Developing A Business Plan For A Boutique Hotel In Blue Mountains

Business Opportunity Analysis

Question:

Managers frequently use CVP Analysis and Budgeting to screen business plans by evaluating a firm’s cost structure and sales volume needed to generate profit. Mountain Views Hotel is planning to open a “Boutique Hotel” accommodation in the Blue Mountains area that runs a Food and Beverage operation serving breakfast as part of the guest experience. Your team is expected to develop a successful business plan including making recommendations for improvement in future years. The Report will be written as if it were being presented to potential investors in the business. Use the Balanced Score Card approach to present key assumptions and justify them by research and analysis undertaken.            

Discuss critically key results that would impact on your future decision-making including a fully supported explanation of how you could improve this business by making any changes.   

Make recommendations to the proposed investors including ideas for the next steps to progress the business concept. Prepare your analysis as an authentic business report. 

The Australian tourism and hotel industry have significant contribution on GDP (Gross Domestic Product) of Australian. As per Price Water cooper house Report of 2009 it is estimated there are 6807 hotels employing almost 188000 people in Australia. The market outlook indicates that the hotel industry has matured because the numbers of hotels have declined over the years and also the income growth of the industry has been minimal.  But the situations are seen improving as the 2015 data suggests that both domestic and international visitors have increased. There has been 8.2% growth in international visitors and 7% growth in domestic visitors (Hall, 1991).

In this report a business plan is developed for Mountain View Hotel analyzing the business opportunity of Boutique Hotel in Blue Mountains (Hardiman & Burgin, 2011).  For this purpose the hotel industry of Australia, tourism opportunity in Blue Mountains and the projected financial data of the proposed Boutique hotel are analyzed to develop an effective business plan and also to evaluate the investment decision.

The objectives of the “Mount Boutique Hotel” for first few years are:

• Achieving customer satisfaction and exceeding customers expectation;
• Achieving 90% occupancy rate during peak period;
• Recruiting and training efficient staffs.

The mission of Mount Boutique Hotel is to become the preferred choice of customers in Blue Mountain area.

Mountain View is a well known hotel chain that is currently running a restaurant in Blue Mountain. It is planning to open a boutique hotel in Blue Mountain.

Australian Tourism and Hotel Industry  

The international and domestic visitors are expected to surge giving a positive outlook for the overall hotel industry. As per the economic forecasts data it is expected that international visitors will grow by 5.3% per annum for next three years. This growth in tourism numbers will have a positive impact on the Australian Hotel Industry. The demands for hotels are expected to grow by 3% per annum in next three years. There is an increasing demand supply disparity in hotel industry as a result it is expected that room rate will grow by 2.9% by 2018 (Anderson, 2006). It can be concluded that Hotel Industry of Australia is looking good and it is the opportune moment to make investment in this sector. 

Market Outlook of the Hospitality Industry in Australia

The Blue Mountains is just two hours away from Sydney and it is a perfect holiday destination for anyone looking for a break from hectic life style. The blue Mountain offers spectacular scenic beauties like Three Sisters at Echo point, dinning, shopping, spa, bush walking and other natural attraction (Hudson & Lang, 2002).  It is an ever growing tourist destination with tremendous growth potential. From an hotelier point of view the current market scenario offers an excellent investment opportunity in Blue Mountain.

There is a growing optimism in hotel industry because of positive macro economic developments. Being in tune with the overall market sentiment Mount View hotel has decided to start a Boutique Hotel in Blue Mountain. Boutique hotels are much smaller in size but they are stylish and unique further it tries to provide separate experience than that of corporate run hotels (Presbury et. al., 2005). The advantages of a boutique hotel are:

• It requires less investment;
• Occupancy rates are also high as there are only few number of rooms;
• Fixed cost is less because the size is small;
• It does not provide variety of services so its variable cost is also low.

The above analysis shows that Mount View hotels decision to open a boutique hotel in Mount View is justified.

Cost Estimation

The aim is to become the best in class boutique hotel in Blue Mountains (Bruner, 1998). It is estimated to have total eighty rooms out of which 30 rooms will be high end deluxe rooms and there will be 50 standard rooms.  The deluxe rooms will include king sized bed, a desk, a mirror and a color television. Further the bathroom of the deluxe room will be of four to five meters with a sink, toilet and shower.

The total estimated cost for starting the Boutique hotel is $754800.00. The details are given in the table below.

Start Up Funding

To fund the project a mortgage loan of Rs. 500,000.00 is to be obtained at 8% per annum.  The remaining fund of 254,800.00 is to be provided by Mountain Views hotel.

The viability of any business plan is determined by analyzing its projected financial performance.  The business plans are often screened for determining their financial viability by using cost volume profit analysis (Scapens, 1985).  The CVP (Cost Volume Profit) analysis helps in determining the effect that costs and volume has on profit. The Cost Volume Profit (CVP) analysis are often performed to determine the future activity and to provide valuable insight on:

• Which services or product are to be emphasized;
• To determine the volume of sales that is required to achieve targeted sales;
• The minimum revenue that is required to achieve break even;
• The level of risk that an organization is exposed to because of the fixed cost;

There are certain assumptions that are made while performing CVP (Cost Volume Profit) analysis (Drury, 1992), they are:

• Per unit Sales price is constant;
• Per unit Variable cost is constant;
• Total Fixed cost is also constant;
• Every units produced are sold;
• Change in costs are due to change in activity;
• In case more than one product is sold then they are sold in same mix.

The cost function is a process of dividing the total costs into fixed costs and Variable Costs (Binswanger, 1974). The total cost can only be ascertained after the estimated financial statement is prepared. The projected financial statements are prepared on the basis of certain assumptions and they are:

• The operating costs are determined by the management based on the research of similar hotels,
• The fixed start up cost is amortized over the years,
• The room occupancy rate was calculated for both the deluxe and standard rooms on the basis of seasonal demand.

The first step of performing the Cost Volume Profit Analysis is to estimate the cost functions. On the basis of the projected financial statement each cost is determined as either fixed or variable costs.  In the projected financial statement of Mount Boutique Hotel the estimated variable costs is $ 2234605.00 which is $96.49 per unit and the estimated fixed cost is $3153904.00.  The estimated fixed costs include Direct Labor costs of $803,040.00; overhead costs of $1696084.00; selling expenses of $259850.00 and administrative expenses of $394950.00. The estimated variable costs include direct material of $88.49 per unit and over head of $8.00 per unit. 

Advantages of Starting a Boutique Hotel

The contribution is calculated by deducting Variable costs from sales. So the contribution margin ratio is that part of the sales that exceeds variable costs (Garrison et. al., 2003). It can be used to pay fixed costs. The contribution margin ratio measures operational efficiency, a higher ratio suggests higher efficiency. In the projected financial statement of Boutique hotel estimated sales is $6995325.00 and estimated variable costs is $2234605.00. The contribution margin comes to $4,460,720.00 that is 66.60% which is very high. It suggests that only 33.40% of total sales cover the variable costs and the remaining 66.6% is used to meet the fixed costs and earn profit. It can be reasonably concluded that any sudden increase in cost will not affect the profitability of the hotel because it has high contribution margin ratio which is a very healthy sign for any business. 

The break even sale represents that level of sales where the profit is zero. At this level total sales revenue is equals to total variable costs and the contribution margin is equal to fixed costs (Blocher et. al., 2008). The break even sale is an important level because sales below this level will result in losses and sales above this level will lead to profits. In the projected financial statements of Mount Boutique hotel total fixed costs are $3153904.00 and the variable cost per unit is 192.60 so the break even sale comes to $4733857.83. The total estimated sale is $6695325.00 and the 70.70% of it is Break even sales. This means that business needs to achieve at least 70% of the estimated sales to attain no profit no loss situation otherwise it will make losses. This is a very high percentage and implies that there is a very heavy burden of fixed costs on the business.  It is suggested that business should re estimate its fixed costs structure and try to reduce the Break even sales to 50%.  The hotel should cut down fixed costs by $4399091.00 to attain the targeted break even sales. 

The margin of safety is that part of the total sales that is above Breakeven Sales. It is calculated by deducting breakeven sales from total sales. The Margin of safety is a valuable indicator of profitability of an organization (Shih, 1979). It also indicates to the management how reduction of revenue will affect the break even of the organization. The higher the Margin of safety the better it is for the business. Because a low Margin of safety suggests increase in fixed costs, extra discounts or increase in prices by suppliers. So it is important to monitor margin of safety ratios. In the projected financial data of Mount Boutique hotel the total expected sales is $6695325.00 and the break even sales is $4733857.38 so the margin of safety is $1961467.62. The margin of safety ratio comes to 29.30% of total sales. It is suggested that Margin of safety ratio should be improved. It can be done by improving sales or reducing breakeven point.  

Estimated Start-Up Cost

The Operating Leverage is the analysis of relationship between fixed costs and variable costs. It is calculated by dividing contribution margin by income from operations. The operating leverages are high for companies that have large fixed costs in their total operation costs. A higher operating leverage suggests that every increase in sales will multiply profits when the breakeven point is reached (Lev, 1974). But if breakeven sales are not reached then higher operating leverage will intensify losses. So with high operating leverage a high level of risk is involved. In the estimated financial statement of Mount Boutique hotel the contribution margin is $4460720.00 and Income from operations are $1306816.00 so the operating leverage comes to 3.4 times.  This means that Contribution is 3.4 times more than income from operation so it can be derived that fixed costs are 2.4 times of income from operation which is very high. So it is suggested to take necessary measures to reduce fixed costs. 

Conclusion

The overall projected financial statement of Mount Boutique hotel indicates that it is a high return low risk business opportunity for any investor. The high breakeven sales and low Margin of safety is due to higher fixed costs (Alexander, 2001). The burden of higher fixed costs is due to the amortization of start up costs in initial years as it gets completely amortized then fixed costs will certainly come down thus improving the margin of safety and break even sales figure.

The market analysis has shown that it is an opportune moment for any investor to enter into tourism sector. The expected growth figures are very attractive and it is also estimated there will be a shortage of supply as the increase in demand is much higher than that of supply (Jennings, 2001). If the overall macroeconomic views are considered then globally major economies are improving so it is expected that international visitors will surge in coming years.

The Mount Boutique hotel will be one of its kinds in Blue Mountains. It will offer a unique experience to its visitors because of its prominent location and customized services. Further the staffs and managements are also experienced and every one of them has a valuable insight in the Hotel industry.

In the light of the above analysis it can be concluded with certainty that investment in Mount Boutique will be profitable. 

References

Alexander, C. (2001). Market models: A guide to financial data analysis. John Wiley & Sons.

Anderson, B. A. (2006). Crisis management in the Australian tourism industry: Preparedness, personnel and postscript. Tourism Management,27(6), 1290-1297.

Binswanger, H. P. (1974). A cost function approach to the measurement of elasticities of factor demand and elasticities of substitution. American Journal of Agricultural Economics, 56(2), 377-386.

Blocher, E., Chen, K. H., & Lin, T. W. (2008). Cost management: A strategic emphasis. McGraw-Hill/Irwin.

Bruner, R. F., Eades, K. M., Harris, R. S., & Higgins, R. C. (1998). Best practices in estimating the cost of capital: survey and synthesis. Financial Practice and Education, 8, 13-28.

Drury, C. (1992). Cost-volume-profit analysis. In Management and Cost Accounting (pp. 205-235). Springer US.

Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2003). Managerial accounting. New York: McGraw-Hill/Irwin.

Hall, C. M. (1991). Introduction to tourism in Australia: impacts, planning and development. Longman Cheshire.

Hardiman, N., & Burgin, S. (2011). Canyoning adventure recreation in the Blue Mountains World Heritage Area (Australia): The canyoners and canyoning trends over the last decade. Tourism Management, 32(6), 1324-1331.

Hudson, S., & Lang, N. (2002). A destination case study of marketing tourism online: Banff, Canada. Journal of vacation Marketing, 8(2), 155-165.

Jennings, G. (2001). Tourism research. John Wiley and sons Australia, Ltd.

Lev, B. (1974). On the association between operating leverage and risk.Journal of financial and quantitative analysis, 9(04), 627-641.

Presbury, R., Fitzgerald, A., & Chapman, R. (2005). Impediments to improvements in service quality in luxury hotels. Managing Service Quality: An International Journal, 15(4), 357-373.

Scapens, R. W. (1985). Cost—Volume—Profit Analysis. In Management Accounting (pp. 59-74). Macmillan Education UK.

Shih, W. (1979). A general decision model for cost-volume-profit analysis under uncertainty. Accounting Review, 687-706.

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