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Unit 2 Finance and Funding in Travel and Tourism Assignment - Merlin
Diploma in Travel and Tourism
Unit Number and Title
Unit 2 Finance and Funding in Travel and Tourism
THe finance and funding in travel and tourismaims at developing the understanding of travel and tourism business and use offinance and funding methods in this sector. This report provide the details of costing methods, pricing methods and other details which relate to cost volume profit analysis of companies in the travel and tourism sector and related businesses. There is great development in travel and tourism business all over the world. Apart from cost volume profit analysis this report also provides information about the financial statement analysis and financial.
The Merlin Entertainment uses Cost volume as a tool to analyze how cost and volume affect the operating expenses and net profit of the business environment. It will provide Merlin entertainment business with an insight of the profitability of the company product and services. The management uses this tool to make the informed decision of the product and service they sell. The management of Merlin Entertainment can manage the projection of future spending and production for the success of the company. If the management knows the breakeven point he can reduce the spending and increase production effort to increase profitability (Ge, 2014).
Cost on the basis of traceability can be divided into two parts-
- Direct cost - These are the cost which can be directly allocated to particular unit, product or service. For example the expenses on electricity incurred in Lego land Park can be directly allocated to the unit
- Indirect cost - These are the cost which cannot directly be allocated to particular unit, product or services. They are allocated to different unit or product on some particular basis. For example; the cost of advertisement incurred by Merlin Entertainment Company cannot be directly allocated to certain unit and is to be distributed over the entire unit within certain geographical location.
Cost on the basis of behavior can be divided into following part-
- Fixed cost-Fixed cost is the cost which the company has to incur regardless of any activity. This cost is fixed and doesn’t vary with the outcome. The amount of outcome decreases the burden over fixed cost. For example the cost of rent incurred by Merlin Entertainment Company is a fixed cost.
- Variable cost –The cost which varies with the level of outcome is known as variable cost. If the sale of the product increases the cost of production will also increase in the same proportion. For example the cost incurred on the food
- Semi- variable –where the cost is fixed at the certain level but increases after a certain level on the basis of outcome. For example expenses on telephone installed in the rooms.
- Stepped cost - It remains fixed at the certain level but rises with certain range of activity (Lin, 2016).
There are lots of people who travel around the world and are visiting different places. The price of tourist business generally depends upon the location, Brand and the ratings provided by the earlier visitor. The pricing policies help in determining the price of the product by considering the cost incurred on the product and the margin of profit to be kept. The price should be decided which not affect the future business of the company. The selling price is decided by adding fix amount of profit to the cost incurred on the product. The price of the product is decided on the method used to decide the price of the product in tour and travel business is as follows-
Market led pricing-The price of the product is decided on the basis of its marketing strategy. If the company wants to increase the number of customer to visit them they should reduce the price as compared to those of competitors to increase the market value of the product. If the current position of the business is good then the price should be high because you get the competitive advantage over the other business (Hong, 2014).
Profit led pricing- The pricing approach can be on the basis of customer or competitor. The Management can decide the price from any of the two bases.
Return on investment-The price in this method is decided on the basis of return on investment in relation with the amount of money invested.
Cost led pricing – The price in this method is decided on the basis of cost and volume of the business. The price of the product is decided on the basis of breakeven point. If the organization sets the price above breakeven point that means the high level of profit is earned by the business.
The factor which affect travel and tourism business of Merlin Entertainments Plc are-
Season -Most of the travel destination has a particular set of high or low season. There are lots of visitors at Merlin entertainment at the time of festival or any event. On the other side during offseason the company sometime faces loss while running the business. Many of the entertainment business make their business planning on the basis of high spending during the season and low spending during off season.
Currency Rate - The travel and tourist industry which are operating internationally are affected by the fluctuation in currency rates between the countries. When the dollar price is low against the British pound there will be reduction in the number of traveler in U.S which will also have effect on Merlin entertainment as the great part of their earning depends on foreign tourist.
Disaster -Due to a disaster there is downfall in the number of visitors to a travel destination. This has a great impact on the travel and tourism business.
Government support -Government provides the source of funding to travel and tourism business as they attract the economy of the other country. Government makes development of tourist spot which help the tourist business by increasing the number of tourist. So the travel and tourist business very much depends on support of the government.
Travel trend -The current trend help in determining what the market is after and in what way these product should be marketed. The accommodation, rides and shows of Merlin entertainment should be developed in the way to attract customer by analyzing the current market trend. The Merlin industry should have check over the current preference of the tourist and develop the facility to fulfill that preference (Alin, 2014).
For the interpretation of the financial statement it is important to ascertain the user of the statement and the information required by them. The shareholder uses the data to check the liquidity and stability of the company and the return which they receive over the investment. The supplier and lenders are generally concerned with the security of their debts and loans. To measure the financial performance following tools can be used -
Current Ratio - current ratio is calculated for the purpose of ascertaining that weather the company is able to pay its short term debts generally within a year. The ratio is used to analyze weather to lend fund or invest with the company. The formula used for calculating current ratio is
Current assets divided by Current liabilities.
The current ratio of the company for 2015 is = 38005000/136403000 = .27
The current ratio of the company for 2014 is = 29410000/121634000 =.24
The increase in current ratio indicates that the company has improved its short term debt paying capacity but is very less than the ideal ratio. A current ratio of 2:1 is preferred. The Current ratio of The Restaurant Group plc is very much low so the lender may feel insecure while dealing with the company. The marketing management should make the efforts in the future year to increase the current ratio for increasing the reliability of the lenders and suppliers (Velten, 2014).
Acid test ratio -Acid test ratio is used to indicate that the firm has immediate short term assets to meet its short term liability generally within a two to three month-
Acid test ratio 2014 = 14889000/121634000 = 0.12
Acid test ratio 2015 = 18250000/136403000 = 0.13
The ability of the company to pay its short term debts has increased over the previous year but is still very low. The ideal acid test ratio should be 1 which indicates the company can repay its short term debts
Return on capital employed: The ratio is calculated to examine how efficiently a company can generate its profit from its capital employed. The formula for calculating return on capital employed is net operating profit divided by capital employed.
Return on capital employed for 2014 = 124992000 /244524000 = 0.51
Return on capital employed for 2015 = 135535000/283560000 = 0.47
There is a decrease in company return on investment over the previous year. As the profit of the company has increased from the previous year and there is also increase in capital employed. This can be due to the inefficient utilization of fund which is acquired from the shareholder.
Return on net assets - It compares the net profit of the company with the net assets to see how well the company utilizing its current assets. The formula for calculating return on net assets is= Net profit / fixed assets
Return on assets for 2014 = 66999000/368576000 = 0.18
Return on assets for 2015 = 68886000/403640000 = 0.17
There is a decrease in return on assets with comparison to previous year as there is increase in the assets over the previous year so the company is not decision making the correct utilization of its new assets acquired by the company (Vij, 2012).
Capital Gearing ratio -It is generally used to analyze the capital structure of the company. The formula used to calculate capital gearing ratio is Equity share capital/ fixed interest bearing funds
Capital gearing ratio for 2014 = 244524000/42388000 = 5.76
Capital gearing ratio for 2015 = 283560000/33483000 = 8.46
The capital gearing ratio for 2015 was higher as compared to 2014 which indicates that there is an increase in the number of equity shareholder from 2014 to 2015.
Debtors collection period -It is the time taken to collect the money from the debtors. The Debtors collection ratio is calculated by dividing the amount owned by the current debtor by annual sales on credit and multiplying it by 365.
Debtors collection period for 2014 = (1504000/635225000)*365 = 0.86 days
Debtors collection period for 2015 = (1955000/685381000)*365 = 1.04 days
The amount in 2015 was realized faster than that of 2014. So the debtors were realized earlier in 2015 as compared to 2014.
Net profit ratio - It is the best measures for overall result of the firm and evaluates how well the company is using its working capital The formula for calculating net profit is (Net profit / net sales) x 100
Net profit ratio for the year 2014 = (66999000/635225000)*100 = 10.54%
Net profit ratio for the year 2015 = (68886000/685381000)*100 = 10.05%
The net profit of the company is decreased from 2014 to 2015 it indicates that the performance of the business over the year has decreased the management should find the reason for downfall of net profit and take appropriate measures.
Gross profit Ratio- Gross profit ratio calculates increase in percent of sales over the cost of goods sold. It helps the management to ascertain the efficiency with which company can produce or sell its product. The formula used for calculating gross profit is (gross profit / net sales)*100
Net profit ratio for the year 2014 = (113900000/635225000)* 100 = 17.93%
Net profit ratio for the year 2015 = (126890000/685381000)* 100 = 18.51%
There is an increase in gross profit ratio from the previous year which shows the product is more profitable as compared to the previous year.
Inventory Turnover ratio- It is an efficiency ratio which measures how effectively inventory is managed by comparing cost of goods sold with average inventory during the period. The formula used for calculating inventory turnover ratio is cost of goods sold divided by the average inventory.
Inventory turnover ratio for the year 2014 = 113900000/10615000 = 10.73
Inventory turnover ratio for the year 2015 = 126890000/9154000 = 13.86
There is an increase in the inventory turnover ratio from the previous year which indicates how effectively the company is selling its inventory. This shows that the company is not overspending by buying too much inventory and waste resources by buying non salable inventory (Kastenholz, 2013).
From the analysis of the finance and funding methods and techniques in travel and tourism sector, it can be concluded that the service industry needs to apply appropriate cost volume profit analysis methods to evaluate its cost and profit structure and achieve efficiency in profits and cost reduction. Also the financial statement analysis has been made in this report. The interpretation of financial statement is done to draw a valid conclusion over it. The single year financial statement is of no use to the manager. To draw effective conclusion financial result of the different year should be compared. It requires comparison to prior years, use of forecast and comparison. User can make comparison between sales and expenses, assets and liability and cash flow to perform the analysis.
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