Unlike manufacturing and companies trading in products, ascertaining cost driver and the basis of revenue to be charged from customers served in service sector involves in depth analysis of various costs incurred by the company in providing such services, bifurcating them into fixed and variable in order to conduct break even analysis. As a matter of worldwide practice, companies these days undertake cost-volume profit analysis into their evaluation and set prices for their product and service offerings (Chea, 2011). In this report analysis have been made that depicts how issues regarding appropriate costing and pricing strategies is addressed by the renowned company, TUI Travel Plc operating in travel and tourism industry in UK. This report also includes discussions held on significance of Cost Volume Profit analysis with context to TUI Travel Plc. Various management accounting information tools and sources of finance for funding expansion projects is briefed all together.
TASK 1:TUI Travel Plc – Business Overview
TUI Travel Plc is one of the world’ leading international leisure travel groups, listed in London Stock Exchange, operating in approximately 180 countries worldwide organized and managed through three principal business sectors involving Mainstream, Specialist and Accommodation & Destinations.
Explaining the importance of costs and volume in financial management of travel and tourism businesses
Cost can be termed as as wide range of business expenditure made by a particular organization for managing of wide several business practices for meeting demand of consumers. For achieving different types of business objectives, management should have to keep proper balance among many expenditure occurred in various business (Kesicki and Ekins, 2012). It includes direct cost, fixed cost, variable cost and indirect cost along with various overheads. For evaluation of several types of spending as well as assessment of prices of services, management of TUI Travel Plc has to measure cost of several services provided by firm.
In this regards, CVP analysis has been evolved to determine relationship between cost and its related volume of sales. It is mainly concerned with how operating profit is affected by changes in variable costs, fixed costs and sale price per unit and the sales mix of two or more different products. CVP analysis when depicted through graphical representation determines the point at which total costs and total revenue meets, which is nothing but break-even point. However CVP analysis has certain inherent limitations in view of that it is a short run marginal analysis which assumes that the unit variable costs and unit revenues are constant. But in long run all costs are considered to be variable.
Hence for long run evaluation, one uses activity based costing or throughput accounting. With the help of this tool, the managers of TUI Travel Plc can acquire most reliable information and accurate information about cost of a range of business activities. This information provides assistance to manager in order to take different kinds of important decisions based on volume of sales as well as revenue form many business operations for assessment of planned profit within particular period (Fridson and Alvarez, 2011). This process helps manager for getting of desire profit by avoiding any type of future losses that can evaluated in terms of fixed costs and other financial loss. It also reflects profitability of investment. With the help of CVP analysis, the administration of TUI Travel Plc can examine the impacts of modification in cost and volume of services on operating and net financial gain of the organization. Another important concept in CVP analysis is that it evaluates the contribution margin as well as its ratio. Contribution margin indicates the worth of profit or income yield by travel organization before deducting fixed expenditures.
Analyzing pricing methods used in the travel and tourism sector
There are wide range of pricing methodsavailable that could be adopted by TUI Travel Plc for determining the prices of different type services in travel and tourism sector. Some most important pricing methods are mentioned below below:
- Discounted pricing: This type of pricing strategy is utilized by TUI Travel Plc during the off season. This approach is very helpful for TUI Travel Plc in order acquire quick response in sales and revenue (Berk, DeMarzo and Harford, 2012). This is because discount offers inspire consumers to buy wide range of services from business entity.
- Value adding: In this approach, management of TUI Travel Plc can add some extra features and services with in diverse product and services that could lead positive impact on perception of consumer. In present business world, the value added pricing is playing most important for attracting consumers.
- Cost plus pricing: This technique of pricing is broadly adopted by all organizations to achieve short and long term business goals. In this regards, the managers of TUI Travel Plc can consider complete portion of fixed cost along with variable cost occurred in rendering of different kinds of services (Fridson and Alvarez, 2011). After calculation of fixed and variable cost, management entity adds some percentage profit.
- Market-led pricing:It is most common method used by several companies in travel tourism industry. In this aspect, Pricing strategies adopted by companies in similar lines of business are almost the same; like for travel and tourism leisure, prices of honeymoon packages are generally kept high in wedding seasons against off seasons. Seasonal pricing is generally meant to offset demands of the periods when they are peak and when they are low, otherwise company may not able to achieve break even.
Analyzing factors influencing profit for travel and tourism businesses
Profit margin can be termed as income of company which is greatly influenced by total sales and cost of firm. Some most important factors are disclosed below that influence profit of TUI Travel Plc –
- Costs: It can be termed as most important element that afftects pricing of wide range of facilities rendered by company like hotel, transportation and etc. If the cost of services is increased then administration of TUI travel PLC has to enhance the price of holiday packages like increment in hotel services and addition in fuel increase transportation cost. All these factors alter cost of holiday packages and create adverse impact on profit.
- Market demand and industry standards: TUI travel PLC is one of the leading business enterprise related to travel and tourism industry. So, business entity has to determine prices of services with reference to brand reputation and service quality needed by consumers (Berk, DeMarzo and Harford, 2012). Another important cause is alteration in service quality standards of travel industry that directly influences pricing strategies of organization as well as profitability.
- Political environment: It creates huge impact on pricing methods and profitability of TUI travel PLC. In this regards, taxation and other policy of authorities and trading rules with other nations are creating huge impact on costing of services. So, change in tax rates and other government charges influence profit of firm.
- Economic environment:During the global recession, people makes efforts to reduce unwanted spending like traveling and etc. This thing creates great impact on market demand in tourism industry (Choo and Tan, 2011). In this situation, business entity tries to encourage demand by providing the discount offers and managing low profit margin in order to attract consumers.
TASK 2 : Role of Management Accounting Information as a decision making tool
Managerial accounting information provides business leaders with data driven inputs which can improve decision making for maintaining going concern of the company. Business leaders using management accounting information decide on how to move the business forward, how to choose between in making or buying decisions. Forward planning, projections and monitoring actual performance cannot be done unless management accounting information is available (Choo and Tan, 2011). So far, various management accounting information tools and mechanisms have been developed for evaluating accounting data to lead informative results based on which strategic decisions can be taken. Tools include conducting ratio analysis, working out variances, preparing forecasts and budgets. In short it can be said that Management Accounting Information (MAI) helps the decision maker to formulate two kinds of decisions such as Strategic decisions and operational decisions
- Strategic decisions: Strategic decisions provides long term benefits to the company as the objective of the TUI travel Plc wants to create better value to its stakeholders and this can be achieved by analysis the accounting information. By studying cash flows and fund flows the firm can estimate the actual position of the company and make the investment wherever required. Cash flow and financial statements provides fair view of company's actual position which will help the company to formulate dividend related decisions and other strategic decisions like acquisition, merger etc. Shareholders of Travel and tourism firm go through the management information before making the investment and in this way, it is very helpful for the investors to make necessary investment decisions (Lim and et.al., 2013).
- Operational Decisions: This kind of decisions are related with the day to day operations of the company. It provides the clear estimation about the working capital required to run the daily operations of the travel and tourism firm and also direct the way to effectively manage the inventory so that effective services can be provided to the customers. Management Accounting Information provides the basis of forecasting which help the controller to find out the variances and formulate the better decisions to overcome the deficiencies(Berk, DeMarzo and Harford, 2012). Management accounting helpful in formulating the budgets through which the company can take significant decisions regarding the short term business strategies.
- Budgets: Another widely used management accounting information tools evolves in form of preparing budgets and forecasts. Budgets are nothing but financial plans for future. They in fact determine what is to be done in the future. They help business to know where the costs will be incurred and where the revenues will come from. Preparing and monitoring budgets will help identifying wasteful expenditures; adapt quickly the business concerns’ financial situation changes and achieve financial goals. As far as TUI Travel Plc is concerned, preparing budgets for likely sales are to be achieved in the coming years and will serve as a direction or achieving a benchmark performance at least at the minimum (Brealey, 2012). The budget system for CEO of TUI Travel Plc will serve as means in which they can formalize and publish their operational plans so that those working at operational level are aware of their targets to be achieved. Budgets are laid and prepared based on prevailing circumstances. One uniform budget cannot be prepared for all the years for which the company is willing to operate. As circumstances changes with the change in economic environment in which the company operates, budgets are revised at frequent intervals which may even be made half yearly. As a measure of controlling and improving operational performance budgets prepared are compared with actual reported figures and reasons for deviation are recorded. From the above discussion it can be said that formulation of budgets is having important role in business decision making.Need for preparation of budgets are describing as follows:
- In order to make realistic estimation about income and expenditure of the firm budgets are prepare so that net profits earned can be find out by the decisions maker.
- As the budget allocate the expenditure to the cost centers which will help in reduction of unnecessary expenditure on operational activities. For the purpose of getting maximum outcome with the minimum expenses budgets are formulated.
- To achieve effective utilization of available resources TUI travel firm can formulate budgets as budgets includes allocation of activities to the respective departments.
- Preparation of budgets are also needed to reduce the probability of duplication of work as tasks are assigned to respective departments.
- In order to prepare short term business plan like marketing efforts, promotional tools budgets are formulated so that business goals of TUI travel Plc can be achieved in effective and efficient way.
- These are the objectives of formulation of budgets which help the company to grow rapidly and make the accurate decisions regarding the business operations so that organizational objectives can be achieved in effective and efficient manner.
- Unless a target performance is set that includes achieving break-even at the minimum, TUI travel Plc will not attain sustainability and gaining competitive advantage will remain an unaccomplished dream. For TUI travels, budgets will help them targeting their operational performance taking into considerations strategic planning disclosed by competitors in their respective annual reports. When company’s stocks are listed on recognized stock exchange, disclosing prospective profit plans through budgets and forecasts helps to mark increase in stock prices, if the budget laid is feasible in view of stakeholders (Fridson and Alvarez, 2011).
TASK 3 : Interpreting Financial Statements of TUI Travel Plc
Financial statements of the business concerns reflect financial position and operational performance of the company’s business activities (Robb and Robinson, 2012). However as a measure of more detailed analysis, various stakeholders analyze financial statements of the business concern in which they place keen interest through conducting a financial ratio analysis test which produce more informative results then a mere tabulated financial statements could not.
Interpretation: Referring to the above tabulated ratios, it can be concluded that company does not possess adequate liquidity position or does not manage its working capital requirements efficiently. Justification of such conclusion drawn is evident from observing current and quick ratio of the concern. Company’s current assets are not sufficient in meeting current liabilities as they comprise almost half of the current liabilities figures. Thus, it can be said that to some extent current liabilities are honored and settled by long term funds. As far as operational performance is concerned depicted through profitability ratios, it can be said that though company generates reasonable gross profit margin from its business activity yet it loses substantial part of margin generated in recovering company’s administrative and other indirect costs leaving it to 1.28%.
As far as efficiency ratios are concerned, company has been made optimum deployment of fixed assets in generating revenue from operations. Company’s average inventory has been sold 229 times during the year. Company’s PE ratio being 243 in number indicates that company is not generating sufficient earnings to pay back prices paid by investors. The higher is the PE ratio, the higher period company will need to payback their investment. Though company’s half debt is almost secured by equity holder’s fund, but company has sufficient funds on account of serving cost of debt justification of which is reflected in interest coverage ratio which is approx 16.63 times.
TASK 4 : Identifying appropriate sources of finance for expanding company’s operations
Sources of business vary with the type of business concern chosen for pursuing business activities. Business concern may evolve in form of conducting business as sole proprietor, forming partnership firms or incorporating companies’ whether public or private (Broadbent, 2003). In this task, sources of finance available to TUI Travel Plc, being incorporated as public company, will be discussed. As far as funding options for public companies are concerned, such companies can aid their business projects with generally two types of sources, one being financing through equity or owner’s fund and another being incorporating debt finance into the company’s capital structure. Sources of finance have been briefed below.
- Equity Finance:A major privilege associated while pursuing business through incorporating public companies is that such companies have access to raise finance from public against offering them securities mainly in form of shares. A company in order to avail initial start-up capital can issue share securities to the public through issuing prospects against money. Investors are interested in lending their money against shares subscription because shares allotted to holders confer on them the right to take part in management and control of company’s activities subject to their voting rights based on their holdings (Lundholm and Sloan, 2012). However an individual is not allowed to take major material decisions for the company just because he holds required number of shares, because in such cases decisions affecting functioning of the company can be only taken at statutory meetings of shareholders as a matter of legal requirement under the companies act. Though equity shareholders are not offered guaranteed returns and principal amount invested by them, yet their cost of financing is much higher than serving debt providers and lenders (Park and Jang, 2014).
Based on above discussions held and interpretations made, it can be concluded that unless a proper method of costing is laid, pricing strategy in service sector specifically in context to travel and tourism leisure cannot be successfully made. As TUI travel Plc operates in various segments, it is important on part of them to choose an optimum package product mix which can be done through established mechanism of CVP analysis. Further, issues regarding raising appropriate sources of finance were being addressed listing the individual pros and cons associated with such finances.
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