Professional Documents
Culture Documents
1.1 Explain the importance of costs and volume in financial management of travel and tourism
businesses
1.2 Analyze pricing methods used in the travel and tourism sector
1.3 Analyze factors influencing profit for travel and tourism businesses.
Task 2
Introduction
Finance and funding is the important concept that is required appropriate amount of time and
attention by the business for the better growth of the business as well as economy. Unit 2
Financial Management in Travel & Tourism Sector Assignment is the important part of the
economy so it becomes essential that finance and funding in this relation be focused with full
capacity and potential. So in that context a travel and tourism company called Carib Happy
Tours Company is planning a trip to Caribbean for one month. So accordingly cost volume and
profit analysis is done along with appropriate pricing strategy in this concern. For the better
performance all the factors that would constitute profits are also analyzed. Next is the
management accounting and the investment appraisal report is also made so that no problems
may arise in that regards in future. Interpretation of the travel and tourism company is made by
its ratios. Company also wants to build a hotel in the Caribbean so sources and distribution of
funds in that regards also mentioned in this assignment in the detail form.
Task 1
1.1 Explain the importance of costs and volume in financial management
of travel and tourism businesses.
It is the type of analysis in which there is the finding of the cost and volume in relation to
breakeven point. For the purpose of determining this various equation are used. Apart from
that various assumption are taken into consideration for finding the cost and volume. There are
certain assumptions in this respect like all the units are sold, there are two types of cost i.e.
fixed and variable and sales, variable per unit and fixed cost remain constant. In relation
to travel and tourism CVP analysis plays a key role as it enables to make plan and control of
the financial matter of the company. This carries certain importance as-
All the future needs are planned and analyzed in an effective manner in the hotel
industry such as CHTC. It helps to make correct and proper decisions so that no chances of
loss may occur.
It is the highly effective tool that enables to determine the breakeven point that
ultimately helps to access the all the necessary information that would help to achieve the
profit or no loss situation.
For the effective performance a most suited combination of all the cost i.e. variable,
fixed is taken into account. Along with this cost, sales, volume and all the other necessary
financial data re considered that enables growth of the business.
This method or technique is easy and simple as all the data can be analyzed with
simply applying formula to derive the answer. So no extra efforts are applied in that concern
that enable it as an easy toolto be taken into practice (Younis et.al, 2010).
1.2 Analyze pricing methods used in the travel and tourism sector
Every business can only survive when it earns profit from the cost spent on the product or
services. So determine that aspect pricing the product or services is important to attain the
profit for the business. There are many methods in this concern like cost oriented pricing,
market oriented pricing, target pricing, transfer pricing, going rate pricing many others as well.
Cost oriented pricing method- In this pricing method certain margin is added to the
cost that enables to derive the profit from the business operation. This is the easy way to
determine the profit as method of pricing is easy and understandable.
Market oriented pricing method- In this method, price is determine as per the
competition that prevails in the market as prices low or high is based on the prices that prevails
in the market by competitors (Capinsk et.al, 2012).
CHTC is planning for the trip to the Caribbean in which £ 60,000 will be charged for hotel
accommodation and airplane fares. Apart from that £ 150 is charged for the meals that are the
variable cost that is charged as per the tourist. Cost oriented pricing method is used in
this business environment as this method would enable to adjust the best margin for the
business that would help to attain the profit for the business even this method is easy and
understandable to all the related party. Apart from that market oriented pricing method can be
used as to compare the pries with its leading competitors that can able it to stand it the
competitive market in the long run.
1.3 Analyze factors influencing profit for travel and tourism businesses.
Factors the influence the profit of the CHTC business are-
Good and effective management strategy is the best tool for the purpose of attaining
profit. If the planning is formulated in a proper manner then there are chances that by
implementation profit can be generated in an accurate manner.
Advertising and promotion campaign also plays an important role in that context as in
the competitive market this marketing planning is important to increase the profit of the
business.
In tourism business travelling expenses is also important to determine as there are less
chances that if airplane or any other mode of transport fare is high then margin in profit would
be low.
A better accommodation facility is also required to earn profit for the business.
Astravellers live in hotels and are charges area affordable then there are fewer chances that
business would suffer any problem (Tokunaga et.al,2013).
CHTC trip evaluation-Hotel accommodation and airplane fares cost amounts to £ 60,000.
This is the total cost whereas £150 per tourist is charged for the meal that is the variable cost.
There are 90 tourist so total variable cost £ 150*90 which is equal to £ 13,500. Total cost is the
addition of fixed and variable cost which amounts to £ 73,500. But business is charging only £
800 per tourist so total money charged by them is £ 72,000. That concludes that business is
having a loss of £ 1500. But business wants to earn at least £ 10,000 so it has to charge £
927.77 from each customer to gain at least this much profit.
Task 2
2.1 Types of management accounting in travel and tourism business
Management accounting helps the management to collect and manage all the internal working
of the data time to time so that if any problem arises then it can be solved without any default.
This is important as all the defaults, flaws or any other aspect that would affect the business
are critically analyzed before any penalty. Different types of management accounting is as
follows-
Budget report-All the expenses that would occur in future are estimated and then
documented in the budget report. By this management accounting all the expenses that can
occur in future are reported that can enable to make plan accordingly. This is the best way
performing accounting.
Job cost report-In this technique, all the main area of the business where profit can be
earned is focused so that no extra time and efforts are wasted on any non-profitable project. All
the aspects through which profit can be generated are analyzed and then reported to make
correct elevation of the profit generating projects.
Cost allocation report - In this report, allocation is made to each and every resources
present in the business at early stage so that no ambiguous situation in any relation may arise
in future. This helps the managers to keep a track record on the functioning of the business
and there related outcome.
In context with the CHTC, business has planned to earn at least £ 10,000 from the trip to the
Caribbean but the planned budget and the actual expenditure differ drastically as if business
charged £ 800 per tourist then it would suffer a loss of£ 1500 which leads to no exchanges of
the profit earning from the trip. This evaluation is performed and a bad management
accounting is showcased by the company. So now it is important that CHTC chose the best
technique for the purpose of accounting (Hopper et.al, 2016).
Profitability ratios
Liquidity ratio
Investment ratio
Profitability ratios-This ratio shows the capacity of the business in relation to the
ability to earn profit from the cost that is incurred for this matter. Rate of return, gross profit
ratio, net profit ratio, return on equity and many others are the ratios that determine the
business capability in regards to its profitability (Parsian et.al, 2014). Two such ratios are
determined below-
Return on equity- It shows the return earn by the company from the shareholders
equity. This is one of the most important ratios that determine company’s worth in the long run
business. Company has shown improvement in relation to the previous year that is the good
sign for the betterment of the company.
Return on assets- It shows the capacity of the business to earn profits from its assets.
From the two year of comparison it was reviewed that company has gain momentum in utilizing
its assets to the great extent as in the year of 2015 company’s ratio has increased in
comparison to the previous year.
Liquidity ratio-They are basically two such ratios i.e. current and quick ratio. Both
ratios are used to determine the short term ability of the company to have liquidity in its
possession. It also indicates the ability to pay the entire obligation associated with the debt
along with margin of safety (VASIU et.al, 2015). These two ratios are described below-
Current ratio- It is calculated by dividing current assets to the current liability. It is
determine to check the capacity of the company to pay its short as well as long term debt. It is
one of the easiest ways to determine the aspects of the company. This company ratio is
decreasing that shows company has to work on its ability to pay its debt on time and without
any difficulties, default and penalties.
Quick ratio- It shows the ability of the business to pay its obligation on time without
any difficulty and defaults. If this ratio is low then it indicates that company is not performing
well in terms of its ability to pay short term obligation. So it is important that this ratio be
appropriate for the company. Company quick ratio has increased from the previous year that
showcases the good sign for the company. It also shows that company is performing well in
this aspect that can reduce its defaults and flaws.
Investment ratio- It shows the ability of the company to earn profit from the investment
made by it for that concern into any projects that may able it to achieve goals on the long run
basis. Various investment ratios are present that helps to analyses the perspective of the
investment. These ratios may be earning per share, price earnings ratio, price to sales ratio,
debt to equity ratio, equity ratio and many others (Rydlewska et.al, 2010). Two such ratios are
listed below-
Earning per ratio- This shows the company earning in accordance with its outstanding
shares. This ratio shows the profitability of the company along with the investment capacity it
possesses in it. This ratio is highly beneficial for making various financial decision s that would
be effective for the company on the long run of the business. Company’s earning per ratio has
increased from the previous year that indicates as a good sign for the company betterment and
progress. Company has to put some more efforts in its working to earn more earning in future.
Equity ratio- This ratios shows the proportion of the funds invested by the company in
comparison to the creditors. This is a sort of the leverage for the company. Company which
works in this industry of travel and tourism require to maintain an optimum equity ratio for the
purpose of investing and liability of long running of business. Equity ratio has decreased from
the previous year so it becomes important for the company to make certain amendment in its
policies for the betterment of the company.
Task 4
4.1 Analyze sources and distribution of funding for the development of
capital projects associated with tourism.
CHTC incurs the loss from the trip to Caribbean due to its poor management accounting. Now
it is planning to build a hotel owned by it at the Caribbean. So for this purpose it would require
funds that would help it to make a hotel. There are various sources of funds that can enable in
the construction of the hotel. These funds are listed below-
Loans- They are the external sources of funds where funds are accumulated from the
borrowing performed by the company by putting the collateral security. It is the fast way
accumulating the funds. Company would only require paying fixed rate of interest to carry out
the loan. Loan can be further categorized into short term loan and long term loan. Short term
loans are the loans that are taken over a small period of time for the better allocation of
resources in need. They are usually the bank overdraft. On the other hands the loans that are
taken for many years then that loan is called long term loans. It is the capital project so long
term loan would be required(Bhattacharya et.al, 2014)
Retained earnings- Profits that are earned are also used as the source in the capital
projects. A certain proportion of profit is reinvested in the business so that some is retained in
the business in need of contingency or emergency.
Equity- Another way through which sources can be accumulated is the issue of the
share capital so that funds of the business can be increased. This the long but better way to
accumulate funds as compared to different sources. There are many alternatives in this
options that can be followed by the company for the purpose of collection of funds from
different sources (Du et.al, 2012).
Another way that business uses is the retaining the funds for the longest time so that
funds can be increased and can be invested in the required projects. This is followed by the
business as it is practical with no measure issue associated with it. This method is known as
capital stretch method. It is an easy and simple method which consist of bills of exchange and
many other receipts related to creditors of the business.
Distribution of the funds is the next step after the sources of funds. Business has budget of
about £ 25 million so company would take the loan of £ 10 million from the banks by paying
interest monthly after putting collateral security to the bank. Another source is the amount from
retained earnings from which £ 4 million is taken into account. Another source is the capital
stretch from which company is estimating about £ 2 million. A short term loan is also planned of
about £ 4 million that would work as a bride loan. Apart from that rest £ 5 million would be
allocated from the share capital (Sokolitsyn et.al, 2016).
Conclusion
Travel and tourism is the important sector of the economy from which suitable amount of
income is generated so it become necessary that finance and funding be made accurate and
suitable. CHTC has planned a trip to Caribbean for a period of one year. It was analyzed that a
company pricing strategy along with other strategy are not proper that leads to the loss to the
company so company require to make correct policy in that regards. Apart from that company
also requires to make necessary changes in the current management accounting technique
along with correct investment appraisal technique that would enable a better growth in relation
to the correct decision making. TUI group is the company that is associated with travel and
tourism so it is also essential that all the necessary changes be made for the progress of the
company. Sources and the distribution of funds in this regards be selected more appropriately
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Price skimming: In this strategy firstly the price of the product and services is marked
the highest and then subsequent reductions are made to attract sales. This strategy is used by
Thomas Cook in several products to offer them at a higher rates during peak seasons and
lower them in fall seasons. It enables the organisation to reduce the price in the market and to
recover its sunk cost. The word skimming for this process is derived after skimming successive
layers of “cream” or consumer segments by lowering their price. For example, an organization
increases the price of a particular product due to the added advantage that it contains which is
considerably higher than its cost.
Cost plus Pricing: Thomas Cook is also found using this strategy in which the entities
tend to add up the cost and then add the mark up as the profit percentage. It is one of the most
practiced methods by entities operating in the travel and tourism industry. This method is fairly
simple to implement and Thomas Cook uses it in some of its most selling packages. For
example the cost of a holiday package is £ 1,000 and the profit percentage to be added is 10%
hence the the post plus price would be £ 1,100.
Market led pricing: This is another method of pricing used by Thomas Cook in which it
prices its packages as same as the rates prevailing in the market generally or even chooses to
price them a bit lower so as to achieve some market and customer advantage. For example
the price of a product prevailing in the market is £ 100 the price of the product belonging to the
company has been set as £ 100.
Absorption pricing: Absorption pricing is another widely used practice of marking the
prices of products by Thomas Cook, in this method the price of the product and the service
includes all the variable cost and the fixed cost to some proportion so as to recover all the cost.
Marginal costing: Marginal costing is regarded as a technique of costing that helps in
ascertaining the marginal cost that arises due to a variation in the production level and it also
helps in identifying the effect of the marginal cost upon the profit generated by the
organization.
TASK 2
2.1. Different types of management accounting information used by the
travel and tourism industry:
As already discussed, management accountancy is all about providence of meaningful and
analytical information for the decision makers so as to support them in their decision making
and enable formulation of strategies that could assist in maximization of benefits. Managers
and the owners of the business use various types of information derived from the management
accountancy techniques so as to run day to day activities and frame out various strategies to
help them achieve their goals and objectives. The type of information needed by any company
depends on the complexities and the size of the business. The various types of information
needed by the Thomas cook Plc are:
Financial statements: Financial statements are the most evident document to procure
meaningful information about any organisation. Financial statements of any entity are the main
accounts of the organization which are the formal records of the activities conducted by the
companies denoted in financial figurines. The financial statements of an organisation are
comprised of the,
Balance sheet which depicts the true and fair financial position of the company and
the, the balance sheet contains information relating to the position of the assets and liabilities
of an organization thereby projecting the financial health of the concern.
Profit and loss statement which depicts the company’s income, expenditure at one
place and
Statement of cash Flow-This depicts the pattern of cash inlays and outlays for an
organisation during a fiscal under consideration(Lacy,2001).
Budgets: Budgets are the forecasted statements depicting the overview of a broad
financial plans of the activities to be held by the companies in the short run to get a basis for
judgment that how much is to achieved by the company and whether it was able to achieve
that or not. There are different forms of budgets that contain different types of information such
as, the cash budget projects that future cash flows relating to a concern, the production budget
forecasts the future production levels of an organization, the sales budget projects the sales
forecasts etc.
Variance Analysis: Variance is the analysis of differences that is comparing the actual
with the budgeted expenses and revenues to observe the deviations and decide about the
steps to be effectuated to overcome such state of differences.
Forecast: Forecast as the word goes is the estimate of the future results of a
company’s operations. Basis for its preparation is the historical cost data’s and the various
financial statements of the entity.
Financial Statements- With the use of financial statements the managers can analyse
the profits and the financial position and the cash flows of the company and take appropriate
decisions there of (Atrill, 2011).
Budgets and Forecasts - Also with the help of budgets and the forecasts take
decisions for the future plans. Forecasting helps in performing investment appraisal, it helps in
making comparison between the results relating to different periods, budgets help in gauging
the profit making capability of an organization, it also helps in establishing control and many
more.
Variances - Variance analysis helps in understanding the areas of approximate
loopholes and the necessary measures to redress which is helpful in thoughtful creation of
future strategies essential to sound management of the entity.
TASK 3
3.1. Ratio based analysis of TUI Travels PLC
We have discusses about various sources of sound decision making for an organisation and
we also have understood there relevance in decision making. Howsoever it needs to be noted
that the financial statements in it are a whole lot of organized information and it at times
become difficult for management and others to understand what they should cite and what is
more important. To help solve this purpose are used the methodology of ratio based analysis
that helps in developing a scientific relationship amongst the key variables of the financial
statements. This helps in thorough analysis and evaluation for the users and management
likewise (Fraser and Orminston 2010).
To facilitate our understanding of the financial and operational performance of TuiTravel PLC a
leading brand name in the travel and tourism industry in UK, a comparative ratio based
analysis for the entity (Appendix) from the financial figures as derived from its financial
statements for the fiscal 2013-14 and 2012-13 have been carried along underneath.
2013 2012
Debtor Collection
2012 33.11757 15051 14460
Period
Creditors Collection
2012 128.0667 13395 12965
Period
NP RATIO 2013 0.42% 63 137
Current Ratio-Current ratio is a litmus test to evaluate the short term liquidity position
of an organisation, i.e. the capability of the organisation to honour its debts as and when they
become due. For TuiTravel PLC, It is computed henceforth ,
Current Ratio is ideally expected to be around 2 and for 2013 in comparison to 2012 we
can see that TUI’s current ratio has increased from 1.15 to 1.38 this is a good movement
towards an effective liquidity risk management initiatives.
Acid Test Ratio – Acid test ratio or quick ratio is another method of testing liquidity risk
management of an organisation. Acid test ratio also helps ascertain the ability of the firm to
cater to its debt payments as and when they fall due.For TuiTravel PLC, It is computed
henceforth,
It is ideally expected to be around 1 and in case of TUI it may be seen that this ratio has
been far below the margin and shows lesser amount in liquid current assets which might be
a reason for a possible threat to the liquidity risk management of the organisation.
Return on Net Assets –It enable the evaluation of the returns generate by the firm,
keeping in regards the proportion of pool of assets which are held by it,For TuiTravel PLC, It is
computed henceforth,
The ROA for TUI has fairly been constant for the years under reviewThis is a matter of
upconcern for the operational management team because it signifies that the operations of
the business have certainly not led to an incremental value addition for the firm.
Debtors Collection Period – It reflects the time taken by the firm to recover the funds
locked up with the debtors of the entity. For TuiTravel PLC, It is computed henceforth,
It is seen that the Debtor collection period for TUI is better than the industry standards and
moreover it has become lesser than 2012 this certainly signifies a good work of the debts
collection team.
Creditors Payment Period – It reflects the time allowed to the firm to pay its trade
creditors. It is a reflection of firm’s relationship with its creditors. For TuiTravel PLC, It is
computed henceforth,
TUI is seen to enjoy a fairly extended creditor’s payment period which is a symbol of strong
relationship with its suppliers. This is howsoever a matter of delicacy as well because it
imposes an ethical responsibility upon an organisation with good suppliers relationship to
honour their debt as and when they fall due because any delay may be detrimental to
entities image and creditors management.
Stock Turnover Ratio –This ratio helps determine the ability of the firm to replenish its
stocks of inventories available. It is test for ascertaining the performance of the sales wing of
the organisation.For TuiTravel PLC, It is computed henceforth,
The stock turnover ratio for has increased for TUI in the periods under review, this certainly
is a matter of appraisal for the sales team because more is the ratio greater is the chances
of generating revenue from sales.
The administration cost of TUI has increased over the fiscal howsoever it has been
managed well. Any increased efforts to place it into permissible limits will lead to further
profits being available with the organisation.
Gross Profit Ratio– This is another profitability ratio that helps understand the net
percentage of gross profit generated out of every pound of sales made by the enity. For
TuiTravel PLC, It is computed henceforth,
The gross profit ratio for the organisation has slightly increased in the fiscal howsoever the
ratio is not on a very good numbers it stands at 11% for 2013 which means the
organisation actually gets only 11 pents out of the 1 pound sales made. The cost of sales
should be reconsidered for ensuring greater profit retention.
Net Profit Ratio- This profitability ratio helps in evaluating the net percentage of profit
generated out of every pound of sales made by the enity. For TuiTravel PLC, It is computed
henceforth,
The Net profit ratio, for the entity is fairly low and this shows that the organisation spends a
lot of what it earns which ultimately leaves a very little profit for the organisation. Further, it
has fallen in 2013 from 2012.
Capital Gearing Ratio –This ratio demonstrated the relationship between fixed interest
and dividend yielding shareholder funds. It helps in understanding the risk to the organisations
finance providers by understanding the exposure and composition of debt instruments in
organisations capital structure.For TuiTravel PLC, It is computed henceforth,
TUI appears to be heavily financed with debt instruments which have further increased in
2013. This poses a threat on the liquidity of the organisation and lower earnings available
for equity shareholders.
TASK 4
4.1. Source and Distribution of Funding for Public and Non Public
Tourism Development
Finance is the actual source of generation of stimulus to plan for anything in a business
organisation. It actually begins with the quantum of funds available to support a plan in
absence or shortfall of which, plans are sure to be hitched. It is not wrong to say that, finance
in actuality is the source of energy for business operations. As, finance is the pervasive thing
required in a business right on from managing of operations till the planning for some future
expected activities we need finance and shortfall in same is sure to take a hitch for our
planning.
As we already know that Travel and Tourism in itself is a very large and very well organized
industry with large spread of horizons for various spheres of growth and expansion. Growth is
at times requiring various capital intensive approaches and this needs heavy capital
investment. We have thus undertaken an evaluation of the various sources of financing for
capital projects in public and non-public tourism development.
The various sources of funding available for a public and non public tourism development are
being discussed underneath,
Public Financing –Public financing as the word denotes refers to the funding from the
state i.e. governmental and semi-governmental entities. It needs to be understood that
development of spheres of tourism and travels is important for any country and the economy
as well because it is a source of livelihood for a large number of population working in this
sector as well as is a source of great foreign exchange. Hence, the government takes active
initiative to develop projects which amplify the overall industrial growth of this sector. Public
financing refers to the funding from the side of governmental bodies, whereby the government
takes the initiative of financing in projects like maintenance and development of antique and
historic sites, development of tourist information centers, project which involve capital infusion
from various governmental bodies and this is executed by several bodies established by the
government which undertake project evaluation and capital investment execution in the
projects (Lacey,2001). The various entities established by the government bodies includes,
Department of Culture, Media and Sport-This body was developed with the aim of
ensuring proper maintenance of heritage sites, development of monuments of historical values,
allocation and provision of budgets for maintenance of the heritage sites and tourism activities
in the union.
Regional Development Fund –Regional development funds is the budgetary
allocation body and planning entity that seeks establishment of newer facilities like tourist
information centers etc and ensuring adequate up keeping of already established facilities. It
also is entrusted with proper maintenance of balance in development initiatives amongst the
various tourist zones in the nation (Kotas 1999)
Non Governmental Public Bodies –Nongovernmental public bodies are majorly self
financed entities that are created to ensure adequate maintenance and creation of newer
tourism facilitation centers for accelerating the growth of the sector overall.
Non Public Financing –Non Public financing is the financing of projects by entities
which are nongovernmental and are majorly driven by possibilities of capital appreciation and
contribution towards overall growth of the industry. Capital intensive tourism development
programs like Cross Railway project has been developed by this form of financing and it
enables participation of private and public equilaterally. It may be done in either of the following
forms like,