Unit 2 Finance and Funding in Travel Tourism Assignment – MEP
Diploma in Travel & Tourism
Unit Number and Title
Unit 2 Finance and Funding in Travel Tourism – MEP
This Unit 2 Finance and funding in travel and tourism assignment – MEP is focused on Finance and Funding in Travel and Tourism sector which will help in gaining knowledge about different concepts of finance of the organizations. Providing services of travel and tourism includes costs and there are many skills which helps the management in making decisions about the costs, funds or funding of the services. This project will help in the development of understanding about financial systems of the sector. The assignment is covered in four tasks which will include the discussions about various aspects of finance and funding of Travel and tourism sector of UK.
This task is based on the given case study of Merlin Entertainments Plc which is focused on creating unique experiences of the guests and visitors in UK and it has more than 60 million guests annually.
1.1 Explain the importance of costs and volume in financial management of travel and tourism businesses using Merlin Entertainments Plc. as your case study
Costs can be referred to the amount which is to be incurred to buy anything or to produce anything. Merlin Entertainments Plc incurs a cost for providing different products and services and to meet the expectations of the customers. Costs are of different types like fixed cost, variable cost, overheads, etc. the company is required to measure its costs in order to determine the prices of its services. For determination of the prices, Cost Volume Profit analysis is the technique which is very useful and appropriate (DINA & BU?AN, 2009).
Cost- Volume and profit analysis is a part of financial accounting in which it is determined that how the variations in the cost or volume of products or services influence its profits assuming that the sales price, fixed costs and variable costs are constant. This technique is used by the finance managers in Merlin Entertainment Plc to know the changes in profits because of the changes in costs and volumes of the company’s products and services. CVP analysis can be presented on a graph where the costs and revenue interacts and that point is known as Break Even point. This technique helps Merlin Entertainments Plc to plan its operations and to take business decisions for future. CVP analysis helps in determining the capacity of the company to produce and deliver services and also determines the spending amounts and investments amounts of the company (Trifan &Anton, 2011).
1.2 Analyzes pricing methods used in the travel and tourism sector. You need to use examples from different types of businesses in travel and tourism
There are different types of pricing methods which are used in the travel and tourism sector .TRG uses the following pricing methods for deciding the prices of its services:
- Cost based pricing: This pricing method refers to the pricing which is done by adding a profit percentage on the total cost of the services rendered by the company. This is the most used technique of pricing and helps the organisation to achieve its short and long term goals.
- Value based pricing: In this pricing method, Merlin Entertainments Plc includes some extra benefits and values in its services to attract more no. of customers and customer demand is taken into consideration in this type of pricing method (Bozhkova & Ryabchenko, 2012).
- Discounted method of pricing: In this pricing method is adopted by Merlin Entertainments Plc in case of off season because during off season, the demand for the services of the company falls and to increase the no customers and sales, the company provides discounts on prices which attract more customers.
- Market based pricing: This pricing method is used by the companies to move with the market in the competitive industry. The prices increases and decreases according to demand of the customer, competitors or seasons which helps the company to achieve its desired profits (Bozhkova & Ryabchenko, 2012).
There are many types of business in Travel and tourism sector and different pricing strategies are adopted by them. For example, Titan Travel is a tour operator in UK and it uses cost based pricing because it adds up a profit percentage it desires on the total expenditure it makes no provision of the services. Another example can be taken of Hotel Premier Inn which provides accommodation. There is much competition in the hotel business as they all provide the similar services. So it provides market based pricing by considering the demand of the consumers and the prices adopted by the competitors. Easy Jet is an airline service provider and it adopts discounted pricing which means cheaper rates in off seasons and costly tickets in peak seasons (Bozhkova & Ryabchenko, 2012).
1.3 Analyze factors influencing profit for travel and tourism businesses using Merlin Entertainments Plc. as your case study
Profits are the gains which are earned by the companies by selling its products or services. It is the difference between the earned amount by the company and the amount it incurred in producing that service or product. There are factors which influence the profits of Merlin Entertainments Plc.
- Variations in seasons: There are off and peak seasons which are given much importance in the travel and tourism industry because the no of customers increases in the peak seasons while it decreases in the off seasons. Off seasons brings decline in the profits of the company because there are lesser no of customers and vice versa in peak seasons (Suhaimi, et al., 2010).
- Political environment: Political environment has a great impact on the profits of Merlin Entertainments Plc because the tax rates, rules of trading and other government regulations are created by political parties which affect the business and ultimately the profits of the business.
- Economic environment: Economic environment also influence the profits as recession impact the spending power of the people and this will reduce the demand of travelers which will influence the overall profits of the companies (Suhaimi, et al., 2010).
- Social environment: It refers to the taste, culture, beliefs, etc of the people of particular area which influences their choices and demands. Merlin Entertainments Plc have to pay attention to these factors as these affect the profitability of the business of Merlin Entertainments Plc
- Current demands and trends: Merlin Entertainments Plc is one of the big players in the travel and tourism sector and it has to take care of the demand of the customers or latest trends which are influencing the demands of the customers. The company has to design its products and services keeping in mind these factors and this might affect their profits as well.
- Bad debts: Bad debts are the losses for the company, the amount which is not recovered. This affects the overall profits of the company (Suhaimi, et al., 2010).
This task covers a given case study of TRG, The Restaurant Group and interpretation is been made on its financial figures and accounts for year ending 2014 and 2015. TRG is a group of restaurants which has more than 500 restaurants and pubs in UK and it has plans for doubling its size and share in the market in the next decade. It believes in delivering great taste and excellent services to its guests. It has around 43 million customers and more than 30 brands (TrgPLC, 2016).
The Restaurant Group
3.1 Interpret financial accounts of The Restaurant Group (TRG) Plc. For the year ended 27 December 2015 showing at least two year performance (for example comparing 2015 to 2014)
Profit for the year
Cost of sales
Earnings per share
Dividend per share
Calculation of Ratios for interpreting the financial performance of TRG Plc. For 2014 and 2015:
1. Current Ratio
- Formula:Current assets/ Current liabilities
- 2014: 29,410/121,634 = 0.24
- 2015: 38,005/136,403= 0.28
2. Quick Ratio
- Formula:Quick assets/ Current liabilities
- 2014:23,880/121,634= 0.20
- 2015:31,616/136,403= 0.23
3. Profit Margin Ratio
- Formula: (Profit for the year/ Revenue)* 100
- 2014:(66,999/635,225) * 100 = 10.55%
- 2015:(68,886/685,381) * 100= 10.05%
4. Return on Equity
- Formula: (Profit for the year/ Total equity)* 100
- 2014:(66,999/244,524) * 100= 27.40%
- 2015:(68,886/283,560) * 100= 24.29%
5. Stock turnover ratio
- Formula:Cost of sales/average inventory
- 2014:(521,325/5,530) = 94.27%
- 2015:(558,491/6,389) = 87.41%
6. Asset Turnover Ratio
- Formula:Revenue/ Total asset
- 2014:(66,999/424,419)= 0.16
- 2015:(68,886/468,078)= 0.15
Ratio Interpretation and Explanation
- Current Ratio- Current ratio is an efficiency ratio which is used to measure the ability of the organisation to pay its liabilities with the available current assets. The ideal current ratio is 2:1. Current ration in the range of 1.5% - 3% is considered good for the industry funding in TRG group has its current ratio at .24 in 2014 and .28 in 2015. The ratio has increased in 2015 for the company but it is still lesser than 1 which shows that there are lesser current assets to pay current liabilities of the company (Maricica & Georgeta, 2012).
- Quick ratio- This ratio refers to the ability of the business to pay off its short term liabilities. The quick ratio of TRG Plc. Was .20 in 2014 and increased to .23 in 2015 which is better but the ideal quick ratio is 1. The ratio lesser than 1 shows that the organisation might face problem in paying off its short term liabilities.
- Profit Margin ratio-It is the ration which shows that how much a company earned from the sales. It is expressed in the percentage and it is the part of profitability ratios. The profit margin ratio of 2014 was 10.55% and it is 10.05 in 2015. It has decreased by .50% and it shows that the revenues are decreasing but expenses are increasing in TRG Plc. (Maricica & Georgeta, 2012).
- Return on Equity- This ratio shows the profitability of in the firm and its ability to produce profits and return on the investments made by its shareholders. It shows how much profit a company can create from the investment made the stockholders. TRG Plc. Had its return on equity ratio of 27.40% and it decreased to 24.29%. The decrease of 3.11% of ratio shows that the company’s ability to generate profits from investments of shareholders is decreasing.
- Stock turnover ratio- This ration shows that how capable a company is in managing the inventory or stock of the company. The stock turnover ratio of TRG Plc in 2014 was 94.27 and it is 87.41 in 2015. The decrease in the stock turnover ratio shows that the company is holding its inventory for the longer periods than it used to hold before selling. It also means that the sales of the company are decreasing (Maricica & Georgeta, 2012).
- Asset turnover ratio- It shows the value of the sales made by the company referring to the asset values. It shows the efficiency of the company that how it uses its assets for generating revenues. The asset turnover has decreased for TRG Plc in 2015 in comparison to 2014 and it shows that the company is not able to increase its sales volume (Pavlatos & Paggios, 2009).
- Earnings per share (EPS)- EPS can be referred to the earning which is made by the shareholders on each share and it shows the profitability of the company. The EPS of TRG Plc is increasing in 2015 which shows that the investors are gaining more on each share and the share price will also increase.
- Dividend Per share (DPS)- DPS is the amount of dividend which is received by the shareholders on each share they hold. It is the part of company’s profit and the DPS of TRG Plc is increasing which means that company is distributing more profits to its shareholders (Pavlatos & Paggios, 2009).
This project focuses on the cost volume profit analysis of Merlin Entertainments Plc which is given in the case and also different pricing methods are discussed for various travel businesses. There are four tasks which includes various concepts of funding and finance of the travel and tourism sector. Different ratios for The Restaurant Group in UK have been calculated by referring to its financial accounts for 2014 and 2015. These ratios are used to analyze the financial performance of the businesses. A presentation and a poster has been created to explain the sources of funds and to provide management accounting information for the business.
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