Delivery in day(s): 5
Diploma in Travel and Tourism
Unit Number and Title
Unit 2 Finance and Funding in TT Sector
Capital projects are the projects which relate to the huge initial investment for the purpose of earning high returns from the operations during the life of the project. Travel and tourism industry is the sector which involves tour operations and other related businesses such as attractions, resorts, theme parks, travel agency etc. The finance and funding in TT sector aims at developing the understanding in relation to finance and funding in travel and tourism sector by applying the methods in real life companies Merlin Entertainments Plc and The Restaurants Groups Plc.
Travel and tourism business is the service industry which include large amounts of fixed costs such as accommodation cost, food cost, vehicle cost, driver’s salary etc. rather than variable costs which directly varies with the distance for travelling or number of passengers travelling. Thus in this situation the analysis of Break Even point is quite essential to determine the volume of business which will result in profits. Merlin Entertainments Plc is an entertainment company which operates around 115 attractions in 23 countries located across the four continents. Thus there is large volume of transactions with the company. Also it operates in three business segments which include Midway Attractions, Legoland parks and Resort Theme Parks, therefore it becomes essential for the company to analyse the profitability of each segment and contribution earned by these segments for the business of company. This analysis can only be made by identifying the nature of costs involved and volume of transactions of each business segment and determination of break - even point for each segment so that the efforts could be made by the company to increase its profitability from the operations of non-profitable or loss making segment and also to limit or extend its operations on the basis of break-even point. Thus the cost volume profit analysis or break even analysis is very important for effective decision making of Merlin Entertainments Plc since the company is operating in diversified geographical areas as well as different business segments within the travel and tourism industry. Hence Merlin Entertainments Plc shall bifurcate its costs into elements of direct and indirect costs, fixed and variable costs, allocation and apportionment of these costs using techniques such as activity based costing, marginal costing, absorption costing etc. so that the short term decisions about the management and operations of business and profitability can be taken with regard to break-even point and economies and diseconomies of scale (Huggett, 2010).
Pricing methods used in travel and tourism sector:
Pricing method in travel and tourism sector refer to as the technique or process which is used to determine the price of a tour product, tour package or other products sold under the travel and tourism sector businesses such as entertainment packages, resort accommodation packages, theme park packages and products etc. The various pricing methods used by different organizations belonging to the travel and tourism sector are as follows:
Cost Plus Pricing – In this method the total cost of the operations is calculated and after that a profit margin is added as a percentage of total cost to arrive at the price of the tour product or package. This method is generally used by those organizations which incur heavy amount of fixed costs to sell the products or procure the material which help in making the tour packages or products saleable. The hotel industry is the segment of travel and tourism business which uses this type of pricing method.
Per person pricing – Under this method the price is determined on per person basis which is charged on the basis of number of persons availing the services and is segregated into types of persons for example children are charged half price as compared to adults. This method is generally used by attractions, transport operators, backpacker accommodation and camp sites si8nce these type of businesses involve large amount of customer base with minimum profit margin per customer (Tiran, 2011).
Per unit pricing – This pricing method involves distributing the expected sales price into number of units expected to be sold or distributing the total costs to the number of units produced and adding per unit profit on each product so that price could be determined for each unit. This type of pricing method is generally used by the travel agencies or tour operations who sell tour packages and charge prices from customers based on pre determined price of each tour package.
Market led pricing – This type of pricing method involves setting the prices of products on the basis of prices prevalent in the market or adopting the prices set by the competitors. This pricing method is adopted as part of strategy to acquire a large market share and eliminate competition by setting prices lower than that of competitors.
Factors influencing profits in travel and tourism sector:
Profit is the amount of gain intended to earn by carrying out a business or profession which relates to purchase and sale of goods and services. Merlin Entertainments Plc is a large entertainment company having operations worldwide with many attraction at many locations and tour opreations through three business segments, thus it has a large profit base on consolidated basis. The nature of business is providing services along with selling of entertainment packages and products. The factors influencing the profits from t5he business of Merlin Entertainments Plc are as follows:
Seasonal variations – It refers to as the influence on the operations of the business caused by the effect of seasons. Since Merlin Entertainments is involved in a seasonal business as the theme parks or resorts are generally preferred in monsoon season or during vacations, therefore the variations in the season’s results in decrease in customer base in off seasons which directly affects the profits which on the contrary result in high profits in the seasonal periods.
Social and political environment – The operations of company are in different countries located in four different continents having diversities of social, political and cultural environment. These diversities result in differences in laws and regulations and other social and political restrictions which limit the scope of business and thus affect the profits from the business as a result of decline in revenue generating capacity of business.
Type and nature of business segment – The nature of business segment also affects the profitability of Merlin Entertainments since it is the seasonal business and thus sometimes non-occupancy of theme parks, resorts and attractions result in loss from the business as the fixed costs could not be recovered in such cases (Medlik, 2012).
Financial performance is the measurement of financial efficiency of a business in terms of profitability and growth potential, investment potential, sound liquidity or solvency position and other financial parameters which develop the interest of stakeholders in the business of the company. Foe the measurement and analysis of financial resources of The Restaurants Group Plc the financial data has been extracted from the annual report of company and the analysis of financial performance is as follows:
Profitability: It is the measure of capability of a business to earn profits from the operations of business. The profitability ratios of the company are calculated as follows:
Profit Margin Ratio = Net profit/ Total Revenue
Profit margin Ratio for 2015 = 68,886/ 685,381 = 10.05%
Profit margin ratio for 2014 = 66,999/ 635,225 = 10.55%
Return on Equity = Net income / Total shareholders’ equity
ROE for 2015 = 68,886/ 283,560 = 24.29%
ROE for 2014 = 66,999/ 244,524 = 27.40%
From the calculation of ratios and the chart showing the net income of the company for past five years it can be observed that the profits of the company have an increasing trend. Both the profit margin ratio as well as the return on equity of the company has decreased in the year 2015 as compared to that of year 2014 but the decline is at a very low rate not affecting the increasing trend of profits. Thus it can be concluded that the company has the capability to earn high profits from its business strategy and therefore has the long term sustainable growth potential (Faure, 2013).
Liquidity: It is the financial measure of the solvency of the business of the company. It is used to evaluate the sufficiency of funds within the business to meet the financial obligations and liabilities along with having a surplus after payment of liabilities. The following are the ratios to evaluate the solvency position of TRG Plc:
Current Ratio = Current Assets/ Current liabilities
2015 = 38,005/ 136,403 = 0.2786
2014 = 29,410/ 121,634 = 0.2418
Acid Test Ratio = Current assets – Inventory – Prepaid expenses/ Current liabilities
2015 = 38,005 – 6,389 – 0 / 136,403 = 0.2318
2014 = 29,410 – 5,530 – 0 / 121,634 = 0.1963
From the above calculated ratios and the chart showing net positive cash flows of company for the last five years it can be observed that the cash flow position of the company has improved as compared to past years where the company reported negative cash flows. The current ratio and acid test ratio suggest that the current assets of the company are not sufficient enough to finance its current liabilities. The liquidity ratios have declined in the year 2015 as compared to year 2014. It means that the company will not be able to pay off its current liabilities from the proceeds realised from the sale of current assets. The liquidity position of the company is not sound.
Efficiency: It is the financial measure which is used to determine the efficiency of operations of business of company and its capability to generate revenues and utilise its assets to the full extent. The following are the efficiency ratios of the company for last two years:
Inventory Turnover Ratio = Cost of goods sold/ Average Inventory
2015 = 558,491/ 6,389 = 87.41
2014 = 521,325/ 5,530 = 94.27
Asset Turnover Ratio = Revenue/ Total Assets
2015 = 685,381/ 468,078 = 1.46
2014 = 635,225/ 424,419 = 1.5From the above calculated ratios it can be observed that both the inventory turnover as well as the asset turnover ratio of the company has increased in the year 2015 as compared to that of 2014. This shows that the assets of the company are utilised properly for the generation of revenues from the business. Also the inventory of the company is performing well in context of revenue generation. Each amount of total assets is generating more revenues than its value. Investment potential and share price movement
Earnings per Share:
The Basic Earnings per share of the company for the year 2015 is 34.55 pounds as compared to 33.39 pounds in the year 2014. The earnings per share of the company has increased from previous year and from the above chart showing the earnings per share of the company for last five years it can be concluded that the per share earnings of the company have an increasing trend and are likely to increase in future (Cartney, 2011).
Dividend per share
The dividend per share of the company for the year 2015 is 17.40 pounds which has increased from 15.40 pounds. From the above chart showing dividend per share of company for last five years it can be observed that the company has a good track record of paying dividends. Also very few companies in restaurant industry tend to pay dividends to its shareholders therefore it hands been ranked above industry average.
Share price movement: The following graph shows the movement in the share price of the company for 10 years and the moving average of the prices of shares for a period of 10 years:
The current price of the share of company is 355.70 pounds. From the above graph showing the movement in the share price, it can be observed that the share prices have increased in the past few years and reached at its peak in the year 2016. From the trend in the movement in the share prices it is likely that the prices will fall in the coming years, however the shares are performing well in the securities market. Thus it can be concluded that the investors can earn god returns from investing into the shares of company.
There are various sources that can be used for the acquisition of funds for tourism related capital projects and the selection shall be based on the risk and return analysis. The type and nature of capital project also defines the sources and distribution of funds. It can be concluded that management information and other techniques and methods such as cost volume profit analysis, break-even analysis etc are very important for businesses in travel and tourism sector for financial management.
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