Question

In: Finance

Q3: Why can a hotel, motel, or restaurant usually operate with a current ratio considerably lower...

Q3: Why can a hotel, motel, or restaurant usually operate with a current ratio
considerably lower than other types of businesses, such as manufacturing
companies?

Solutions

Expert Solution

Answer-

The reasons that the Curent ratio ( Current assets / Current liabilities) that is required by the hotel,  motel or restaurant ( HM&R) to operate is considerably low compared to other industries are

1) Lower receivables days - The receivables days for the HM&R is very low compared to other businesses like manufacturing industries because of immediate cash on delivery in some cases.

2) Low Cash coversion cycle - The cash conversion cycle for HM&R is very low compared to the other businesses like manufacturing companies.

3) The daily turnover and the cash received in HM&R is sufficient to meet the short term obligations and there is not much of working capital required unlike manufacturing companies.

4) The Capital expenditure which is a one time investment is quite low unlike other businesses of manufacturing companies which requires heavy machinery and equipment which is costly.

5) The equipment like wood furniture and tables and beds, appliances like lights, fans and utenils have long life and need to be replaced after long time and have less maintainance costs compared to manufacturing business equipment.

6) The workforce required is less compared to other businesses and the work environment is safe and insurance costs are low compared to other businesses like manufacturing industry.   

Therefore the HM&R business can manage and run with low Current ratio than other businesses like manyufacturing businesses.


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