Introduction to Finance and Funding in Tourism Sector
Travel and tourism management [TTM] is a crucial part for every country in which many type of services are provided to tourist. It is a holiday activity by which people go for the relaxation with their family. Tourism and travel are two different thing where travel is simply a movement on which people go for journey by any transport such as train, bicycle, and airlines and so on.
In this report The Carib happy Tours Company is a private entity who deals in the summer holiday packages and different services. In which it’s provide a private charter only for their tourist guest and company also focuses on accommodation which arranged in hotel and aeroplane for customers comfortability. CHTC charge £800 per tourist and total cost for accommodation for 2 weeks is £60,000. I n addition CHTC evaluate CVP importance in decision making process related to the travel-tourism. In this management accounting, financial accounting is considered in context of TTM. Moreover in these report proper analysing the source of funds that will be assists for the development in TT sector.
A) Concept of CVP analysis and its importance
Cost volume profit analysis is a proper analysis in which variable cost, fixed cost, selling price, volume of sale are evaluated. It is also assists for determining net income and operating income. For systematic analysis various assumptions can be perform such as production management, fixed and variable cost are constant or not and many more. In travel and tourism sector, CHTC evaluate importance of cost and volume and they are as follows...
It is a margin percentage in which contribution is divided by the sales so that percentage will be find out. CHTC use this term to find out the contribution margin in their holiday packages. For these following formula is used to find out the percentage.
CHTC Company has adopted 40% margin in their holiday packages. It will assists for the set margins and also its effectiveness in total sales.
MOS is stand for margin of safety and this is used in a travel-tourism sector to compute total amount of sale after excluding break even sales. It will assists for set high margin so that there is a low risk in the tourism sector. In other words it is also a forecasting which expressed safety margin for better sale in future.
Break even analysis
It is often called sale mix in which total selling part are evaluated. CHTC has many holiday packages and all having different margins so that Company can use sale mix in the calculation of total selling (Becker, 2016). BEP manage the balance between profit and loss and compute a point where no profit and loss is there. All above points are playing very important role in travel and tourism sector for better consideration of budgets and so on.
B) Analysis of pricing methods
CHTC has adopted pricing methods for systematic analysing in context of travel and tourism. CHTC has mainly three choice to select their pricing method which are based on cost, demand and competition. There are various pricing methods which are discussed below...
Cost based pricing
In these method some of the percentage is added in the cost price to set the final price. In other word it is a selling price in which profit margin is included so that it’s often called cost plus pricing. CHTC has adopted this method for set their packages pricing. It will assists for gathering the minimum information and calculate the price in a simple terms.
Demand based pricing
In these price is deciding according to the tourist’s demand in which CHTC has used high price if demand of product is more in the market. On the other hand if demand is low so there is a deduction in the price. This strategies are helpful for attracting tourist towards the products. It is based on a market analysis in this evaluation of demand is helpful in the reaching success. When CHTC has low demand, at that time they deduct the all prices to cover the loses and obtain more capital if customer happily accept the all changes.
Competition based pricing
Prices are to be formulated in a strategy so that competition cannot overtake company's market share. This process in which prices are formulated with regards to competition is called competition based pricing. CHTC use different prices such as low, high and equal according to the other competitions.
In additions to that company may reduce charges for some routes where competition is higher so that tourist attract more over the company. Entity also publish different discount voucher according to their clients with spouse, family and family group. With the help of above methods CHTC has adopted different analysing methods for development of tourist and travel sector.
C) Factorial analysis
In travel and tourism sector, so many factors influence the profit margins. CHTC (Carib happy Tours Company) analyses all these factors so that they can assist for less influencing profits in these sector. There are many factors who affects the profits and some of them are as follows...
Every company computes their per annum sale and these total selling is effected the profit in a two way. In first if selling is compatibility high so that it’s positively affected the profit. In contrary if per year selling is low so that it’s negatively impact the profit. CHTC should try to balance between profit and loss so that there is less chances of loss.
Cost and Selling price per tourist
Selling price per tourist must be analysed and decided in such a way that profit margins are not worst affected. Company has to make effective pricing strategies so that customers will feel a value for money experience during their travelling time. Cost price is the amount at which services are bought by company. Both these prices are contributors to profits. Any sot of negligence in formulation of cost and selling price will disturb complete financial dynamics of travel company.
CHTC must evaluate its costing method which is based on three dimensions such as demand, competition and cost based so that it can be assists for the cost related loss in profits. Customers have many choice so that CHTC has adapted best cost for their products so that customers easily attract towards the price. Moreover cost is less influencing the profit.
For promotions of travel and tourism packages, CHTC used many advertisement and for that company invest in promotions activity. If they are not select appropriate way of advertisement so that there is no effects of all these promotions activities. Moreover its influence the profit and there are also reduction in consumers for visit.
Quality of services
Every customer want a better service because individual is paying for these so that they want perfection in the service. In TT sector, quality of services always create always matter. If entity is not providing best services and customer became dissatisfaction with the services so that it directly influenced to the profit.
If company not adopted new technology such as online bookings, customer services and so on, its affects its profit because customer always demand for new one in their services.
Number of tourists
Profits are extracted from tourists. If CHTC will not meet their minimum requirements of tourists then it is obvious that the company will face loss. Adequate number of tourists ensures smooth and even flow of economy and a balanced financial structure.
A) Types of management accounting information
Management accounting information is for gathering information related to finance part in this total consumption of produced goods and services are evaluating. It is an important part every company to determine the work effectiveness and how well work is going. It will also assist for collecting information in the decision making process. Here different type of information discussed below that could be used in travel and tourism...
Cost allocation reports
With the help of allocation of cost manger prepare a report in which total capital invested and according to these evaluate that how much goods and services allocated. With the help of job costing, process costing allocation of resources become easy. CHTC is also assist for ensuring that demand and supply in tourist sector is an accurate amount of costs. It is also helpful for the reputation of the company. If demand is not fulfilled by the company it’s negatively impact on the company’s performance.
Companies have to devise budgets so that they can gather an estimated value of revenues and expenses during one financial year. CHTC manages its budgets with accounting facilities. Every company should prepare a budget in this systematic distribution of fund can be assists for the evaluation. Travel-tourism is a sector where lots of expenditures are made and for this a business budget is necessary for the management finance. Company must prepare individual department budget so that it can easy to manage master budget. It is also helpful to taking a flexible rates for maintains demand and supply.
The process in which a financial perspective is gained on past and present status of a company is forecasting. The analytical information so gained, is based on historical trends and situations that will help CHTC to safeguard itself from threats. It is assists for the travel and tourism to evaluate economic factors and more. CHTC forecast customers demand before the season and putting efforts in the accomplishment of their demand. In these strong decision trees should be made for forecasting model. These information is assists for increasing selling in the peak session.
The process of budgeting or management accounting is incomplete without variance analysis. It is the diversions of actual results from estimated ones. The end result can be beyond or below expected values. For example, CHTC has kept an estimated expenditure of £60,000 but manages to expend £62,000. Then variance value will be £2,000.
B) Investment appraisal techniques
In a decision making tool, investment appraisal play a vital role in which accounting information can be use. CHTC use all these investment appraisals to deciding that in which department fund is require. The use of appraisal techniques as decision making tools is described ahead:
Accounting rate of return (ARR)
When a company proposes certain capital investments, then ARR technique is used for calculating net income that will be returned after this investment. It helps in getting an insight of profits. Major weakness of this method is that it doesn't include cash flow as its element. Which reduces its accountability for money value.
Stipulated time in which invested amount is recovered is called payback period. In these only recovery is the main objective. CHTC has not adopted these technique because it is not appropriate for small firms which tends to be its weakness. With calculation of this time, the company will be able to understand the type of investment it can make and get recovered quickly.
Discounted cash flow
CHTC has to evaluate its investment opportunity according to the feasibility conditions that are related with the investment. Hence, discounted cash flow method is used in this situation. Decision of investment can be made with help of this analysis. If analysed or resulting cost after calculation is higher than current cost then opportunity is favourable. The advantage of this method is to provide estimates regarding future growths.
Net Present Value (NPV)
Also referred as Net Present Worth(NPW), this method or technique is used for measuring profit outcomes of current undertaking. Its role in decision making is based on predictions that revive values of investment that will be additional to the company. Major pitfall regarding NPV is risk adjustment. The rate of interests in investments depend on the amount of risk it involves. Hence, NPV parameters are less considerate.
Internal Rate of Return(IRR)
IRR is systematic management of investment to cover the profitability of considerate investments.. It is often called break even in which no profit and loss can be evaluated. The favour-ability conditions with selection of this method is greater IRR values, more chances of opting for the investment. CTHC can use IRR values for making quick decisions.
A) Interpretation of financial statements
Financial statements of a company are utilised for conducting ratio analysis. This technique is used for getting knowledge about complete economic structure of a company. From cash flows to financial position all aspects are covered in this analysis. Sole existence of this technique is not possible. Certain other gauges are applied for stabilising financial ratios. These are industry norms, aggregate economy and company's past records of performance. Following limitations occur with ratio analysis.
- Functioning of large firms involves different working divisions. They are unable to formulate average industry ratios for each functioning division.
- Travel and tourism industry is a seasonal business. Its complications increase when climatic conditions are not in favour. Ratio analysis gets distorted when business seasons are affected frequently.
- Interpretation of financial statements through ratio analysis is highly affected by inflation. Comparative ratio analysis of all companies is thus distorted.
- Stability of a company is determined through ratios. But differencing data that is good and bad ratios make it difficult to conclude whether a company is strong or weak.
From present ratio analysis gross profit ratio is decline from 12.17% to 11.97% from present ratio analysis gross profit ratio is decline from 12.17% to 11.97% may be due to high overheads and less proportionate increase in turnover as compare to % increase in direct cost. While, on the other hand, net margin shows an increasing trend to 1.70% which is good as it indicates that TUI group improved its operational performance in 2015 may be due to decrease in indirect spending. Contrary to this, CR and QR got improved to 0.70 and 0.57, both the ratios demonstrates that TUI group enhanced its capability to make timely payments to their short-term business obligations. It indicates that business liquidity position is improved, but still, by further increase in CA and repayment of some CL, TUI group can achieve the ideal CR and QR of 2:1 and 1:1 respectively. Debt/Equity ratio of the company remains constant to 0.36 because of change in composition of debt and equity. Besides this, inventory turnover ratio of the company got enhanced from 147.36 to 148.24 which show that managers are utilizing business stock in the best manner to get better return.
A) Sources of funding
There are two types of sources of funding for the development of capital projects. CHTC has used these sources for funding their project of a new Hotel in following ways...
CHTC must have earned profits earlier on past projects. These can be used as a personal source of funding. It will help the company to reinvest their net income.
Squeezing cash from daily finances
Personal savings are highly useful in extracting money for investments. Although this solution is short term and takes a long time to gather funds but it reduces reliability over other sources. It can only be applied when investment is not planned in near future.
Sale of Assets
Current assets or fixed assets can be sold and money that is gained from these selling practise can be used for investment.
Advantages and Disadvantages
- No charging of heavy interest rates is experienced in internal source of funding. They are feasible and debt ridden.
- Flow of cash is limited to the company. Hence, no third party will be involved as partners in profits. Sole ownership belongs to the business.
- It lessens the amount of loan or capital that has to be borrowed. This means company will not face much difficulty in paying debts.
- Major drawback of internal sources is loss of savings. If current investment fails then company will suffer massive losses with loss of assets.
Debt capital is a loan for the raising of business and loan amount have to pay in a fixed date. It is fully differ from the equity and share because it is not a part of business person. Bank loan is return on fixed percentage it is called interest. CHTC has taken loan from respective bank for the development of new facilities and should return in a specific time so that it maintain a goodwill of the company.
For the development of business, company issues share to generate financial resources. It is done through marketing, distribution and allocations of new issues. CHTC has issued share and get their financial resources. It is provide additional capital for business and it is fully dependant on the information that is gathered by the financial situation based on the estimations or a perfects.
It is a financial reward given by the local, federal and state government for encouragement of their performance. In the travel and tourism sector government provides funds to their private sector to enhance their facilities. For that government also organise training and counselling for better use of resources.
Advantages and Disadvantages
- Trade credits are useful in boosting daily finances. They help in developing better personal relations with marketeers.
- Limits are clear when choosing external sources. It helps in getting required finances which doesn't incur excess debts.
- Substantial ownership is lost during usage of these resources. This drawback is often a non supportive factors. People have to repay their loans by losing ownership.
Present report is based on travel and tourism sector in context of financial management. In these CHTC has evaluated importance of cost and volume on the basis of contribution margin and so on. It is helpful for managing better prices set up. Entity also adopted various methods of pricing in which competitive price strategy should adopted. For development of travel and tourism sector CHTC used different information on the basis on management accounting so that it can assists for the fornicating in the supply and demand chain. Moreover different source of can be adopted by the CHTC for recovering the capital sources.
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