hotels made by CMIE Prowess (Appendix-D), MCA-21 (Ministry of Corporate

Affairs site) and review of HVS International for the period of 2005-2010.

Due do the limitations secondary data of only four hotels have considered for research.

These hotels are The Indian Hotels Ltd. (The Hotel Taj Blue Diamond, Pune), Kamat

Hotels (VITS Hotel, Pune), Sayaji Hotel and Royal Orchid Hotel (Royal Orchid Central

Hotel). The brief information about these groups of hotels is as following:

The Indian Hotels Ltd.:

The Taj Mahal Palace and Tower built in 1903, in Mumbai by Jamsetji N. Tata,

founder of the Tata group. With total of 57 properties in 40 locations across India and 18

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International Hotels, the Taj family of Hotels encompasses iconic city hotels, grand

palaces, modern business hotels, beach resorts and rustic safari lodges.

Kamat Hotels:

The Kamat Group had a modest beginning. The Chairman Late Mr. Venkatesh

Kamat had started a small restaurant at Mazgaon, Mumbai. Within the span of five years

(1972-1976), a total of six establishments a partnership in the well known Asiatic

Department store at Churchgate, catering to the distinctly different needs of general

office goers. In September 1995, the management decided to upgrade and reopen the

property as a Five Star Hotel and ‘The Orchid’ Asia’s first Eco-Friendly Five Star Hotel

was opened. The group also had their hotel at several other countries like Belgium,

Dubai, Japan, Singapure, U.K. and U.S.A.

Sayaji Hotels:

Sayaji Hotel was incorporated in 1982. It was become public limited in the year

1992. It is the part of Sayaji Hotel group. This hotel’s Head office is at Indore. This

hotel has its properties at Indore, Vadodara and Pune.

Royal Orchid Hotels:

Hotel Royal Orchid’s Head Office is at Bangalore and established in 1973. This

group operates 18 business and leisure hotels across India. The hotel has a strategic plans

to expand into international markets in the immediate future.

5.2.1 Hypothesis 1 The bank finance is the commonly used source of working capital

for hotels.

With the help of both the primary and secondary data researches, the hypothesis has been

tested. It is assumed that short term bank borrowing is used to fulfill the working capital

need of the hotel.

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Table 5.1 The Indian Hotels Ltd. (The Hotel Taj Blue Diamond, Pune a Five Star

Hotel): The field research reveals that the sources of finance of the working capital for

this hotel are mainly advances from customers and public deposits. Presently, this hotel

does not obtain bank finance to satisfy the working capital need and also do not avail

non-fund based facilities like bill discounting, letter of credit, or factoring services.

Following table shows the contribution of total borrowings to short term borrowings.

Table 5.1 Short-term borrowing to the borrowing in The Indian Hotels Ltd. (The

Hotel Taj Blue Diamond, Pune a Five Star Hotel):

(Fig. in Cr.)

Year Total

Borrowings

from Bank

Short Term

Borrowing from

Bank during the year

% of Total Borrowings

from Bank to Short

Term Borrowing from

Bank

2005-06 110.00 10.00 9.10

2006-07 177.99 80.03 44.96

2007-08 211.47 120.51 56.99

2008-09 145.25 29.44 20.27

2009-10 0.00 0.00 0.00

Average 26.26

Source: Financial data published by CMIE Prowess, Appendix-D pg.xxviii

From the given financial data (from table 5.1), it been has revealed that this hotel is very

inconsistent in using the bank finance for satisfying the working capital needs. It is

varied from 0-56%.

Other than fund based facilities, the bank provides some non-fund based facilities as well.

Table 5.2 shows various financial charges charged by the banks for providing these

services.

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Table-5.2 Table Shows various financial charges for providing financial services for

The Indian Hotels Ltd.

(Fig. in Cr.)

Financial services 2005-06 2006-07 2007-08 2008-09 2009-10

Financial charges on Instruments 0 0 0 0 0

Other fund based financial services 0 0 0 0 0

Bill discounting charges 0 0 0 0 0

Bank charges and guarantee fees

etc.

0 0 0 0 0

Source: Financial data published by CMIE Prowess, Appendix-D pg.xxiii

Table 5.2 shows various financial charges taken by the bank. The data reveals that

this hotel did not avail any service related to the working capital finance.

VITS (Kamat (I) Hotels, Four Star Hotel) : The Bank finance is the source of the

working capital for this hotel. This hotel used 10-15% bank finance to satisfy its working

capital requirement and does not use popular banking services like bill discounting and

factoring. Following table shows the contribution of short term borrowings to total

borrowings.

Table -5.3 Share of short term borrowings to total borrowings in VITS Hotel

(Fig. in Crore of Rupees)

Year Total

Borrowings

from Bank

Short Term

Borrowing from

Bank

% of Total Borrowings from

Bank to Short Term

Borrowing from Bank

2005-06 93.94 4.32 4.63

2006-07 120.66 30.09 24.94

2007-08 102.81 30.97 30.12

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2008-09 127.5 48.11 37.73

2009-10 174.69 2.13 1.22

Average 19.73

Source: Financial data published by CMIE Prowess Appendix-D pg.xli

From Table 5.3, it is revealed that there is no consistency in using bank finance as short

term source of finance or working capital finance. In the years 2005-06 and 2006-07 its

contribution was 4.63% and 24.94%, respectively; from 2006-07 to 2008-09 it was

increasing. However, in the year 2009-10 short term finance from the bank to total

borrowing from the bank was just 1.22.

Table 5.4 shows the financial expenses made or financial charges paid to bank for

availing these services.


VITS Hotel

(Fig. in Cr.)


Financial charges on

Instruments

0 0 0 0 0

Other fund based financial

services

0 0 0 0 0


Bank charges and guarantee fees

etc.

0 0 0 0 0

Source: Financial data published by CMIE Prowess Appendix-D pg.xxxvi

Table 5.4 shows various financial charges taken by the bank. Alike Taj Blue Diamond,

from the data it is revealed that, this hotel also did not avail any service provided by the

bank which is useful to the hotel as non fund based facility.

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Royal Orchid Central (Five Star Hotel):

During the field study efforts were made to know the use of bank finance for meeting the

working capital requirement of the hotel Royal Orchid Central. It is revealed from the

field research that the bank finance is the major source of the working capital for this

hotel. This hotel used 60% bank finance to satisfy its working capital requirement. This

hotel has availed cash credit facility and also term loan to assure uninterrupted working

capital for the hotel. This hotel also has approached their bank for facilitating letter of

credit. However, this hotel did not use popular banking services like bill discounting and

factoring. The bank asked the hotel to provide security for getting the working capital.

Along with the bank finance, this hotel had also borrowed from corporate houses, to

satisfy its working capital requirement. Table 5.5 shows the contribution of short term

borrowings to total borrowing.

Table-5.5 Share of short term borrowings to total borrowings in Royal Orchid

Central Hotel (Fig. in Crore of Rs.)

Year Total

Borrowings

from Bank

Short Term

Borrowings from

Bank


Bank to Short Term

Borrowing from Bank

2005-06 26.37 0.00 0.00

2006-07 21.90 0.00 0.00

2007-08 16.81 0.00 0.00

2008-09 61.77 50.00 80.95

2009-10 137.86 50.00 36.27

Average 58.61

Source: Financial data published by CMIE Prowess Appendix-D pg.liv

Table 5.5 shows that during the first three years, the Royal Orchid Hotel has not availed

any short-term borrowing from banks. However, in the year 2008-09 the short term

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borrowing was as high as 80.95%, and is the highest among all the years.

During the next year it was reduced to 36.27 percent. Before 2008-09, this hotel did not

borrow any funds from the bank to satisfy its working capital need.

Table 5.6 shows the financial expenses made or financial charges paid to the bank for



Royal Orchid Central Hotel

(Fig. in Crore of Rs.)



Instruments

0 0 0 0 0

Other fund based

financial services

0 0 0 0 0


Bank charges and

guarantee fees etc.

0.05 0.06 0.1 0.08 0.06

Source: Financial data published by CMIE Prowess Appendix-D pg.xlix

The table shows various financial charges taken by the bank. The above data discloses

that, this hotel has availed only few services like bank guarantee, etc. The bank charges

and guarantee fees paid by the hotel varies between Rs. 0-05 to Rs. 0.1 which is very

negligible.

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Sayaji Hotel (Three Star Hotel):

From the field investigation, it has been found that the bank finance was one of the

sources of the working capital financing for this hotel. This hotel used to obtain financial

assistance from the bank to satisfy its working capital need. This hotel has also availed

term loan to fulfill permanent working capital need from bank. This hotel has also

availed bank guarantee. However, it did not avail bill discounting and letter of credit

facilities from the banks. Table 5.7 shows the contribution of short term borrowings to

total borrowings.

Table -5.7 Share of short term borrowings to total borrowings in Sayaji Hotels


Year Total

Borrowings

from Bank

Short Term

Borrowing from

Bank


Bank to Short Term

Borrowing from Bank

2005-06 1.74 1.74 100%

2006-07 1.72 1.72 100%

2007-08 0.00 0.00 0%

2008-09 0.00 0.00 0%

2009-10 0.00 0.00 0%

Average 40%

Source: Financial data published by CMIE Prowess Appendix-D pg.lxvii

The table 5.7 reveals that during the years 2005-06 and 2006-07 this hotel has availed the

100% short term finance from bank which is normally used for satisfying the working

capital need of this hotel. Subsequently, for the next three reporting years the hotel has

not availed any bank finance. It has also been revealed that the share of bank finance to

the total borrowing is very low.

Following table shows the financial expenses made or financial charges paid to bank for


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Table-5.8 Table Shows various financial charges for providing financial services

Sayaji Hotels




Instruments

0 0 0 0 0

Other fund based financial

services

0 0 0 0 0


Bank charges and guarantee

fees etc.

0.15 0.37 0.44 1 1.09

Source: Financial data published by CMIE Prowess Appendix-D pg.lxii

Table 5.8 shows various financial charges taken by bank. The table shows that this hotel

did not availed many services except few services like bank guarantee. Further, the bank

charges and guarantee fee etc paid by the bank varies between Rs. 0.15 and Rs. 0.09

Analysis of Primary Data Collected from 25 Respondent hotels: During the field

study efforts were made to interview selected respondents from the hotel industry

regarding various sources of finances availed by the hotel industry for fulfilling the

working capital requirements. For the purpose specific questions were asked and the

views of respondents were obtained. The detailed discussion has been made regarding

sources of finance of the Hotels in Pune City to satisfy the working capital needs, which

have been presented as under.

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Q. No. 1 - What are the sources of finance of your hotel for fulfilling the need of the

working capital?

As regards the sources of finance, the respondents have stated that proprietor funds bank

finance and advances from the customers of working capital are the main sources of

finance for hotel industry. The details of the analysis is presented in table 5.9.

Table 5.9 Shows various sources of finance

Option No. Sources No of respondents

1. Proprietor’s Funds 15

2. Bank Finance 14

3. Advances from customers 12

4. Public Deposits 2

5. Others 2

Source: Field Study Research From table 5.9, it is observed that out of total 15 respondents have preferred propreitor

fund as the main source of finance while 14 have preferred bank finance. On the other

hand, 12 respondents have preferred advances from the customers as the main source of

capital for meeting the working capital needs. Only two other respondents have preferred

public deposits and others for meeting their working capital need. The field study

observations also have been presented in graph. 5.1.

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Graph-5.1 Shows the sources of finance of Hotels in Pune

(Source – Field research)

Graph 5.1 shows the multiple choices (sources of finance), which were selected by the

respondents. Five respondents have selected bank finance as their only source of

working capital. That means only 20% respondents are entirely depending on the banks

to fulfill their working capital needs. During the field study efforts have been made to

collect information regarding five questions and the respondents were requested to give

their answers in Yes or No form. The answers given by the respondents are presented in

Table-5.10

Table-5.10 Showing whether the Hotels take Bank Finance to satisfy their working

capital need

Q. No. Questions Yes% No%

Q.2 Do you obtain bank finance for satisfying the working

capital need of your hotel?

56 44

Q.5 Do you avail any term loans to satisfy your need of

permanent working capital?

28 72

15

14

12

2

2

Sources of Finance

Proprietor’s Funds

Bank Finance

Advances from customers

154

Q.6 Do you avail facility of bill discounting from your

bank?

20 80

Q.7 Do you avail facility of letter of credit from your bank? 40 60

Q.8 Do you avail facility of factoring services from your

bank?

0 100

Source: Field Investigation.

From table 5.10 it is revealed that 56 per cent of the respondents have agreed that their

hotel obtain bank finance for meeting working capital requirements. As regards the terms

loans, 28 per cent respondents have disclosed that they have availed term loans to satisfy

their permanent working capital requirement. On the other hand only 20 per cent

respondents avail bill discounting facilities to meet their working capital needs.

The respondents were also asked regarding the use of letter of credit for working capital

needs, only forty per cent respondents have replied positively. The respondents were also

asked whether they use factoring services. In this regard, surprisingly it has been

revealed that none of the respondents have used factoring services to meet the need of

working capital. During the field study the respondents were asked about the use of bank

finance for meeting their working capital requirements. The details of the observation is

presented in graph 5.2.

Graph-5.2 Shows whether hotels take Bank Finance to satisfy their working capital

need


0

50

100

150

Q2 Q5 Q6 Q7 Q8

Yes% No%

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Graph 5.2 indicates that 56% respondents used bank finance to satisfy their working

capital need. Two respondents (8%) did not avail bank finance to satisfy their day-to-day

business needs. However, 28 per cent respondents have availed the term loan to satisfy

their permanent working capital need. Not a single respondent has used factoring

services provided by bank.

During the field study, similar effort has been made to enquire regarding the extent of

finance used by the respondents. The answers of the respondents are presented in table

5.11 and graph 5.3.

Table – 5.11 Showing upto what extent hotels take Bank Finance

Q. No. Questions 0-20% 21-40% 41-60% > 60%

Q.3 Up to what extent you obtain bank finance for

satisfying the need of working capital for your

hotel?

2 6 4 2

Q.4 Up to what extent your bank provides you cash

credit or over draft facility to fulfill the need of

working capital

3 5 4 2


Graph – 5.3 Showing upto what extent hotels take Bank Finance

0

2

4

6

8

0-20% 21-40% 41-60% < 60%

Q.3 Q.4

156


Table 4.6 and graph 5.3 reveal that total 14 respondents have availed bank finance to

satisfy their working capital need. It shows that 71% of the respondents have availed 21-

60% bank finance while 64% respondents have availed 21-60% cash credit or over draft

facility.

A very sincere effort has been made during the field investigation to know the reasons the

hoteliers are not obtaining credit from the bank for fulfilling the need of the working

capital. The main reasons are as follows:

The banks ask more than 50% of the loan amount as security for fulfilling the

working capital need of the hotels. The bank ask the hotel to arrange minimum

25% margin.

It has also been stated by the respondents that the terms and conditions of the

banks for sanctioning credit to hotels for satisfying their working capital needs are

very rigid.

Primary data collected from 5 banks:

In order to make the study more meaningful, efforts were also made to enquire from five

bankers to know their opinion. The primary data have been collected from The Cosmos

Co-operative Bank, The Saraswat Co-operative Bank, Bank of India, Bank of

Maharashtra, and Central Bank of India.

These banks have revealed that though the banks provide finance to hotels to fulfill their

needs of working capital financing, hotels come in the caution list of the banks. The

banks keep very close monitoring on the performance of hotels, while sanctioning them

finance for working capital. The reasons for precaution are as follows:

1. The hoteliers obtain double financing that is high amount of credit from their

suppliers and also obtain bank finance to satisfy their working capital needs.

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2. The banks have observed that there is no standardization in room rate. Hence, it

is difficult for the banks to calculate and analyze the proposed income of these

hotels.

3. Lack of transparency in maintaining the records of hotels discourage the banks to

sanction working capital finance.

4. Most of the stocks of the hotel are fast moving. Hence, it is not acceptable as

security for banks.

5. During the field research the banks have revealed that while sanctioning project

finance banks also provide certain amount for working capital to fulfill the day-to-

day needs of the hotels.

6. General Manager of a Nationalized Bank has revealed, during the field research

that, the banks may grant working capital finance to hotels, if it is supported by

stock and less than 90 days debtors as Primary Security and second charge on any

fixed assets.

Both the study and analysis of primary and secondary data have disclosed that the hotel

industry does not entirely depend on the banks to fulfill their working capital needs.

However, 56% respondents have approached banks either for cash credit facility, bill

discounting, or letter of credit facility. On the other hand, 42.86% respondents have

availed more than 40% bank finance to satisfy their working capital needs. Hence,

Hypothesis-1: “The bank finance is the commonly used source of working capital

for hotels”, is partly proved.

5.2.2 Hypothesis 2: The current credit policies of the hotel industry are liberal.

The credit policy of a firm provides the framework to determine whether or not to extend

credit to customers. How much credit to be extended? It also involved in making the

decision about determining the credit period. Since last three years, many reputed

international and domestic chain hotels have started their hotels by making joint ventures

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with local business houses. This has increased the number of five star hotels in Pune.

Therefore, hotel market in Pune has become the buyers’ market. But, these hotels are

concentrating more on business enterprises than their other segment of customers.

To test this hypothesis, debtors’ turnover ratio and apportion of debtors collection period

(more than 6 months credit and less than 6 months credit) have been referred from

financial statements and are presented in table 5.12.

Table- 5.12 showing Credit Sales to Total sales (in %)

Year Cash Sales Credit Card Sales Credit Sales other than Credit Card

2005-06 10.7 47.2 40.0

2006-07 14.0 53.9 31.8

2007-08 30.3 53.0 15.9

2008-09 13.6 59.8 26.3

2009-10 11.3 57.9 28.6

Average 15.98 54.36 28.52

(Source – Records of HVS International)

From table 5.12 it is revealed that, during the period 2005-06 to 2009-10, on an average

15.98 per cent cash sales were recorded by the hotel industries in Pune. During the year

2007-08, the highest percentage of 30.3 cash sales were achieved. On the other hand, the

lowest of 10.7 per cent cash sales was recorded during the year 2005-06 among all the

years. As regard, sales through credit cards during all the reporting years the sales were

varying between 47.2 and 59.8 per cent. The highest per cent of sales were recorded in

the year 2008-09 while the lowest percentage was also recorded in the year 2005-06. The

hotels also go for credit sales through other than the credit card. This sales varies

between 15.9 per cent to 40.0 per cent during the reporting period. As a whole, the

average sale through credit card was 54.36 per cent on the highest among all.

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Market Segmentation

The market segmentation of the Hotel Industry consists of 10 different categories of

customers. As a part of the study, efforts were made to understand the composition of

types of guests who have visited the hotels during the period 2006-10. It has been

presented in table 5.13.

Table-5.13 Shows the market segmentation for Two and Three Star Hotels/Four,

Five, and Five Star Deluxe Hotel

Composition

(Guest in %)

2005-06 2006-07 2007-08 2008-09 2009-10

Air Crew 0.2 1.1 0 2.3 0 45.0 0 0.2 5.6 5.2

Business

Travelers-

Domestic

61.8 41.5 50 34.8 52.3 34.6 43.0 34.0 43.3 42.2

Business

Travelers –

Foreign

11.9 41.7 14.0 45.7 9.0 56.1 14.5 53.0 19.4 42.3

Complimenta

ry Rooms

0.5 1.1 0.8 0.8 0.8 0.6 1.1 1.0 0.8 1.2

Domestic

Tourists

7.9 2.0 17.6 2.6 13.7 4.2 12.4 3.8 12.6 2.7

Foreign

Tourists

1.3 2.1 1.8 3.2 1.8 0.7 6.2 2.7 3.0 1.6

Meeting

Participants

(less than

100)

2.2 1.3 3.6 1.3 2.7 0.3 3.4 0 4.7 0.2

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(Source - HVS International)

According to the survey of HVS International, in the year 2009-10 domestic and foreign

business guests contributed to as high as 85.5% of the total business of four star, five star,

and five star deluxe hotels, while it was 62.6% from two star and three star hotels. This

leads to cut throat competition among hotels to attract corporate houses. From table 5.13

it is revealed that the contribution of domestic business travelers varies between 34.0 and

61.8 per cent during the period of study. On the other hand the foreign business travelers

and their percentage varies between 9.00 and 56.1. Thus it can be concluded that on an

average 65-80% of total guests are either domestic business travelers or foreign travelers.

Debtors Turnover Ratio and Debtors Collection Period

Debtors turnover ratio measures whether the amount of resources tied up in the form of

debtors are reasonable and the organization has been efficient in converting it into the

cash. The debtors’ collection period denotes how long it takes to collect the amount from

the guests of the hotels. However, from financial data, the opening and closing balances

for debtors have been considered while calculating debtors turnover ratio. With the help

of field research and data published by CMIE Prowess for four hotels in Pune (The

Orchid Hotel, Hotel Taj Blue Diamond, Hotel Royal Orchid Central, Sayaji Hotel) the

Meeting

Participants

(more than

100)

9.9 5.9 8.1 4.7 16.4 1.6 12.8 1.3 9.2 4.0

Domestic

Tour Groups

1.6 1.3 1.6 0.3 1.1 0.6 2.2 1.3 2.6 0.9

Foreign Tour

Groups

1.2 1.9 0.6 3.0 1.0 0.3 1.0 2.3 1.2 0.5

Others 1.6 0.2 2.1 1.4 1.1 0.7 3.0 0.3 2.5 4.0

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study of debtors turnover ratio and debtors collection period have been carried out.

The field study has revealed that all these hotels provide 15-30 days credit to their guests.

These hotels have predetermined their credit period to the customers, but hotels

authorities have experienced that, the customers do not settled their account within

specified period, inspite of the prompt follow up. The study has further disclosed that,

the customers of the hotel have settled their accounts within 40 to 45 days. All of these

hotels have recovery departments, which keep the track record of the outstanding of the

customers. The major part of the business comes from a few big customers. Therefore,

these customers dictate terms for credit. However, it has been revealed from the primary

and secondary data that these hotels had not sustained much loss due to bad debts. These

hotels do not charge any interest or take any action from their guests for not receiving

outstanding amount within stipulated period. The study also has revealed that these

hotels have never encourage early settlement of dues from their debtors by offering them

any cash discounts.

The details regarding debtors turnover ratio of the selected Indian Hotel is presented in

the table 5.14:

Table- 5.14 Showing Debtors Turnover Ratio of Hotel Taj Blue Diamond (Indian

Hotels) (Rupees in Crores)

Year Debtors

Turnover

Ratio

Debtors

Collection

Period (Days)

% of Debtors

to Current

Assets

Debtors out

standing less

than 6 months

(%)

Debtors out

standing more

than 6 months

(%)

2005-06 13.34 27.35 19.86 91.32 8.68

2006-07 13.54 26.96 25.66 90.89 9.11

2007-08 12.28 29.71 25.87 84.89 15.11

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2008-09 12.42 29.38 17.66 78.48 21.52

2009-10 12.13 30.08 13.07 75.05 24.95

Average 12.74 28.70 20.42 84.13 15.87

Source: Financial data published by CMIE Prowess Appendix-D pg.xxix & xxxii

From the Table 5.14, it is revealed that the debtors’ collection period of this hotel has

increased from the year 2007-08, which has decreased slightly in the year 2008-09 and

increased during the subsequent years. It also discloses that the proportion of outstanding

debtors for more than 6 months has been showing and increasing trend during the entire

period of study. Therefore, it is clear that the customers of this hotel have enjoyed credit

period for more than one hundred and eighty days. Similarly, the debtors turnover ratio

of The VITS Hotel is presented in Table 5.15.

Table -5.15 showing Debtors Turnover Ratio of The VITS Hotel (Kamat Hotels) Year Debtors

Turnover

Ratio

Debtors

Collection

Period

(Days)

% of

Debtors to

Current

Assets

Debtors out

standing less

than six months

(%)

Debtors out

standing more

than six months

(%)

2005-06 16.96 21.51 21.30 90.21 9.79

2006-07 18.48 19.76 5.89 95.65 4.35

2007-08 13.61 26.82 28.13 88.58 11.42

2008-09 8.40 43.47 25.01 83.04 16.96

2009-10 7.53 48.45 16.45 83.82 16.18

Average 13.00 27.40 19.36 88.14 11.74

Source: Financial data published by CMIE Prowess Appendix-D pg. xlii & xlvi

Table 5.15 reveals that debtors collection period of this hotel has increased since the year

2007-08. It also discloses that proportion of debtors to current assets was the highest of

28.13 in the year 2007-08 and the lowest was in the year 2006-07 and the outstanding

163

debtors for more than 6 months was the highest of 24.95 per cent in the year 2009-10

where as the lowest of 8.68 per cent was recorded in the year 2005-06.

In the similar manner, efforts have been made to analyze the debtors’ turnover ratio of

Hotel Royal Orchid Central, which has been presented in Table-5.16

Table-5.16 showing Debtors Turnover Ratio for Hotel Royal Orchid Central

Year Debtors

Turnover

Ratio

Debtors

Collection

Period

(Days)

% of

Debtors to

Current

Assets

Debtors out

standing less

than six months

(%)

Debtors out

standing more

than six months

(%)

2005-06 20.87 17.49 2.18 99.54 0.46

2006-07 18.48 19.75 3.07 100.00 0.00

2007-08 20.29 17.99 4.08 100.00 0.00

2008-09 19.59 18.63 9.39 100.00 0.00

2009-10 13.84 26.38 6.39 82.94 17.06

Average 18.61 20.05 5.02 96.50 3.50

Source: Financial data published by CMIE Prowess Appendix-D pg. lv & lx

From Table 5.16 it is found that, the proportion of debtors to the current assets of this

hotel is comparatively less than other hotels and its average comes only to 5.02 per cent.

The debtors’ turnover ratio is also high and also varies between 3.84 and 20.87. The

debtors outstanding for more than six months were found to be for three years nil. It

shows that this hotel is very prompt in recovering from their debtors. However, the

current assets of this hotel shows that in the year 2005-06, 89.01% of its funds just

remained unused on the account of cash and bank balance (Appendix-D). In the year

2009-10, 26.05% of its funds were invested in short term deposits and 58.06% remained

unutilized in cash and bank accounts (Appendix-D). The debtors outstanding for a period

of less than six month vary between 82.94 and 100 per cent. Surprisingly, it was cent per

164

cent for a period of three years. Thus it can be considered that, this hotel has adopted

conservative approach in managing their current assets.

Alike other hotels, the debtors turnover ratio of Sayaji Hotel is presented in Table 5.17

Table- 5.17 showing Debtors Turnover Ratio for Sayaji Hotel

Year Debtors

Turnove

r Ratio

Debtors

Collection

Period

(Days)

% of

Debtors to

Current

Assets

Debtors out

standing less

than six

months (%)

Debtors out

standing more

than six

months (%)

2005-06 7.11 51.31 38.59 63.36 36.64

2006-07 6.23 58.62 16.96 62.68 37.32

2007-08 8.89 41.03 17.56 68.76 31.24

2008-09 12.35 29.55 9.63 51.76 47.75

2009-10 12.85 28.40 18.42 60.57 39.43

Source: Financial data published by CMIE Prowess Appendix-D pg. lxviii & lxxii

Table 5.17 reveals that, debtors collection period of this hotel has increased in the year

2006-07 and showing a decreasing trend since the year 2007-08. However, from the

table, it is also observed that the proportion of outstanding debtors for more than 6

months period during all the five accounting years, are substantially high and varies

between 31-24 and 47.75 per cent. During the period of field study efforts were made to

find out the credit period and also the settlement of accounts. This analysis is presented

in table 5.18 and graph 5.4.

165

Table – 5.18 Showing whether the Current Credit Policies of Hotel Industry are

Liberal

Q. No. Questions 0-30

Days

31-45

Days

46-60

Days

>60

Days

1. How many days you provide credit

to your customers?

100% 0% 0% 0%

4. Within how many days your

customers settled his accounts

usually?

12% 40% 36% 12%

(Source – Field Research)

Graph 5.4 Showing whether the Current Credit Policies of Hotel Industry are Liberal

All the 25 respondents were of the opinion that they provide credit up to 30 days to their

customers. However, only 12 per cent respondents have disclosed that they have

successfully recovered the outstanding amount from debtors within specified time. On

the other hand 40 per cent respondents have revealed that they have recovered the

outstanding dues with in a period 31 to 45 days while 36 per cent respondents have

disclosed that they have recovered their dues with in a period of 45 to 60 days. Only 12

per cent respondents have stated that they recovered their outstanding after 60 days.

Various factors such as credit period, interest, discount, etc. are responsible for early

recovery of dues were discussed with the respondents during the field study. The details

of the opinion given by the respondents are presented in table 5.19. Similarly, the factors

0%

20%

40%

60%

80%

100%

120%

0-30 Days 31-45 Days 46-60 Days <60 Days

Q1 Q4

166

which are responsible for influencing the credit policies of the hotels in presented in

graph 5.5.

Table -5.19 Showing factors which influence credit policies of hotels Q. No. Questions Yes No

Q.2 Do you predetermine specific credit period to your customers? 96% 4%

Q.3 Do your customers settle their accounts within specific credit

period?

12% 88%

Q.5 Do you have specific mechanism for recovery of dues? 100% 0%

Q.6 Do you recover any interest from the debtors for making delay

in payment?

0% 100%

Q.7 Do you believe that major part of your turnover comes from

few big customers?

96% 4%

Q.8 Do you believe that these big customers dictate terms for

credit to your hotels?

92% 8%

Q.9 Do you bear loss for bad debts? 92% 8%

Q.10 Do you encourage early settlement of dues from your debtors

by offering them cash discount?

0% 100%

Graph -5.5 Showing factors which influence credit policies of hotels

(Source – Field Research)

0%

20%

40%

60%

80%

100%

120%

Q.2 Q.3 Q.5 Q.6 Q.7 Q.8 Q.9 Q.10

Yes No

167

All the 25 respondents have specific recovery mechanism for the collection of the debts.

They also prepare age-wise debtors statement regularly and undertake the follow up and

monitoring as well. However, due to competition in the hotel industry they can not take

any action against the customers for not settling their accounts within the given period.

In the city of Pune, most of the hotels are depending on corporate for business. These

corporate houses dictate the terms and conditions to the hotels. However, it has been

observed from field research and financial statements that, loss due to bad debts is

negligible.

From both primary and secondary data it has been observed that only 12 per cent

respondents could recover debts with in specified time. The data further revealed that no

action has been taken for not settling debtors’ accounts in time. Further, all the

respondents have clearly stated that no action is charged for making delay in making

payment. Similarly, all the respondents have stated that no encouragement is given for

early settlement of dues from the debtors by offering cash discount. The financial

statements of all four hotels reveal the existence of debtors more than six months. Hence,

hypothesis -2 is accepted.

Hence, both the primary and secondary data proves the following hypothesis:

“The credit policies of hotel industry are liberal.”

5.2.3 Hypothesis- 3 Maximum hotels take the advantages of spontaneous financing

to control outflow of cash.

The spontaneous finance arises naturally during the course of business. Trade creditors,

credit from employees, expenses outstanding, advances from customers, etc.; are the

examples of sources of spontaneous financing. These sources also reduce the amount of

168

negotiated financing. If these are timely repaid, are proved as more convenient, and less

costly as compared to negotiated financing. Through both field research and financial

statements efforts have been made to study whether star hotels in Pune City take

maximum advantage of spontaneous financing.

It has been revealed from the field research that, the creditors have constituted the major

portion of current liabilities of these hotels. The credit period granted to these hotels

differs from supplier to supplier. However, generally creditors grant credit for a period of

30-45 days to these hotels. The hotel authorities have disclosed during the field research

that, they are satisfied with the credit limit provided by their suppliers, credit period, and

quantum of supplies. They also have revealed that, these hotels get advances from their

customers, especially walking individual guests and the corporate, which did not have

business with them before. They further have admitted that, outstanding expenses like

salary, wages, water, power, fuel, and other charges reduce their current cash out flow.

Creditors turnover ratio, creditors repayment period, the proportion of advances from

customers to total current liability (excluding provisions) have referred to study the

impact of spontaneous financing. While calculating creditors turnover ratio, expenses

like raw material purchase power, fuel, & water charges; compensation to employees;

etc.; have been considered. The creditors’ turnover ratio and creditors repayment period

of the Indian Hotels is presented in table 5.20.

169

Table-5.20 Showing Creditors Turnover Ratio and Creditors Repayment Period of

Hotel Taj Blue Diamond (Indian Hotels)

Year Total Current

Liability

Excluding

Provisions (Rs. In

Crs.)

% of Advances

from

Customers to

Current

Liability

% of

Creditor to

Current

Liability

Creditors

Turnover

Ratio

(Times)

Creditors

re-payment

Period

(Days)

2005-06 198.84 11.63 62.94 3.52 87.22

2006-07 305.24 17.16 60.71 3.90 110.31

2007-08 286.88 24.52 51.79 3.91 94.42

2008-09 343.89 21.65 54.42 4.25 93.40

2009-10 419.32 16.37 58.50 3.16 120.10

Average 18.27 57.67 3.75 101.09

Source: Financial data published by CMIE Prowess Appendix-D pg. xxviii & xxxiii

Table 5.20 shows the proportion of advances from the customers to total current

liabilities of this hotel, were rising till the year 2007-08 and subsequently it has started

declining. The table has further revealed that the creditors have contributed substantially

in the total current liabilities. The average percentage of contribution of creditors to

current liabilities was 57.67 and this ratio varies between 51.79 and 61.94. The credit

repayment period of this hotel is very high. Further, the credit turnover ratio of this hotel

varies between 3.16 and 4.25 times.

Similarly, an effort has been made to present the creditors turnover ratio and creditors

repayment period of The Orchid Hotel in Table 5.21.

170


The VITS Hotel (Kamat Hotels)

Year Total Current

Liability

Excluding

Provisions (Rs.

In Crs.)

% of

Advances

from

Customers to

Current

Liability

% of

Creditor to

Current

Liability

Creditors

Turnover

Ratio

(Times)

Creditors

re-payment

Period

(Days)

2005-06 12.94 2.86 91.96 2.88 105.03

2006-07 13.46 9.21 72.51 3.27 78.44

2007-08 21.16 10.73 65.23 3.85 86.69

2008-09 29.32 12.99 58.86 2.87 122.54

2009-10 28.78 26.69 51.88 2.78 129.17

Average 12.496 68.08 3.13 104.37

Source: Financial data published by CMIE Prowess Appendix-D pg. xlii & xlvii

Table 5.21 shows that, the proportion of advances from customers to current liability was

showing an increasing trend for this hotel consistently from 2005-06 to 2009-10. On the

other hand, proportion of creditors to current liabilities is showing a declining trend with

an average of 68.03 per cent. The Creditors turnover ratio of this hotel is very low and

shows a fluctuating trend with an average of 3.13 times. Therefore, it reveals that, this

hotel is enjoying very high repayment period.

Similarly, the creditors’ turnover ratio and creditors repayment period of Hotel Royal

Orchid is depicted in Table 5.22.

171


Hotel Royal Orchid Central (Royal Orchid)

Year Total Current

Liability

Excluding

Provisions (Rs. In

Crs.)

% of

Advances

from

Customers to

Current

Liability

% of

Creditor to

Current

Liability

Creditors

Turnover

Ratio

(Times)

Creditors

re-payment

Period

(Days)

2005-06 8.32 3.49 32.57 6.50 101.83

2006-07 8.57 3.50 59.43 9.62 76.25

2007-08 10.61 2.83 42.41 8.51 81.58

2008-09 11.53 2.60 33.04 8.57 62.50

2009-10 13.69 2.26 30.83 8.65 74.74

Average 2.94 39.66 7.62 63.38

Source: Financial data published by CMIE Prowess Appendix-D pg. li, lv & ixi

From Table 5.22 it is revealed that the proportion of advances from customers and trade

creditors to current liabilities of this hotel is declining since 2007-08 with an average of

2.94 per cent. Creditors turnover ratio of this hotel is moderate with an average 7.62

times. It has been disclosed from field research and data give in table 5.22, that this hotel

is quite particular in paying their creditors in time as compared to the other three hotels.

Alike other hotels, the creditors turnover ratio and creditors repayment period of Sayaji

Hotel is presented in Table 5.23.

172


Sayaji Hotel

Year Total Current

Liability

Excluding

Provisions (Rs.

In Crs.)

% of Advances

from

Customers to

Current

Liability

% of

Creditor to

Current

Liability

Creditors

Turnover

Ratio

(Times)

Creditors

re-payment

Period

(Days)

2005-06 10.11 1.68 69.04 3.16 102.67

2006-07 6.67 3.75 82.91 4.06 68.34

2007-08 8.37 6.33 85.54 6.39 56.57

2008-09 15.85 3.97 86.56 4.84 85.13

2009-10 10.50 1.52 87.05 4.11 57.63

Average 3.45 82.22 4.51 74.07

Source: Financial data published by CMIE Prowess Appendix-D pg. lxvii & lxxii

From table 5.23 it is revealed that the proportion of advances to current liabilities of this

hotel is declining after the year 2008-09. The table 5.18 further reveals that, the creditors

encompass to be the most important component of this hotel’s total current liabilities.

Creditors’ turnover ratio of this hotel is very low. The credit repayment period is

inconsistent. This shows that, this hotel has not followed defined policies to settle their

obligations. There has to be a correlation between the inflow and outflow of the cash.

Credit limit in terms of period and quantum, advances from customers, etc. decides the

financial discipline of hotels. During the field study various questions have been asked to

know the advantages of spontaneous financing to control the outflow of cash.

173

Table 5.24 showing whether hotels take the advantages of spontaneous financing to

control outflow of cash.

Q. No. Questions Yes No

Q.1 Do you obtain credit from your suppliers? 100% 0

Q.2 Do creditors constitute major portion of your purchase? 100% 0

Q.3 Are you satisfied with credit limit provided by your supplier

to you in terms of days and quantum?

100% 0

Q.4 Do you obtain advances from the customer? 100% 0

Q.6 Do you feel accruals like salary, wages, power, fuel, and

other charges controls your current cash outflow?

100% 0

From table 5.24 it is revealed that all the respondents have revealed that there has been a

spontaneous financing in Toto because cent per cent credit was obtained from suppliers.

The respondents have given positive answers fully for the remaining questions also.

Graph 5.6 is showing whether hotels take the advantages of spontaneous financing

to control outflow of cash.

Source: Field research

In addition, a separate question was asked to know the percentage of advances from

customers to business turnover-

During the field study all the respondents have revealed that they take advances from the

customers. They normally get advances from the walking customers or from the

0%

50%

100%

150%

Q.1 Q.2 Q.3 Q.4 Q.6

Yes No

174

corporates whose credit track record is not available with them. Such advances are

varied from 2-10% to their total business turnover. However, the oldest five-star hotel in

Pune, ‘Hotel Taj Blue Diamond’ has got maximum advances from the customers.

After analyzing primary and secondary data it has been proved that the hoteliers in Pune

City are very keen in using spontaneous finance to satisfy their working capital need.

The advances from customers, low credit turnover ratio and high credit repayment period

further confirms that the hoteliers make maximum utilization of spontaneous finance.

Hence, there are many valid reasons in support of the following hypothesis.

“The maximum hotels take the advantages of spontaneous financing to control

outflow of cash.” and it is proved.

5.2.4 Hypothesis-4 Techniques like ABC Analysis can be adopted for stock control

in hotel industry.

In a productive business unit, an inventory has significant share in total investment.

Therefore, any effort made in stock control brings major benefits for the enterprise.

Exact identification of the level of inventory, not only allows uninterrupted production of

goods and services but also reduces the investment in the raw materials. In pertinent to

the hotel industry, a stock means stock of all kitchens, restaurants, housekeeping, and

other materials. The finance manager should aim at maintaining optimum level of

inventory on the basis of the trade of between cost and benefit. However, in hotel

industry bifurcation of raw material, work in process, and finished stock is not possible.

Many sophisticated Techniques are available for inventory management like: ABC

Analysis, VED Analysis (Vital, Essential, Desirable), FNSD Analysis (Fast moving,

Normal moving, Slow moving, Dead Stock), Parento Analysis (80/20 rule), Fixation of

Inventory Levels (Minimum, Maximum, Re-ordering, etc.), etc. In hotel industry, an

inventory is required for various departments like housekeeping department, kitchen,

175

restaurants and bars. The list of Kitchen, Restaurant and Bar inventory items is given in

Table 5.25

Table 5.25 Various materials used in Hotel Industry

List of Material is used in Kitchen

Sr. No. Material Name Rate

(RS.)

Fast Moving/

Slow Moving

RICE BASMATI (SUPREME CHEFF) [1 KG] 51.95 Fast Moving

SHAI JEERA [1 KG] 402.00 Slow Moving

ALMOND ROASTED [1 KG] 451.00 Slow Moving

SONF KASHMIRI [1 KG] 140.00 Slow Moving

ATTA (ASHIRWAD) [1 KG] 21.09 Fast Moving

TAJ TEA BAGS 200GMS [ 1 PAC ] 92.00 Fast Moving

GARAM MASALA [ 1 KGS ] 189.90 Fast Moving

PAPAD PLAIN URAD [ 1 KGS ] 141.99 Fast Moving

SACHET SALT [1 SAC] 0.18 Fast Moving

THANDAI SYRUP [1 BOT] 150.00 Slow Moving

SAFFRON [1 PAC](50GM) 168.81 Slow Moving

PISTA GREEN [1 KG] 824.00 Slow Moving

176

OIL 01 LTR PKT [1 PAC] 58.00 Fast Moving

CLOVES [1 KG] 358.02 Slow Moving

BESAN FLOUR [1 KG] 39.00 Fast Moving

From table 5.25 it is revealed that the price of various materials varies between Rs. 0.18

only and Rs. 824.00. The first one is a fast moving one while the later one is a slow

moving one.

List of Material is used in Restaurants (Utensils)

Sr. No. Material Name Rate (Rs.) Delicate/ Robust

1. BRANDY INHALER 72.19 Delicate

2. HIBALL GLASS 27.00 Delicate

3. ICE CREAM GLASS 190.00 Delicate

4. FRUIT PLATE 84.00 Delicate

5. IRISH COFFEE MUG 96.00 Delicate

6. A.P. KNIFE 56.30 Robust

7. A. P. FORK 32.00 Robust

8. BUFFET SPOON NEW 118.46 Robust

9. ICE TONG NEW 100.00 Robust

177

10. SOUP SPOON NEW 39.00 Robust

List of Material is used in Bar

Sr. No. Material Name Rate (Rs.)

1. CHATEAU D OR. CABERNET SAUVGNON [ 750 MIL ] 0.08

2. VALLONNE MERLOT [ 750 MIL ] 653.25

3. SANTA RITA 120 CAB. SAUVIGNON [ 750 MIL ] 1068.33

4. CHABLIS DOMAINE HEMILIN [ 1 NUM ] 2054.00

5. HONEY BEE BRANDY [ 750 MIL ] 217.60

6. CHIVAS REGAL SCOTCH WHISKY 750 [ 750 MIL ] 3061.60

7. MARTINI VERMOUTH BIANCO 1000ML [ 1000 MIL ] 715.30

8. JURA 10YO SGL MALT(ISL) [ 700 MIL ] 3318.00

9. GLENLIVET SCOTCH WHS 18 YRS QT [ 700 MIL ] 6469.67

10. FANTA 300ML [ 1 BOT ] 7.96

11. JUICE GRAPE (REAL) 1LTR [ 1 NUM ] 55.24

12. MINERAL WATER EVIAN 1LTR [ 1 BOT ] 75.15

Source- Stock statement of Five Star Deluxe Hotel.

178

From the field it has been research revealed that inventory management for restaurants

and bars usually is the joint efforts of financial controller, purchase manager, and food

and beverage controller. These employees are aware of few techniques of inventory

management like ABC Analysis, Fixation of Inventory Levels, EOQ, etc. Almost 90% of

hotels used these techniques.

From table 5.25, it is revealed that, various types of inventories are utilized by hotels for

different operations. This inventory varies based on its price, durability, consumption,

etc. Further, the field research has revealed that, inventory management for restaurants

and bars usually is the joint efforts of financial controller, purchase manager, and food

and beverage controller. ABC Analysis is one of the very significant techniques used for

control of stock in hotel industry. During the field study, an effort has been made to find

out the use of techniques like ABC Analysis by the hotel industry and is presented in

table 5.26 and graph 5.7.

Table 5.26 Showing whether Techniques like ABC Analysis can be adopted for stock

control in hotel industry

Q. No. Questions Yes No

Q.1 Are your managers aware about various techniques of stock

control like ABC Analysis?

100% 0%

Q.2 Do they use them for inventory control? 100% 0%

Q.3 Do you classify your stock of inventory according to the

cost and consumption?

100% 0%

Q.4 Do you work out maximum, minimum or reordering level

for various stocks of material?

96% 4%

Q.5 Do you use management control systems techniques like

EOQ?

80% 20%

Q.6 Do you believe that such techniques have direct impact on

efficient management of inventory?

100% 0%

179

Graph 5.7 Showing whether Techniques like ABC Analysis can be adopted for stock

control in hotel industry

Source-Field research

Table 5.26 and graph 5.7 have revealed that the employees of the hotels are aware of few

techniques of inventory management like ABC Analysis, Fixation of Inventory Levels,

EOQ, etc. Almost 90% of hotels use these techniques. Except EOQ, the hotels are using

the remaining methods fully for controlling their stock.

With reference to the list of Kitchen, Restaurant and Bar inventory items the hotels very

well utilize various techniques of inventory management. From the primary data, it is

revealed that all the managers who are looking after inventory are aware of various

techniques of stock control like ABC Analysis and most of them use these techniques.

Therefore, the 4th hypothesis; “Techniques like ABC Analysis can be adopted for

stock control in hotel industry.”

All the four hypothesis have been put together and presented in the summary form in the

following manner.

0%

50%

100%

150%

Q.1 Q.2 Q.3 Q.4 Q.5 Q.6

Yes No

Summary:

Hypothesis-1 The bank finance is the commonly used source of

working capital for hotels, is partly proved.

Hypothesis-2 The current credit policies of hotel industry are

liberal.

Hypothesis-3 The maximum

spontaneous financing to control outflow of cash.

Hypothesis-4 Techniques like ABC Analysis can be adopted for

stock control in hotel industry.

In addition to question based on hypothesis certain general questions also were asked to

the respondents to know their

management.

Type of ownership of respondents:

Effort has been made to know the category of

hotels is presented in graph 5.9.

Graph-5.8 Graph showing the type of ownership of respondents


180

The bank finance is the commonly used source of

working capital for hotels, is partly proved.

The current credit policies of hotel industry are

liberal.

The maximum hotels take the advantages of

spontaneous financing to control outflow of cash.

Techniques like ABC Analysis can be adopted for

stock control in hotel industry.

question based on hypothesis certain general questions also were asked to

the respondents to know their opinion regarding the process related with working capital

Type of ownership of respondents:

Effort has been made to know the category of hotels. The type of ownership of these

hotels is presented in graph 5.9.

Graph showing the type of ownership of respondents

Partenership Firms

Public Ltd. Cmapnaies

Private Ltd. Company

Partly

Accepted

Accepted

Accepted

Accepted.

question based on hypothesis certain general questions also were asked to

process related with working capital

hotels. The type of ownership of these

Graph-5.8 reveals that 72% of the respondents hotels are private limited Companies, 20%

are Public Ltd. Companies, and 8% are Partnership Firms. Normally, the management in

private limited companies is close ended. Four among twenty five respondents are public

limited listed hotels in Stock Exchange.

Investment in fixed assets in hotel indust

organization need to invest substantial amount of funds for acquiring land at good

locations. Further, huge cost is incurred for hotel construction, it’s interior and exterior.

However, to make an optimum use

required. Hence, study has been conducted to know the proportion of working capital to

total capital structure of these hotels and is presented in graph 5.

(Graph-5.9) The Proportion of working capital to total capital structure


The graph 5.9 shows substantial working capital requirements for hotel industry Prasanna

Chandra in his Financial Management book, edition 7, Exhibit 26.3 suggested only 1

181

reveals that 72% of the respondents hotels are private limited Companies, 20%

blic Ltd. Companies, and 8% are Partnership Firms. Normally, the management in


limited listed hotels in Stock Exchange.

Investment in fixed assets in hotel industry is very high than of working capital. The



However, to make an optimum use of this huge investment adequate working capital is


total capital structure of these hotels and is presented in graph 5.9.

Proportion of working capital to total capital structure

shows substantial working capital requirements for hotel industry Prasanna

Chandra in his Financial Management book, edition 7, Exhibit 26.3 suggested only 1

10-20%

21-30%

31-50%

>50%

reveals that 72% of the respondents hotels are private limited Companies, 20%

blic Ltd. Companies, and 8% are Partnership Firms. Normally, the management in


ry is very high than of working capital. The



of this huge investment adequate working capital is


Proportion of working capital to total capital structure

shows substantial working capital requirements for hotel industry Prasanna

Chandra in his Financial Management book, edition 7, Exhibit 26.3 suggested only 10-

20%

30%

50%

182

20% current assets. More than 50% respondents have revealed that they need more than

20% working capital to perform their business operations.

Secondary data collected for four hotels (Indian Hotels Co. Ltd., Kamat Hotels (I) Ltd.,

Royal Orchid Hotels Ltd. and Sayaji Hotels Ltd.) from CMIE Prowess have revealed the

status of these hotels working capital management through net working capital and

liquidity ratios ( current ratios, and quick ratios).

Net Working Capital:

Efficient working capital management requires that firm should operate with some

amount of Net Working Capital. What should be the exact amount of working capital is

varying from firm to firm. It is based on the size of the firm and nature of the industry.

Theoretically it is accepted that Net Working Capital to measure the liquidity of the firm.

The greater the margin by which the current assets cover the short term obligations, the

more is the ability of the firm to pay them when they become due for payment. Normally,

the cash flows resulting from payment of current liabilities are relatively predictable.

However, cash inflows are difficult to predict. Hence, it is advisable to firm to finance

that gap between current assets and current liabilities with long term funds. Following is

the table showing Net Working Capital of Four Hotels:

Table 5.27 Showing Net Working Capital


Name of Hotels 2005-06 2006-07 2007-08 2008-09 2009-10

Indian Hotels Co. Ltd. 43.06 -24.57 -68.61 81.27 -159.65

Kamat Hotels (I) Ltd. 1.40 58.29 -17.18 -39.88 35.88

Royal Orchid Hotels Ltd. 133.26 115.92 51.26 -2.42 11.64

Sayaji Hotels Ltd. 5.4 34.93 35.83 37.72 26.84

Source: Financial data published by CMIE Prowess (Appendix-D)

183

Table 5.27 reveals that except Sayaji Hotel all three hotels have experienced negative

working capital. The negative working capital position may badly affect business

operations and profitability. It may also spoil the financial reputation of the firm in the

market. Further it would be difficult for firm to seek adequate working capital finance

from banks and financial institution. In that case firm may need to borrow the funds at

high rate from both organized and unorganized sector.

Liquidity Ratios:

Current Ratio: This ratio established the relationship between the current assets and

current liabilities. It measures the firm’s short term solvency. This ratio signifies the

extent of the soundness of the current financial position of an undertaking and the degree

of safety provided to the creditors. A current ratio of 2:1 indicates a highly solvent

position. Current ratio is also known as banker’s ratio where 1.33:1 is considered as

minimum acceptable level for providing working capital finance. Following table shows

current ratio of four hotels:

Table 5.28 Showing Current Ratio of Hotel

Name of Hotels 2005-06 2006-07 2007-08 2008-09 2009-10

Indian Hotels Co. Ltd. 1.12 0.95 0.89 1.16 0.85

Kamat Hotels (I) Ltd. 1.06 2.06 0.75 0.57 1.96

Royal Orchid Hotels Ltd. 6.56 5.15 2.7 0.96 1.18



Table 5.28 signifies Indian Hotels and Kamat Hotel have Aggressive Approach towards

management of working capital. Under this approach current assets are maintain just to

meet the current liabilities. Above table shows that Tata Hotel during the year 2006-2008

and in the year 2009-10 does not even maintaining current assets to match current

184

liabilities. Same is the case with Kamat Hotel during the year 2007-2009. Adoption of

this strategy may reduce the investment in working capital and cost of financing it but,

also increase the risk as the firm is in danger to sudden shock.

On the other hand data given in table- reveals that Royal Orchid Hotel (during 2005-06 to

2007-08) and Sayaji Hotel Ltd. (during 2006-2007 to 2009-10) reveals that these two

hotels have adopted conservative approach of working capital management. This

strategy recommends high level of current assets to be maintained in relation with the

sales. Surplus current assets ensure smooth business operations. Higher liquidity level

reduced the risk of insolvency. However, large investments in current assets lead to

higher interest and carrying costs and indicate inefficiency in handling current assets

(most of the time cash and debtors in these two hotels). Such lower risk may translate in

to lower return.

Liquid Ratio or Quick Ratio: Liquid ratio is the ratio of liquid assets or quick assets to

current liabilities. Liquid assets can easily converted into cash which excludes stock and

prepaid expenses. It is advisable for firm to keep liquid assets at least equal to current

liabilities (1:1 ratio). Following table shows quick ratio of four hotels:

Table 5.29 Showing Quick Ratio of Hotel

Name of Hotels 2005-06 2006-07 2007-08 2008-09 2009-10

Indian Hotels Co. Ltd. 0.45 0.35 0.32 0.38 0.53

Kamat Hotels (I) Ltd. 0.52 1.76 0.41 0.23 1.15

Royal Orchid Hotels Ltd. 6.08 4.61 1.84 0.56 0.79



Table – 5.29 reveals that quick ratio of these hotels is either high or is low.

indicates the extent of cushion of protection provided from the quick assets to the current

creditors. Above data have revealed that quick ration of these hotel is not satisfactory

The hyper competition in the hotel industry in Pune city lea

whether hotels make adequate investment in marketing and sales promotion activities?

The data published by HVS International in the year 2009

various marketing media (like Web Sites, Print Advertis

and Television Advertising, Telemarketing etc.) to maintain their respective marketing

share. The extent of use of working capital for the purpose of marketing and sales

promotion has been presented in graph 5.10.

(Graph-5.10) The part of working capital used for marketing and sales promotion


Around 64% respondents have spent 5

marketing and sales promotion. The use of working capital more than 10% is tr

high. Following is the table showing the part of working capital used for marketing and

64%

Negligible

185

reveals that quick ratio of these hotels is either high or is low.


creditors. Above data have revealed that quick ration of these hotel is not satisfactory

The hyper competition in the hotel industry in Pune city leads to make a study to know


The data published by HVS International in the year 2009-10 has revealed that they used

various marketing media (like Web Sites, Print Advertising, Outdoor Advertising, Radio



promotion has been presented in graph 5.10.

.10) The part of working capital used for marketing and sales promotion

Around 64% respondents have spent 5-10% (average) of their working capital for

marketing and sales promotion. The use of working capital more than 10% is tr


11%

21%

4%

Little Average High Very High

reveals that quick ratio of these hotels is either high or is low. This ratio


creditors. Above data have revealed that quick ration of these hotel is not satisfactory.

ds to make a study to know


10 has revealed that they used

ing, Outdoor Advertising, Radio



.10) The part of working capital used for marketing and sales promotion

10% (average) of their working capital for

marketing and sales promotion. The use of working capital more than 10% is treated as


186

sales promotion for four hotels with the assumption that working capital is used on hotels

operating expenses.

Table 5.30 Showing the Part of Working Capital Used for Marketing and Sales

Promotion for The Indian Hotels Ltd.

2005-06 2006-07 2007-08 2008-09 2009-10

Marketing Expenses (Fig. in

Crore of Rupees)

62.54 58.56 66.84 74.01 63.55

Operating Expenses (Fig. in

Crore of Rupees)

813.07 986.24 1070.79 1144.57 1106.96

% of Marketing Expenses to

Operating Expenses

7.69 5.94 6.24 6.47 5.74


Table –5.30 reveals The Indian Hotels Ltd. have spent around 6 to 8% of their working

capital for marketing and sales promotion. During the field research respondent revealed

as The Indian Hotels is the oldest hotel chain in India; these hotels have their loyal

customers. Hence, comparatively less efforts on advertising and sales promotion they

have to be made.


Promotion for Kamat Hotel (I) Ltd.

2005-06 2006-07 2007-08 2008-09 2009-10


Crore of Rupees)

4.96 6.39 9.89 7.54 4.81


Crore of Rupees)

42.64 59.42 78.09 82.6 69.8

% of Marketing Expenses to 11.63 10.75 12.66 9.13 6.89

187

Operating Expenses


Table 5.31 reveals that Kamat Hotel (I) Ltd. have spent around 7 to 12% of their

working capital for marketing and sales promotion.


Promotion for Royal Orchid Hotels

2005-06 2006-07 2007-08 2008-09 2009-10


Crore of Rupees)

3.13 4.22 5.3 5.97 4.34


Crore of Rupees)

29.32 40.16 46.76 64.06 59.48


Operating Expenses

10.68 10.51 11.33 9.32 7.30


Table 5.32 reveals that Royal Orchid Hotel have spent around 7 to 11% of their working

capital for marketing and sales promotion.


Promotion for Sayaji Hotel

2005-06 2006-07 2007-08 2008-09 2009-10


Crore of Rupees)

0.27 0.33 0.34 0.3 0.96


Crore of Rupees)

25.42 30.87 49.48 61.53 58.9


Operating Expenses

1.06 1.07 0.69 0.49 1.63


Table 5.33 reveals that Sayaji Hotel spend

marketing and sales promotion, which is very less as compare to other hotels.

The labor turnover ratio of most of the hotels is very high. Hotel industry is a service

industry. Hence, the contribution of

development of hotel is very high. HVS International Survey Report (2009

revealed that more than 75% hotel employees who worked under different capacities are

trained. However, being a dynamic in

business trends and practices. Further retention of good staff is big challenge in this fast

growing industry. Hence, efforts have been made to analyze whether hotels of Pune

make adequate provision for

Resource Management. This important aspect has been presented in graph 5.1

(Graph-5.11) Graph showing the proportion of working capital is used for Human

Resource Management.


50%

Negligible

188

reveals that Sayaji Hotel spend around 1 to 2% of their working capital for


r turnover ratio of most of the hotels is very high. Hotel industry is a service

industry. Hence, the contribution of hotel employees, service providers in the growth

of hotel is very high. HVS International Survey Report (2009


trained. However, being a dynamic industry, its staff needed to be updated with current



make adequate provision form its working capital (operating expenses)

This important aspect has been presented in graph 5.1

) Graph showing the proportion of working capital is used for Human

11%

25%

14%


around 1 to 2% of their working capital for


r turnover ratio of most of the hotels is very high. Hotel industry is a service

service providers in the growth and

of hotel is very high. HVS International Survey Report (2009-10) had


dustry, its staff needed to be updated with current



(operating expenses) for the Human

This important aspect has been presented in graph 5.11.

) Graph showing the proportion of working capital is used for Human

189

Graph 5.11 shows that 36% hoteliers spend little or negligible many for very crucial

aspects like Human Resource Management. Various activities like Recruitment, job

assignment, training, transfers, appraisal, employees’ retention etc. are the various

important aspects of Human resource management. For the growth and development of

the organization all these activities have to be given due importance.

Data collected from CMIE PROWESS for four hotels have revealed the proportion of

Compensation to Employees to Operating Expenses. Following is the table showing the

part of working capital used for compensation of employee management for four hotels

with the assumption that working capital is used on hotels operating expenses.

Table 5.34 Showing the Part of Working Capital Used for Giving Compensation to

Employees for The Indian Hotels Co. Ltd.

2005-06 2006-07 2007-08 2008-09 2009-10

Compensation to Employees


202.33 270.44 300.91 374.77 348.62

Operating Expenses


813.07 986.24 1070.79 1144.57 1106.96

% of Compensation to Employees

to Operating Expenses

24.89 27.42 28.10 32.74 31.49


Table 5.34 has explained that Indian Hotels spend on compensation to employees to App.

25% to 33% of this hotel’s total operating expenses.

190


Employees for Kamat Hotels (I) Ltd.

2005-06 2006-07 2007-08 2008-09 2009-10

Compensation to Employees (Fig.

in Crore of Rupees)

12.48 17.36 23.93 25.49 22.09

Operating Expenses (Fig. in Crore

of Rupees)

42.64 59.42 78.09 82.6 69.8



29.27 29.22 30.64 30.86 31.65


Table- have explored that Kamat Hotel’s expenditure on compensation to employees

contributes to App. 30% to 32% to its total operating expenses.


Employees for Royal Orchid Hotels

2005-06 2006-07 2007-08 2008-09 2009-10


in Crore of Rupees)

6.53 8.74 11.47 15.97 15.71


of Rupees)

29.32 40.16 46.76 64.06 59.48



22.27 21.76 24.52 24.93 26.41


Table 5.36 has suggested that Royal Orchid Hotel’s use up on compensation to

employees to App. 22% to 26% to its total operating expenses. It is comparatively less

than Indian Hotels and Kamat Hotels.

191


Employees for Sayaji Hotels

2005-06 2006-07 2007-08 2008-09 2009-10


in Crore of Rupees)

3.75 5.38 9.23 11.75 11.5


of Rupees)

25.42 30.87 49.48 61.53 58.9



14.75 17.43 18.65 19.10 19.52


Table 5.37 have analyzed that Sayaji Hotel’s expend on compensation to employees to

App. 15% to 20% to its total operating expenses. It is comparatively very less than other

three Hotels.

Alike the inventory, the receivables, and cash is also very crucial component of the

working capital. It has to be managed wit due care. It has been seen that profitable firms

have became bankrupt due to the lack of liquidity. It is the responsibility of the finance

manager to maintain adequate cash reserve to meet the firm’s need of day to day

expenses and to face contingencies. Further, excess cash has to be invested to maintain

the firm’s profitability as well. A sincere effort has been made to ascertain whether

hoteliers of Pune had ever faced the problem of shortage of funds to fulfill their day to

day needs. This shortage of cash aspect has been presented in graph 5.12.

(Graph-5.12) Showing how o


From Graph 5.12 has been

shortage of funds for meeting day to day expenses. The

in these organizations is that the

properties. Thereby, if need arises, the funds can be provided to hotel from

business organizations.

Some of the hotel respondents

asked to give their opinion about what could be the reason for such shortage

been presented in graph 5.1

36%

4%

Never Sometimes

192

) Showing how often the respondents have experienced shortage of cash

been disclosed that 53% of respondent have

shortage of funds for meeting day to day expenses. The main reason for lack of shortage

is that the promoters have more than one business or hotel

properties. Thereby, if need arises, the funds can be provided to hotel from

Some of the hotel respondents who have faced the problem of shortage of funds

asked to give their opinion about what could be the reason for such shortage

been presented in graph 5.13.

53%

4%7%

0%

Sometimes Seldom Often Very often

shortage of cash

have never faced any

for lack of shortage

promoters have more than one business or hotel

properties. Thereby, if need arises, the funds can be provided to hotel from other

who have faced the problem of shortage of funds were

asked to give their opinion about what could be the reason for such shortage which has

Graph 5.13 The reasons for shortage of funds


From the study mixed responses were

respondents were of the opinion

the available funds to ot

receivables policies of hoteliers are quite liberal. Therefore, recovery problems also can

be the reasons for the shortages. Graph 5.1

of funds also could be one of

A sincere effort has been made to analyze whether unpredictable environmental situation

can leads to increase in the costs which are related to the working capital.

significant aspect of unpredicta

presented in graph 5.14.

16%

Inappropriate Forecasting

Funds Diverted

Not responded

193

reasons for shortage of funds

mixed responses were received for question shortage of funds. Some

were of the opinion, that it is a common practice of hoteliers that they divert

the available funds to other business of the promoter. It has been also noticed that


be the reasons for the shortages. Graph 5.13 has revealed that inappropriate forecasting

one of the reasons for shortage of funds.

been made to analyze whether unpredictable environmental situation

can leads to increase in the costs which are related to the working capital.

significant aspect of unpredictable environment and its impact on the business has been

7%

32%

26%

19%

Inappropriate Forecasting Recovery Problem

Funds Diverted Others

Not responded

for question shortage of funds. Some

, that it is a common practice of hoteliers that they divert

her business of the promoter. It has been also noticed that


has revealed that inappropriate forecasting

been made to analyze whether unpredictable environmental situation

can leads to increase in the costs which are related to the working capital. This

ble environment and its impact on the business has been

Graph 5.14 Impact of unpredictable environmental situation of cost


Industries like tourism and hospitality are very sensitive. Foreign delegates, domestic

visitors, pilgrimers, etc. visit the city and occupy the hotels. The social unrest due to the

bomb blast at the German Bakery, in Pune or militant attacks at Mumbai o

November, 2008 have affected the hotel business badly. Unforeseen incidences like

spread of swine flu in city also hampered the business. Under such circumstances, to

induce the guest to make a stay in city is very difficult task. Many hoteliers

heavy discounts, and provided other facilities like pick up and drop at free of cost etc. for

the hotel stay. Under such circumstances

conditions of the business. T

affair.

46%

Negligible

194

Graph 5.14 Impact of unpredictable environmental situation of cost



bomb blast at the German Bakery, in Pune or militant attacks at Mumbai o

affected the hotel business badly. Unforeseen incidences like

swine flu in city also hampered the business. Under such circumstances, to

induce the guest to make a stay in city is very difficult task. Many hoteliers


the hotel stay. Under such circumstances, guests or tour operators also dictate terms and

conditions of the business. Thus, to maintain the business no doubt it becomes

11%

29%

14%




bomb blast at the German Bakery, in Pune or militant attacks at Mumbai on 26th

affected the hotel business badly. Unforeseen incidences like

swine flu in city also hampered the business. Under such circumstances, to

induce the guest to make a stay in city is very difficult task. Many hoteliers offered


guests or tour operators also dictate terms and

doubt it becomes a costlier

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