The amount of the joint venture the company owns is recorded as an asset. Instead of booking a major expenditure as an expense, the financial manager could record it as a long-term asset.
Concurrently, the total asset value shown on the balance sheet would be artificially inflated, making the business appear stronger than it should. The financial manager is informed that the company has signed a long-term contract to provide products or services to a customer. This, of course, is totally misleading and illegal. Short-term gains through unethical means inevitably result in long-term losses and personal disgrace.
The temptations, however, are still there for those who insist on breaking the law. It will likely come back to haunt you. For example, some small businesses may not declare and report all its revenues and expenses accurately. By declaring less revenue than it should, such a business pays less income and sales tax. Other companies may hire illegal immigrants and therefore need money on the side to pay these workers off the books.
Whenever employees sense that management is not following fair practices, they will likely not follow fair practices either and will try to steal from the company. Finance in Action The Boatman The Boatman is a room hotel located in a major metropolitan city near a medical center. Boatman, Inc. This particular property focuses primarily on guests who visit the medical center for business purposes, but it also has limited meeting space that can accommodate a group of up to one hundred guests.
Teresa Sage, controller of the Boatman, is in the process of analyzing operations and is starting by conducting a horizontal analysis on the income statement for the previous two months. When conducting a horizontal analysis, what numbers do you need to calculate?
As seen in the shaded regions of the completed horizontal analysis for the Boatman Hotel, the change in dollar amounts and percent change must be calculated for each line item. All of the calculations are provided in the finished example.
The easiest way to identify major changes is to look at the percent change column. By looking at each line item, you can see there were significant increases in rooms revenue, telecommunications revenue, rooms expense, telecommunication expense, other operated departments expense, administrative and general expense, franchise fees, and utilities.
The next step is to analyze the data and put meaning to the numbers. Revenue for telecommunications is very small compared to revenues for rooms or food and beverage. Franchise fees and utilities also increased over the period, causing total undistributed operating expenses to increase This increase was achieved through higher rooms revenue and a slight drop in operating expenses.
Overall, the property appears to be in good shape, but Teresa must conduct further analysis to determine why some of the expense accounts have increased. She could also perform a horizontal analysis on the changes in expenses as a percentage of departmental revenue.
In this chapter, you read about vertical, horizontal, trend, and ratio analyses. You were also introduced to certain industry norms and standards to help you determine if your operation is on par with your competition. You are also now aware of financial tricks that can be played to purposely misrepresent financial data and mislead the readers of financial statements. In the following chapter, we address two more important operational subjects: working capital and cash management.
All accounts are expressed as a percentage of one base account. Horizontal analysis tracks both changes in dollar amounts and percentages.
Ratio analyses are categorized as liquidity, solvency, activity, profitability, and operating ratios. These financial tricks are called window dressing and can include off-balance-sheet financing, capitalizing current expenses, and improper recognition of revenue. When analyzing an income statement, all expenses are sized using revenue as the common base. In analyzing a balance sheet, total assets, total liabilities, or total equity serves as the base.
Line graphs and bar charts are often used to graphically show the results of the analysis. It is expressed in number of days. Is the T Resort too heavily in debt? How can you evaluate its debt structure?
What is the projected current ratio for the T Resort as of December 31, , and ? Are the ratios favorable? What are the projected profit margin, and return on equity for The T in ?
What will be the inventory turnover rate for The T in ? She was doing well until last year. You notice she has a large amount of current liabilities that are way overdue. She also shows a large cash balance on the books. Something tells you she is not being honest with you and is trying to make her statements look better than they should. What should you tell her?
What is SAS 99, and how does it address the issues relating to window dressing? These restaurants concentrate on serving homestyle food such as meatloaf, fried chicken, mashed potatoes, barbecued foods, and apple pie at an affordable price. Utilizing the income statement and balance sheet provided, assist Ms. Blackwell with her analysis by calculating the following ratios for Address any ratios that appear high or low, and explain why you think this is the case.
Based on your analysis, would you recommend that investors buy stock in this company? Please explain your answer. The hotel recently underwent a major renovation in which all of the guest rooms, the lobby, and meeting rooms were brought up to date.
The owner of the property thought the renovation would boost the business, but so far the hotel is not meeting budgeted goals. Beth Samuelson, the current general manager, is worried she may lose her job if she does not meet the projected goals, so she has turned to her fellow managers for help.
Explain how the company can reduce expenses or increase revenues to meet budgeted goals. Now pretend you are Ms. Is this attainable if the Crescendo Hotel only has rooms? Hint: Use the desired volume calculation. How he rose to this position is an interesting story.
Charles strongly believes in maintaining relationships and never burning bridges. He also devoted his extra time to working in the hospitality industry during his high school and college years.
His first job was as a busboy at the Drake Hotel in Oakbrook, Illinois. I [also] found that if you just did things in a commonsense way, you could move ahead. Professional waiters also passed along other tricks of the trade. Upon graduation in , the twenty-two-year-old Illinois native went to work for Arthur Young and Company as an auditor.
Basically, he was unhappy being an auditor. I longed to be back in the hospitality business. While at the university, he met his first mentor, Donald Greenaway, a professor at the college and a former president of the National Restaurant Association.
In , when Landry moved to Manor Care Co. To accomplish this, Chuck established centralized accounting, centralized staffing, and a new internal control system. Many interesting things have happened to Warczak during his tenure with Sunburst Hospitality.
Today, armed with a strong balance sheet and an improving economy, his company is aggressively pursuing opportunities as they arise.
Recently, Sunburst added eleven self-storage facilities, four large apartment complexes, and fifteen hotels to its portfolio, making it one of the largest franchisees of Cendant Corporation. Sunburst is also developing a unit condominium project and thirty townhomes in Arlington, Texas.
Throughout his thirty-year hospitality career, Warczak has relied on and applied the financial knowledge and skills he learned at Conrad N. Hilton College and the accounting experience he gained with Arthur Young. So what are his accounting and finance tips to aspiring hospitality managers and entrepreneurs? Learn how the income statement and balance sheet relate to each other and how a change to one impacts the other.
Also, understand the concept of return on investment and relate it to every financial decision you make in business and financial decisions in your personal life as well. You accomplish things not through your own knowledge but by working with people collectively. Interview, Cook, Lou. Understand the concept of working capital and its importance to the success of a business.
Determine the level of working capital a business should maintain. Understand the need for cash controls and cash management. Understand the importance of a cash budget and its preparation. Understand how credit cards are processed and the range of transaction fees charged.
Preview of Chapter 4 Managing working capital and controlling cash 1. Definition of working capital b.
Factors impacting the amount of working capital required by a business c. Ways to minimize the amount of working capital needed 2. Cash controls b. Cash forecasts c. Managing bank balances and services provided by banks d. It is critical, therefore, that you learn how to manage what is called working capital. Current assets include cash, accounts receivables, inventories, notes receivable, prepaid expenses, and any other assets that can easily be converted to cash within a year.
Current liabilities are accounts payable and other monies owed that must be repaid during the current year. In the business world, the term working capital more commonly refers to the amount of cash required to operate a business.
THE REAL DEAL Most small businesses find it helpful to prepare a ninety-day rolling cash budget to better manage their cash inflows and outflows and to determine whether or not they will have enough working capital to meet their short-term financial obligations to vendors, suppliers, and staff.
When preparing a cash forecast or budget, focus on the following issues: 1. Managers can sometimes sense the pattern of cash receipts and disbursements better than you can. Negotiate with your suppliers to obtain favorable credit terms, and then factor the terms into your forecast of cash disbursements. Be realistic and conservative when forecasting revenues. Remember that revenue is dependent on a variety of factors.
While you can control some, you cannot control them all, including the economy and your competition. If your cash forecast looks good based on conservative revenue projections, it will look even better when you exceed your revenue goals. It is your cash; take good care of it, or it will disappear before your very eyes. Some credit card companies, however, record credit card sales as accounts receivables and pay only after the credit card transactions are processed by sending a check to the business.
More sales means more accounts receivable, and more staff means a higher payroll. Because you need to pay your employees, suppliers, and vendors on a timely basis, rapid growth can cause a cash crunch. Cash discounts are common in retailing. Why not offer them at hotels and restaurants as well? Should a hospitality business process its own payroll, or is it better to outsource the payroll function? Can this decision impact the cash picture of the business?
Many companies and banks offer payroll services that only take a few business days to process once the personnel documents are received and the system is set up. The payroll process is more than multiplying hours worked by the appropriate wage rates. It also involves calculating the employer portion of taxes due, filing tax returns quarterly, and paying payroll taxes to the government. In addition to the regular weekly or biweekly payroll process, vacation and sick time must also be monitored and accrued.
At the end of the year, businesses are required to generate W-2 forms for all employees to allow them to prepare and file their personal income tax returns. Some companies and banks provide small businesses with all of these services, including a payroll register, a direct deposit report, a K retirement fund report, a vacation and time off report, a tax report, an employee benefits profile, a workers compensation report, and even a tip credit report for foodservice employees.
The cost? It depends on the number and type of services provided, the number of employees, and how often payroll checks are processed. This converts your inventories into cash faster and reduces your need for working capital. Effective inventory management is a skill every hospitality manager should possess. Many restaurant operators are afraid to run out of a menu item and therefore overstock slow-moving items.
Most customers like when a restaurant serves only fresh products, and they understand that a restaurant may occasionally run out of a menu item or two. Many suppliers start a new account on a cash-on-delivery COD basis.
Once the business is established and gains the trust of the supplier, more favorable credit terms are offered. Do the math: If your vendor delivers food to you on May 1 and invoices you at the end of the month, by the time you write him a check, he has actually financed your food purchase for thirty days. All during this time, your cash is earning you interest. Pay your suppliers on time, as they are your source of product, but use your credit to its maximum.
Pay suppliers on the last day the invoice is due to earn the most interest possible on your money. If you do not follow up, and your vendor is dishonest, you will have paid more for the product than you should have.
Cash Cash is the most important asset a business can have. With cash, a business has both liquidity and buying power. As a hospitality manager, your job is to control cash. You should know how much cash you need to operate your business, plan your cash disbursements carefully, and prepare accurate cash forecasts at all times. Under this law, a bank or financial institution can convert a paper check into electronic form and submit it for payment instead of having to send paper checks to other banks to receive payment.
The process saves banks time, resources, and money. Check 21 also allows banks to make substitute checks and, therefore, banks no longer need to keep a copy of the original check. If you have a checking account that returns cancelled checks, you may be able to receive your own checks, substitute checks, or combine these approaches.
Substitute checks are special paper copies of the front and back of the original check. They are considered legal copy and can be used as proof of payment, just like the original check, and you are still fully protected. In fact, under both state and federal law, whether or not you receive any form of a cancelled check or an account statement, you are protected against errors the financial institution may make on your account.
All Check 21 does is speed the processing time with new technology. But how does this affect your business? If you need to pay bills, make sure you have sufficient funds in your account.
You can no longer play the float and hope the check will not clear for a few more days so you have the time to deposit funds in the bank to cover it. On the receiving end, you will be able to receive payments faster. It is liquid, often easily accessible to employees, and attractive to everyone that comes in contact with it. It is easier for your employees to steal cash from your business than to steal more concealable assets.
Remember: Cash is not limited to currency; it includes checks, money orders, and marketable securities. The forecast is, in essence, a cash budget. Over the years, her relationships have led her to one opportunity after another. She constantly pushes herself to step outside her comfort zone because she believes that with greater risk comes greater reward. The risks she has taken to date have paid off handsomely to the point where she now has both the time and the money for her philanthropic efforts, which she loves.
According to Clare, her real reward is her ability to give back to others. Today, Jackson is the president and chief executive officer of Sullivan Group, a Houston-based meeting and event production company.
Like many female entrepreneurs, the decision to strike out on her own was partly due to her desire to strike a work-life balance. After working in the industry for several years, I knew that I needed a change. There was no balance between career and family for me. The contacts she cultivated while at the University of Houston became both her role models and business associates. But, as do many start-up businesses, Jackson faced cash flow problems at the beginning.
If you have not yet begun to cultivate your relationships, start now and build on them. Risk taking is another quality that defines an entrepreneur. What was the biggest risk Clare Jackson took in starting her business? I just knew the other side of things, how to work there.
It should not deter you either. Jackson had this advice for the students about risk taking: To the degree one is willing to risk, the reward is far greater. Who can I call that I might be a little intimidated about talking to?
What am I avoiding? Step outside of your comfort zone and make something happen. When you have achieved your financial goals, you will have the resources to do the things that you could not afford to do earlier in your career, whether that means retiring early and traveling around the world or spending more time with your family.
For Jackson, her success in the event and meeting planning business has given her the time and resources to do what she truly enjoys: volunteer work. Keynote Speech, Conrad N. Hilton College Career Fair, October 20, Perin, M. The objective of a cash forecast is to alert management to probable cash shortages or surpluses in advance. If a cash shortage is forecasted, the business may need to take out a shortterm business loan. If a cash surplus is forecasted, the business may have too much working capital on hand and should invest the surplus in a short-term interest-bearing account.
Illustration shows how a cash budget can easily be prepared using an Excel spreadsheet. Illustration presents a cash budget for the Sienna Resort, a hotel property. Schedule A also links with schedule C, which details cash sales, charge sales, and the accounts receivable aging process. Schedule B provides management with details related to cash disbursements from operations. As you can see, cash budgets can be relatively simple, like the one shown in Illustration , or quite complicated, like the one shown in Illustration The degree of sophistication is dictated by the type and size of the operation and the needs of management and ownership.
Many banks offer special services to help small businesses manage their cash more effectively. These reports are mailed to the business or can be accessed via the Internet. This service is easy to use, but there is normally a set-up fee and a monthly charge.
Banks also offer what are called sweep accounts, which can generate additional interest income for a business.
Here is how a sweep account would work for a small chain of restaurants: 1. The restaurant company first establishes a minimum cash balance that it wants to maintain in each local bank where the company has a restaurant. Each day the restaurants make cash deposits to their local bank.
The central bank then automatically invests the surplus cash in secure overnight investments on behalf of the restaurant company. A monthly fee is usually charged for this service. If your business maintains large cash balances, a sweep account may be something you might want to pursue. A lockbox is also recommended if you have a large number and amount of accounts receivable.
Lockbox processing allows a business to collect and process payments quickly. Using a P. Today, with identity theft being so common, the use of a lockbox is another security feature your business may want to consider. Third-party credit card check processing is a big industry, and many reputable companies offer this service. This standard consists of six primary requirements: 1.
Build and maintain a secure network. Protect cardholder data. Maintain a vulnerability management program. Implement strong access control measures. Regularly monitor and test networks. Maintain an information security policy. Safeguards are a must, as Internet fraud is so prevalent today. It is important for everyone to recognize that credit card information must be treated with the utmost care.
Banks also offer zero balance accounts. By consolidating cash balances, you eliminate the need to maintain cash balances in each account, thereby reducing the amount of working capital needed and also avoiding certain bank charges. Banks will also invest the excess funds on your behalf daily. Some credit card companies, like American Express, charge their members an annual fee for the right to use the American Express card. Other credit card companies provide charge cards to their customers on a no-fee basis.
All credit card companies charge the merchant a credit card transaction fee. VISA and MasterCard normally charge fees at the low end of the range, while credit card companies like American Express charge fees at the high end of the range.
The higher the average transaction price and the higher the credit card sales volume generated by the business, the lower the transaction fee. The actual percentage is negotiable. It is a good practice to meet with the sales representative of your credit card companies once a year to revisit the rates you are being charged.
If your sales volume has increased during the year, you should be able to negotiate a more favorable transaction fee. While this is a positive step, they still lack the ability to monitor reservations taken over the Internet that require a credit card to be used to hold the reservation.
It is important to first secure your website and then work with your technology consultant to design a website that is secure. Internet reservations and shopping are here to stay, and customers need to be confident that the information they are providing on your website is confidential! Juancas Ltd. Because the company is a large operation, this minimum balance can be subsidized the first couple of months of operation by cash flows from other divisions.
The following table provides a breakdown of the cash inflows and outflows for September through January. The September figures are provided, so all you have to do is place them in the correct row in the chart. The same calculation can be utilized for increased credit and cash purchases, but instead of multiplying by 1.
Input the amount of cash sales for November, credit sales for October that were collectable in one month, and credit sales for September that were collectable in two months, and add them to get total cash available. Now, total the cash disbursements for November. Now you can do the same calculations for December and January. Annual growth in revenues and profits are expected by owners and demanded by top management. Growth is common to all successful companies. The next two chapters discuss the need for growth, the benefits of growth, alternative growth strategies, and ways to finance growth.
Key Terms The numeric difference between current assets and current liabilities. Earnings are usually based on the federal funds traded rate, and the interest earned is credited daily. Banks invest the surplus funds on behalf of the business.
What are three key methods of minimizing the amount of working capital needed? Give an example of each. Discuss the zero balance accounts and lockbox services that most banks offer. List three advantages and three disadvantages of each service.
Feel free to visit Internet sites for banks and other financial institutions as you determine your response. Ask your manager at work what credit card processing fees your hospitality operation is charged. Explain how credit card companies determine the transaction fee percentage charged to merchants. Search at least three websites regarding credit card fees and compile the range of transaction fees charged by these companies.
You are the manager of the Potomac Inn. He finds himself short of cash and is about to play the float by sending in his accounts payable checks on their due date. By doing so, the payments will be in the mail and will take at least one additional day to reach his suppliers and then another day for them to process the checks.
As of October 28, , a new federal law, called Check 21, went into effect. Check 21 is designed to enable banks to process more checks through an electronic process rather than using paper checks. Electronic processing is more efficient and less costly. Do a search on the Internet on the Check 21 law. Is this a fair rule for the consumer? Is this a fair rule for businesses?
Is Eugene being unethical in this particular case? Compile a comparison of at least three sources regarding the fees charged for such services and the minimum account balances required by each service.
The Watree is a beautiful ski lodge located in a popular area, but during the summer months hotel guests become scarce and cash management becomes a major problem. Because the Watree is independently owned and operated, every once in a while the owners must provide additional funds to carry the business over. The general manager hired Mr.
From the information provided in the chart, determine available cash for the months of July, August, and September. How can this property better manage its working capital? Provide specific suggestions for Watree Lodge management. Concept Check Managing Cash at the Greenville The Greenville Restaurant, which is independently owned and operated by the Greenlee Family, is located in a small historical town frequented by antique shoppers and other tourists attempting to glimpse at American history.
While Mr. Greenlee wants to continue the family business, he would also like to branch out and open restaurants in other locations, perhaps even franchising the Greenville Restaurant. One account is for immediate access to pay bills and does not draw any interest. The second account is strictly for savings to pay for problems that may arise, such as an oven going out.
Can you give any tips to the restaurant to better manage their situation? As the Greenlees open new restaurants what banking services are available to them? How can the Greenlees better manage their credit card payments? How can they better manage fees as the business grows? After just three weeks of operation, J. Initially, Alice expected to be a stay-at-home wife.
Before they married, she said to J. That year, business from the first stand was so good that the Marriotts opened a second stand. According to J. As long as the receipts were more than the expenditures, we knew we were doing all right. Marriott would spy on them through a hole in the back door. However, as fall approached, the cool weather caused their root beer sales to drop off. To divest the risk of this lost cash flow, J.
Chili, hot tamales, barbecued beef sandwiches, and hot dogs were added to the menu, and the Hot Shoppe concept was conceived. Soon, thereafter, the Marriotts renamed their root beer stands Hot Shoppes and grew the chain to over sixty-five restaurants. In , a Hot Shoppe manager at the Hoover Airport location observed that airline passengers would buy snacks and drinks from the restaurant to take with them on their flight. He told Mr. Marriott about this, and immediately the entrepreneur cleared a storeroom in the basement and converted it into a flight catering assembly room.
In spite of World War II, this division quickly expanded into the foodservice management business, providing meals for thousands of workers in government and the private sector. Marriott was thus faced with a critical decision: Should he be conservative and grow the business slowly by reinvesting its cash flow, or raise a war chest for expansion and take the risk of going public?
In , Hot Shoppes, Inc. The flush of cash was used to further expand Hot Shoppes, in-flight catering, and the foodservice management businesses. The company then diversified into lodging with the construction and opening of the Marriott Twin Bridges in Arlington, Virginia. Other Marriott hotels soon followed in Washington, D. Even after officially relinquishing control to their eldest son, J. Marriott Jr. The phenomenal growth of their original root beer franchise into a worldwide hospitality conglomerate was no accident.
Marriott: The J. Willard Marriott Story. Salt Lake City: Deseret, Marriott, J. New York: HarperCollins, Willard Marriott. Marriott, Company Co-Founder, Dies at Understand why a company must demonstrate consistent growth to be successful. Understand the concept of shareholder value and how management strives to increase it.
Understand the concept of risk and return, and how to measure it. Identify the benefits and advantages that growth offers a company. Understand the growth strategies available to companies and the advantages and disadvantages of each. Preview of Chapter 5 Growing the Business 1. Private company goals b.
Risk and reward c. Public company goals 3. Provide career paths for employees b. Attract new qualified employees c. Increase market share d. Limit new competition e. Diversify to reduce risk 4. Increase sales and productivity of existing properties b. Expand physical facilities c. Franchise brand rights d. Secure additional management contracts e. Merge with or acquire competitors f.
Stockholders of public companies expect the price of their stock to rise each year. This is a major challenge for most companies and becomes even harder the larger the company becomes. The primary goal of management, therefore, is to increase shareholder value. R Shareholder Value Shareholder value is the market value of the company. Shareholder value for a public company is the current market price of its common stock multiplied by the number of shares of common stock outstanding.
Shareholder value for a private company is the price the company could be sold for on the open market. O Brien. Edward Ketz. Fridson CFA.
O Neil. Without the Burdens of Ownership! Lasser Institute. Neil Weintraut. Curtis Jamison. Peter Steidlmayer. At all times, the book rigorously applies itself to the specific needs of the hospitality decision-maker, contextualising and explaining financial decision making and control in this light. Combining a user-friendly structure with frequent international cases, worked examples and sample reports to illuminate the theory, Financial Management for Hospitality Decision Makers is ideal for all students of hospitality, as well as being a vital source of information for practitioners already in the industry.
It should serve as a reference book to be used as financial problems and opportunities arise. Hospitality Finance and Accounting provides a uniquely concise, accessible and comprehensive introduction to hospitality, finance and accounting from a managerial perspective.
By avoiding unnecessary jargon and focusing on the essentials, this book offers a crucial breakdown of this often overly-complex subject area. The concise chapters cover the essential concepts, ideas and formulas to be mastered within the hospitality industry including income statements, balance sheets, pricing and budgeting.
Each chapter is split into two sections: theory and practice, giving students practical insight into the everyday realities of the hospitality industry through case studies which show how theories are applied to a range of relevant scenarios. Emphasis is placed particularly on the practices of revenue and budget management within the food and beverage industry. This will be an essential introductory yet practical resource for all Hospitality students and future managers within the industry.
The success of every business in the hospitality industry depends on maximizing revenues and minimizing costs. This Ninth Edition continues its time-tested presentation of fundamental concepts and analytical techniques that are essential to taking control of real-world accounting systems, evaluating current and past operations, and effectively managing finances toward increased profits.
It offers hands-on coverage of computer applications and practical decision-making skills to successfully prepare readers for the increasingly complex and competitive hospitality industry. Accounting and Financial Management: developments in the international hospitality industry presents new and innovative research and developments in the field of accounting and financial management as it relates to the work of managing enterprises and organisations in the international hospitality industry.
The content contains contributions from a rich source of international researchers, academics and practitioners including, university and college lecturers, professional accountants and consultants and senior managers involved in a wide range of teaching, scholarship, research, and consultancy in the hospitality industry worldwide. The material is drawn from their work and experience and relates directly to the management of hospitality undertakings. Therefore the up to date case studies and examples used are taken from a wide ranging of companies across the industry including large international chains such as Sheraton, Holiday Inn, and Intercontinental.
For non-accountant hospitality managers, accounting and financial management is often perceived as an inaccessible part of the business. Yet having a grasp of accounting basics is a key part of management. Using an 'easy to read' style, this book provides a comprehensive overview of the most relevant accounting information for hospitality managers.
It demonstrates how to organise and analyse accounting data to help make informed decisions with confidence. It is a key resource for all future hospitality managers. Chapters will be developed under the auspices of a select group of hospitality industry General Mangers, Directors of Finance, and Regional Accounting Managers to ensure that the information is current, accurate and useful. Understanding and applying the information will be the main focus of this book. This textbook should provide hospitality managers the knowledge and experience to be comfortable in using numbers to operate their departments.
As a result, they will have more time to spend on the floor with their customers and employees. This knowledge will help them understand their operations and how to improve, change or expand them to increase revenues or profits.
This new book, Restaurant Financial Management: A Practical Approach, provides valuable guidance on how to apply the concepts of accounting and finance to real-life restaurant business activities.
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