Financial Analysis of The Fairmont Hotel

Introduction 

The position of financial partner to the general manager it is of critical importance to highlight the current financial state of the Fairmont Hotel and come up with a final conclusion on whether or not it is in a position to continue with significant renovations for expansion. The financial health of the organization is heavily dependent on the firm’s ability to make sales of the services it offers. The 2004 income statements along with the projected income and expenses of the firm are particularly important in identifying the financial health of the company. It is evident that the company cannot afford to undertake significant renovations if they are not geared towards generating more income or if the financial health is in a poor state. The following report will be used to generate several income statements and an analysis that lessens the burden of making a decision on current plan of expansion. 

Financial Statement 

Income Statement for the year 2004 

Income Financial Statement for 2005 

The 2004 financial statement demonstrates that the Fairmont Hotel is set to experience a significant increase in its net income from the year 2004 to the year 2005. The increase comes from a significant rise in the income earned particularly from the hotel rooms. The proposed expansion and renovation of the Fairmont Hotels will significantly increase occupancy in the second to eight floor rooms to 90% while the ninth floor will see a 75% occupancy. Although the rate expected per room will be maintained in the hotel rooms between the second and eighth floors, it will increase by $110 for the ninth floor. This is to show a significant rise in the quality of the rooms within this floor. The elevated rate will help in the raised income of the hotel, but a critical factor is maintaining the expenses of the organization. The rate of the Rooms Payroll as well as the other expenses of the room will be critical in ensuring a significant income rise. 

There are more changes expected in the 2005 fiscal year particularly in the operating revenue section. The financial statement shows that there will be no significant change the revenue earned from food and beverages at the hotel. However, there will be a 5% increase in the payroll, cost of goods sold and other expenses in the fiscal year. As a result, the food and beverages sector experiences a significant drop in revenue accounting for nearly $250,000 drop from the previous year. The telephone sector is seen to lack any change as it continues to bring about losses at the organization. The cost of goods sold as well as the payroll expenses bring about a -$200,000 income at the hotel. The financial income statement portrays a rapid increase in the undistributed operating expenses as well as the fixed expenses. Nevertheless, this is not enough to cause a decline in the net income as it nearly triples the previous year. 

Analysis of Financial Statement 

The Fairmont Hotel income statements shed light to the financial health of the organization. The firm is seen to experience significant increase in the revenue of the hotel and it will help in realizing the goals and vision of the firm. The number of rooms occupied in the year 2005 are expected to be higher than the previous year. A 90% occupancy in the rooms between the second and eighth floors would mean that 252 out of a possible 280 would be occupied. The final floor will experience a 75% occupancy which will mean 30 out of a possible 40 rooms. In total 282 rooms will be rented out to guests visiting the hotel. With the top floor changing significantly higher rates per room per day, it is expected that the organization will realize higher revenues compared to the previous year. The fact that the Payrolls and Other Room Expenses do not increase within the year 2005 is an added benefit to the organization as it ensures higher overall income. 

There were numerous areas in the organization that experienced significant increase particularly for the expenditures in the operating expenses, undistributed operating expenses, and fixed expenses. It is concerning how the the Hotel is not attempting to minimize these expenses as they could prove to be a major hindrance in the future. For instance, the 5% increase in Payroll, Cost of Goods Sold, and other Food and Beverage expenses have been a major hit to the income of the hotel reducing revenue by $250,000. The lack of income from telephone is concerning and should be addressed to prevent further dip in the revenue earned by the organization. In the undistributed operating expenses, it is evident that the marketing expenses are set to increase over the next year. A further $300,000 will be spent. Although this is a significant expenditure, it is may be categorized as an investment in the future of the company. In this case, due to the extra services and quality offered in the ninths floor of the building, the members of the board feel the need to make it known to all potential consumers. The approach will help in increasing the revenue of company and probably the room occupancy will increase even further over the coming years. 

There are only two changes evident in the fixed expenses sector particularly on mortgage and interest rates. The significant expansion of the company will likely lead to an increase in the payments made for the mortgage which has been identified clearly as $250,000 per year while this will also result in an increase in the interest rates of the loans borrowed by $324,392 per year. It is important that Fairmont hotel continues to monitor the fixed expenses and ensure that they do not increase so drastically that it becomes difficult to achieve the expected profits. The organization should note that growth is a gradual process that will require high levels of patience and critical evaluation of financial health. At the moment, it is evident that the firm is performing well as it has the appropriate financial power to experience a significant profit in future. The expansion plan is likely to prove to be more profitable to the organization rather than cause major downfall of the firm’s financial performance. Increased revenue will mean that the company can effectively pay off debts and credit extended for the purpose of the loan. 

Conclusion 

The financial health of the organization is in a stable condition whereby it is likely to experience a significant increase rather than a decline. Fairmont Hotel is a mid range hotel that is well known to the consumers who visit its selected location. Over the years from 2003 and 2004, it has become clear that the firm has been able to retain majority of its regular clientele. However, the expansion process is intended to help turn most of them to the Amenity level which is the new floor with improved services. The period of expansion is filled with a lot of uncertainty where the regular members may not prefer the additional services and may instead opt to remain in their cheaper rooms. It is for such incidences that a critical review of the financial health of the firm comes into question. Based on income statement, it is evident that if all operating revenues stay the same, it is likely that the constant rise of mortgage, marketing, and interest expenses will lead to a decline in the profits earned by the organization. The net income after taxes may go even lower than the previous year in just a short while. The predicted 2005 income statement considering higher levels revenue is an attractive proposition that is acceptable to majority stakeholders. Nevertheless, if the expenses decrease and revenue remains the same, it would not be a good idea to seek expansion of the hotel. 

References 

Demirçiftçi, T., & Kızılırmak, I. (2016). Strategic branding in hospitality: Case of Accor Hotels. Journal of Tourismology, 2 (1), 50-58.