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Travel and Tourism

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Introduction

Unlike manufacturing and companies trading in products, ascertaining cost driver and the basis of revenue to be charged from customers served in the 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 in their evaluation and set prices for their product and service offerings (Chea, 2011). In this report analysis has been made that depicts how issues regarding appropriate costing and pricing strategies are addressed by the renowned company, TUI Travel Plc operating in the travel and tourism industry in the UK. This report also includes discussions held on the 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 are briefed all together.

TASK 1:TUI Travel Plc - Business Overview

TUI Travel Plc is one of the world's leading international leisure travel groups, listed on the 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 the financial management of travel and tourism businesses

Cost can be termed as a wide range of business expenditures made by a particular organization for managing of wide several business practices to meet the demands of consumers. To achieve different types of business objectives, management should have to keep a proper balance among many expenditures that occur in various businesses (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, the management of TUI Travel Plc has to measure the cost of several services provided by the firm.

In this regard, CVP analysis has evolved to determine the 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 meet, which is nothing but a break-even point. However, CVP analysis has certain inherent limitations given that it is a short-run marginal analysis which assumes that the unit variable costs and unit revenues are constant. But in the 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 the most reliable information and accurate information about the cost of a range of business activities. This information provides assistance to managers in order to make different kinds of important decisions based on the volume of sales as well as revenue from many business operations for the assessment of planned profit within a particular period (Fridson and Alvarez, 2011). This process helps managers get of desired profit by avoiding any type of future losses that can evaluated in terms of fixed costs and other financial losses. It also reflects the profitability of the 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 the 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. The contribution margin indicates the worth of profit or income yielded by the travel organization before deducting fixed expenditures.

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Analyzing Pricing Methods Used in the Travel and Tourism Sector

 There is a wide range of pricing methods available 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:

  • 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 to acquire quick responses in sales and revenue (Berk, DeMarzo, and Harford, 2012). This is because discount offers inspire consumers to buy a wide range of services from business entities.        
  • Value adding: In this approach, the management of TUI Travel Plc can add some extra features and services within diverse products and services that could lead positive impact on the perception of consumers. In the present business world, value-added pricing is playing the 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 regard, the managers of TUI Travel Plc can consider a complete portion of fixed costs along with variable costs occurring in the rendering of different kinds of services (Fridson and Alvarez, 2011). After the calculation of fixed and variable costs, the management entity adds some percentage of profit.  
  • Market-led pricing: It is the most common method used by several companies in the 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, the company may not be able to break even.  

Analyzing Factors Influencing Profit for Travel and Tourism Businesses

Profit margin can be termed as the income of a company which is greatly influenced by the total sales and cost of the firm. Some most important factors are disclosed below that influence the profit of TUI Travel Plc -

  • Costs: These can be termed as the most important element that affects the pricing of a wide range of facilities rendered by companies like hotels, transportation, etc. If the cost of services is increased then the administration of TUI Travel PLC has to enhance the price of holiday packages like an increment in hotel services and an addition in fuel to increase transportation cost.  All these factors alter the cost of holiday packages and create an adverse impact on profit.
  • Market demand and industry standards: TUI Travel PLC is one of the leading business enterprises related to the travel and tourism industry. So, a business entity has to determine the prices of services with reference to brand reputation and service quality needed by consumers (Berk, DeMarzo, and Harford, 2012). Another important cause is an alteration in service quality standards of the travel industry that directly influences the pricing strategies of organisation as well as profitability.
  • Political environment: It creates a huge impact on the pricing methods and profitability of TUI Travel PLC. In this regard, taxation and other policies of authorities and trading rules with other nations are creating a huge impact on costing of services. So, changes in tax rates and other government charges influence the profit of the firm.
  • Economic environment: During the global recession, people make efforts to reduce unwanted spending like traveling and etc. This thing creates a great impact on market demand in the tourism industry (Choo and Tan, 2011). In this situation, the business entity tries to encourage demand by providing discount offers and managing low-profit margins in order to attract consumers. 

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TASK 2: Role of Management Accounting Information as a Decision Making tool

Managerial accounting information provides business leaders with data-driven inputs that can improve decision-making for maintaining the going concern of the company. Business leaders using management accounting information decide on how to move the business forward, and how to choose between making or buying decisions. Forward planning, projections, and monitoring of 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 to informative results based on which strategic decisions can be taken. Tools include conducting ratio analysis, working out variances, and 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 as Strategic decisions and operational decisions

  • Strategic decisions: Strategic decisions provide long-term benefits to the company as the objective of TUI Travel Plc is to create better value for its stakeholders and this can be achieved by analysis of 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 provide a fair view of the 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 firms 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: These kinds of decisions are related to the day-to-day operations of the company. It provides a clear estimation of the working capital required to run the daily operations of the travel and tourism firm and also directs 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 better decisions to overcome the deficiencies(Berk, DeMarzo, and Harford, 2012). Management accounting is helpful in formulating the budgets through which the company can make significant decisions regarding short-term business strategies.  
  • Budgets: Another widely used management accounting information tool evolves in the form of preparing budgets and forecasts. Budgets are nothing but financial plans for the future. They in fact determine what is to be done in the future. They help businesses to know where the costs will be incurred and where the revenues will come from. Preparing and monitoring budgets will help identify 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 is 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 the CEO of TUI Travel Plc will serve as a means in which they can formalize and publish their operational plans so that those working at the 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 change with the change in the 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 the preparation of budgets are described as follows:
  • To make realistic estimations about the income and expenditure of the firm budgets are prepared so that net profits earned can be found out by the decision-makers.  
  • The budget allocates the expenditure to the cost centers which will help in the reduction of unnecessary expenditure on operational activities. To get maximum outcome with the minimum expenses budgets are formulated.  
  • To achieve effective utilization of available resources TUI travel firm can formulate budgets as budgets include allocation of activities to the respective departments.  
  • Preparation of budgets is also needed to reduce the probability of duplication of work as tasks are assigned to respective departments.  
  • In order to prepare short-term business plans like marketing efforts, promotional tools, and budgets are formulated so that the 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 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 a competitive advantage will remain an unaccomplished dream. For TUI travelers, budgets will help them target their operational performance taking into consideration strategic planning disclosed by competitors in their respective annual reports. When a company's stocks are listed on the recognized stock exchange, disclosing prospective profit plans through budgets and forecasts helps to mark an 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 the 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 produces more informative results than mere tabulated financial statements could not.

Interpretation: Referring to the above-tabulated ratios, it can be concluded that the company does not possess an adequate liquidity position or does not manage its working capital requirements efficiently. Justification of such a conclusion drawn is evident from observing the current and quick ratio of the concern. The company's current assets are not sufficient to meet 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 the company generates a reasonable gross profit margin from its business activity it loses a substantial part of the margin generated in recovering the company's administrative and other indirect costs leaving it to 1.28%.

As far as efficiency ratios are concerned, the company has made optimum deployment of fixed assets in generating revenue from operations. The company's average inventory has been sold 229 times during the year. The company's PE ratio being 243 in number indicates that the company is not generating sufficient earnings to pay back prices paid by investors. The higher the PE ratio, the higher the period the company will need to payback its investment. Though the company's half debt is almost secured by the equity holder's fund, the company has sufficient funds on account of serving the cost of debt justification which is reflected in the interest coverage ratio which is approx 16.63 times.

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TASK 4: Identifying Appropriate Sources of Finance for Expanding the Company's Operations

Sources of business vary with the type of business concern chosen for pursuing business activities. Business concerns may evolve in the form of conducting business as sole proprietors, 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 a 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 with pursuing business through incorporating public companies is that such companies have access to raise finance from the public by offering them securities mainly in the 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 share subscription because shares allotted to holders confer on them the right to take part in management and control of the company's activities subject to their voting rights based on their holdings (Lundholm and Sloan, 2012). However, an individual is not allowed to make major material decisions for the company just because he holds the required number of shares, because in such cases decisions affecting the 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 amounts invested by them, their cost of financing is much higher than serving debt providers and lenders (Park and Jang, 2014).

Conclusion

Based on the above discussions held and interpretations made, it can be concluded that unless a proper method of costing is laid, a pricing strategy in the service sector specifically in context of travel and tourism leisure cannot be successfully made. As TUI Travel Plc operates in various segments, it is important on the part to choose an optimum package product mix which can be done through an 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.

References

  • Chea, A., 2011. Activity-Based Costing System in the service sector: a strategic approach for enhancing managerial decision making and competitiveness. International Journal of Business and Management.6(11). pp.3.
  • Choo, F and Tan, K. B. 2011. An Income Statement Teaching Approach for Cost-Volume-Profit (CVP) Analysis by Using a Company's CVP Model. Journal of Accounting and Finance. 11(4).pp. 23-36.
  • Kesicki, F and Ekins, P., 2012. Marginal abatement cost curves: a call for caution. Climate Policy. 12(2). pp. 219-236
  • Lim, J. Y and et.al., 2013. Financial Ratio Analysis for Developing Nursing Management Strategies in University Hospitals. Journal of Korean Academy of Nursing Administration. 19(1).pp..7-16.
  • Park, J. Y and Jang, S. S., 2014. Sunk costs and travel cancellation: Focusing on temporal cost. Tourism Management. 40.pp. 425-435.
  • Robb, A. M and Robinson, D. T., 2012. The capital structure decisions of new firms. Review of Financial Studies. hhs072.
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