Chapter 1

Introduction
 The purpose of this course is to provide an
introduction to financial management.
 The financial management function is an
important part of every hospitality organization.
 Financial management is used to make key
decisions involving expansion, renovation, choice
of location, and many others.

Hospitality Financial Management ©2005 Pearson Education, Inc.

By Robert E. Chatfield and Michael C. Dalbor 1-1 Pearson Prentice Hall
Upper Saddle River, NJ 07458
 What Is Financial Management?
 Financial management is used to help make three
major decisions:
1. Which assets should we invest in?
2. How will we pay for these assets?
3. What should we do with the earnings generated by the
assets?
 These are called the investment, financing, and
dividend decisions.

Hospitality Financial Management ©2005 Pearson Education, Inc.

By Robert E. Chatfield and Michael C. Dalbor 1-2 Pearson Prentice Hall
Upper Saddle River, NJ 07458
 Differences Between
Accounting and Finance
 Financial accounting involves recording and
classifying financial information.
 Completion of accounting cycle
 Compilation of financial statements

 Managerial accounting applies tools to

financial information to generate new
information.
 Ratio analysis
 Breakeven analysis

Hospitality Financial Management ©2005 Pearson Education, Inc.

By Robert E. Chatfield and Michael C. Dalbor 1-3 Pearson Prentice Hall
Upper Saddle River, NJ 07458
 Differences Between
Accounting and Finance
 Financial management involves a number of
different areas such as:
 Stock valuation
 Bond valuation

 Asset diversification

 Property appraisal and valuation

 Working capital management

Hospitality Financial Management ©2005 Pearson Education, Inc.

By Robert E. Chatfield and Michael C. Dalbor 1-4 Pearson Prentice Hall
Upper Saddle River, NJ 07458
 Types of Business Organizations
 Sole proprietorship
 Partnership
 Limited liability partnership
 Corporation
 Limited liability company (LLC)
 Subchapter S corporation

Hospitality Financial Management ©2005 Pearson Education, Inc.

By Robert E. Chatfield and Michael C. Dalbor 1-5 Pearson Prentice Hall
Upper Saddle River, NJ 07458
 Comparison of Corporate Securities
 Common stock
 Voting rights
 Can receive dividends

 Preferred stock
 Priority position for dividends
 No voting rights

 Bonds
 Paid interest before stockholders
 Limited influence on corporation

Hospitality Financial Management ©2005 Pearson Education, Inc.

By Robert E. Chatfield and Michael C. Dalbor 1-6 Pearson Prentice Hall
Upper Saddle River, NJ 07458
 Preferred Stock and Bonds
 Preferred stock has a fixed dividend.
 Preferred stock is often callable
(repurchased by the company for a certain
price).
 Bondholders receive interest payments
every six months.
 Bondholders receive original amount the
company borrowed from them when note
matures (principal).
Hospitality Financial Management ©2005 Pearson Education, Inc.
By Robert E. Chatfield and Michael C. Dalbor 1-7 Pearson Prentice Hall
Upper Saddle River, NJ 07458
 Goal for the Hospitality
Financial Manager
 The goal is to maximize the wealth of the
owners.
 For a corporation, this means increasing the
stock price to its highest possible level.
 Maximizing revenues does not necessarily
mean maximizing profits.

Hospitality Financial Management ©2005 Pearson Education, Inc.

By Robert E. Chatfield and Michael C. Dalbor 1-8 Pearson Prentice Hall
Upper Saddle River, NJ 07458
 What Affects the Stock Price?

 The stock price is the sum of present and

future dividends.
 Future dividends are affected by three major
factors:
 The amount of the dividends
 When the dividends are received

 The risk associated with the dividends

Hospitality Financial Management ©2005 Pearson Education, Inc.

By Robert E. Chatfield and Michael C. Dalbor 1-9 Pearson Prentice Hall
Upper Saddle River, NJ 07458
 Agency Relationships
 Owners—managers
 Franchisee—franchisor
 Owners—lenders
 Agency relationships involve a principal
(example: owner) and an agent (example:
manager).

Hospitality Financial Management ©2005 Pearson Education, Inc.

By Robert E. Chatfield and Michael C. Dalbor 1-10 Pearson Prentice Hall
Upper Saddle River, NJ 07458
 What Is an Agency Problem?
 Agency problems arise when an agent does
not act in the best interest of the principal.
 Some typical agency problems:
 Shirking
 Consumption of perquisites

 Conflict between owners and lenders led to

Marriott corporation split in 1992.

Hospitality Financial Management ©2005 Pearson Education, Inc.

By Robert E. Chatfield and Michael C. Dalbor 1-11 Pearson Prentice Hall
Upper Saddle River, NJ 07458
 What Do Hospitality Managers
Do to Create Value?
 Increase revenues
 Careful management of room rates
 McDonald’s breakfast market

 Lower expenses
 Control food and beverage costs
 Decrease turnover to reduce labor costs

Hospitality Financial Management ©2005 Pearson Education, Inc.

By Robert E. Chatfield and Michael C. Dalbor 1-12 Pearson Prentice Hall
Upper Saddle River, NJ 07458
 We Can Undertake Projects
That Create Value
 Kemmons Wilson and the creation of
Holiday Inn
 Marriott International
 Creation of guest rewards program
 In-room video check-out

 Marriott’s extensive consumer research

regarding courtyard

Hospitality Financial Management ©2005 Pearson Education, Inc.

By Robert E. Chatfield and Michael C. Dalbor 1-13 Pearson Prentice Hall
Upper Saddle River, NJ 07458
 How Do We Know If a Project
Creates Value?
Incremental benefits $5,000,000
Less: incremental costs $4,000,000
Net benefits $1,000,000

 Overall, if a project’s benefits exceed its

costs, value is created for the owners.

Hospitality Financial Management ©2005 Pearson Education, Inc.

By Robert E. Chatfield and Michael C. Dalbor 1-14 Pearson Prentice Hall
Upper Saddle River, NJ 07458