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Unit 2 Finance and funding in Travel Tourism Assignment – TRG Plc
Diploma in Travel and Tourism
Unit Number and Title
Unit 2 Finance and funding in Travel Tourism – TRG Plc
Unit 2 finance and funding in travel tourism assignment – TRG Plc is the fastest growing industry in the service sector throughout the world. With the ease of transportation, the growth rate of travel and tourism business is increasing rapidly. With this the scope of finance and funding requirements and their application is also increasing. The sources of funds, investment in capital projects etc are the crucial decisions for any travel and tourism business. The application of these methods and analysis and interpretation of financial statements and accounting information is included in this report.
1.1 Importance of costs and volume in financial management of Merlin Entertainments Plc.
Travel and tourism business is one of the most emerging businesses in the present world. It helps in the economical development of the company by attracting the currency of the other country. The Merlin Entertainment company can use the cost volume for effectively managing the business operations. It determines how cost and profit react to change in activity which helps the management in deciding the best activity. The duty of the management of Merlin Entertainment Company is to effectively use the cost and volume to minimize the cost of product and maintaining the quality by eliminating wastage of resources. The management should check the functioning of the each unit build the control over unit where the cost is over-runs. The various cost and volume measures used by the management are:
- Direct cost- The direct cost is the cost which can be directly attributed to a particular product. For example the cost incurred on repairing of the rides of resort theme park can be directly allocated to it.
- Indirect Cost- The cost which cannot be attributed to particular unit or product and is to be apportioned between different unit and product is known as indirect cost. For example Cost incurred on the Advertisement of Merlin Entertainment Company is to be distributed between all the units of the company (Vij, 2012).
- Variable Cost – The cost which increases with the level of outcome is known as variable cost. It increases with the increase in production volume. For Example the cost incurred on food items increases with the level of sales.
- Fixed cost – The cost which doesn’t vary with the level of outcome is known as fixed cost. The per unit fixed cost depends upon the outcome. If the cost volume is high it will reduce the burden on fixed cost per unit. The Cost incurred by Merlin Entertainment for the salaries of staff is a fixed cost.
- Step Cost– The Cost is same for the certain level of activity but increases eventually by a significant amount at a certain level. For Example hiring the extra worker when the sales reach a certain point.
- Semi variable cost– It is fixed for the certain level of activity but increases with the level of outcome from a certain level. For example cost of telephone installed in hotel rooms.
- Break even analysis - It is the point where total sales are equal to total cost. At this point the company neither earns profit nor any loss. This is used to decide the sales volume above which company will earn profit.
- Economies of scale - It is the benefit which the company receives by conducting large scale operations. For Example Merlin Entertainment can produce the food item in bulk for all the branches which help in reducing the cost incurred on food and increase the profit margin.
- Diseconomies of scale - It refers to disadvantage that the company receives by conducting large scale operations. For Example Merlin Entertainment operates in different country if it will increase its level of activity than it will lead to complex organizational structure and communication barrier within the company.
1.2 Pricing methods used in the travel and tourism sector
The Management should use appropriate price method to determine the price by considering all the factors which affects price. The price of the tourist business generally depends upon the location, brand and the reviews of the earlier customer. The management should decide the price by using the appropriate cost volume measures and the margin of profit which is to be kept. The price should be decided by conducting the market analyzing and the position of the business in the current market. The selling price is generally calculated by adding a fix amount of profit on the cost of the good. The price should be as such which not much affect the business in future. The various methods used by different travel and tourism businesses are as follows:
- Market Led price– The price of the product in this method is determined by considering the company current position in the market. If the company has lower amount of sales it concentrate on reducing price to attract customer. Whereas if the market value of the company is good the price of the product should be high to get the competitive advantage from other business
- Profit led price – The price here is decided on the basis of customer and competitor. If there is less competition in the market the company can keep high profit margin.
- Cost led pricing- The price of the product is decided on the basis of cost incurred in manufacturing the product. For this purpose breakeven analysis is used by the management. The price should be kept above breakeven level to earn a profit by the business environment (Kostenholz, 2013).
1.3 Factors influencing profit of Merlin Entertainments Plc
The management of Merlin Entertainment should have control over all the factors which affect the travel and tourism for effectively conducting all the activity of the business. The factors which generally affect the entertainment company are as follows:
- Currency rate - The fluctuation in currency rate between the countries have a huge impact on the travel and tourism business. If the price of the currency will be low as compared to other country it will reduce the number of foreign traveler to that country because the cost of their trip will increase.
- Disaster - In the recent year there was a downfall in the number of tourist on the certain places due to disaster. If any of the disaster occurs at Merlin Entertainment Company it will reduce the number of the customer of the company.
- Season - Nearly every of the business has a season when the demand of its product is very low or high. In the situation of low season the Merlin entertainment company should use various schemes to maintain the adequate profit margin.
- Government support- Travel and tourism business very much depends on the support of the government of that particular region. The Government helps in building the basic infrastructure which helps in attracting customer to that location.
- Current market trend- The trend helps in determining the preference of the customer in the market. The company should alter or bring its new product as per the current preference of the customer (Lozano, 2016).
3.1 Interpretation of financial accounts of The Restaurant Group (TRG) Plc
The management of The Restaurant Group Plc should use the financial statement to draw a valid conclusion over it. The interpretation of the financial management is done on the basis of its users and the information which is required by them. The suppliers and lenders generally use sit for the purpose of security of their debts and loans whereas the shareholder uses it for stability of the company and the return which they will receive on their investment. The management should use the data of different year to draw a valid conclusion by making the comparison or analyzing the trend. It also helps the management in forecasting and creating the future business policies (Chang, 2015). The management uses the following tools to draw interpretation on the financial statement.
Gross profit ratio - Gross profit ratio is used by the management to ascertain the efficiency with which the company is producing and selling its products. The increase in percent of sales over the cost of goods sold has been calculated. The formula to calculate gross profit ratio is (gross profit/net sales) * 100.
Gross profit for 2014 = (113900000/635225000) * 100 = 17.93%
Gross profit for 2015 = (126890000/685381000) * 100 = 18.51%
There is an increase the gross profit ratio of the company from 2014 to 2015 which means that the company is efficient in producing and selling its product. The reason for increase in gross profit is due to increase in sales over the previous year which is good for the company.
Net profit ratio -Net profit ratio is used to measure the efficiency with which the company is utilizing its working capital. The net profit is calculated after deducting all the administration expenses from gross profit. The formula for calculating net profit is (net profit/net sales) * 100.
Net profit for the year 2014 = (66999000/635225000) * 100 =10.54%
Net profit for the year 2015 = (68886000/685381000) * 100 = 10.05%
There is downfall in the net profit of The Restaurant Group Plc from 2014 to 2015 which indicates that the company is not making the optimum use of its working capital. The sales have increases over the previous year but there is downfall in net profit ratio so the management should control the administration cost.
Current ratio- The management of the company will use the current ratio of the company to check that weather the company is able to pay its short term debts generally within a year. The supplier and lender use this ratio to ascertain the liquidity position of the company. The formula used for calculating current ratio is current assets/current liability.
The current ratio of the company for 2014 is = 29,410,000/121,634,000 = 0.24
The current ratio of the company for 2015 is = 38,005,000/136,403,000 = 0.27
The ideal current ratio for the company is 2:1. The company current ratios is very much low as compared to ideal ratio. So the management should build the policies which will help in improving the current ratio of the company. This will build the trust of the supplier and lenders with the company.
Acid test ratio: Acid test ratio is used to compute the short term debts repaying capacity generally within 0 -3 months.
Acid test ratio for 2014 = 14,889,000/121,634,000 = 0.12
Acid test ratio for 2015 = 18,250,000/136,403,000 = 0.13
The Ideal acid test ratio for a company is 1.The company acid test ratio is much below the ideal ratio which indicates that the company is not able to meet its short term debts.
Return on capital employed- The management uses this ratio to calculate that the company is earning adequate profit from its capital employed. The shareholder uses this ratio to check that whether they are receiving adequate return on its profit. The formula for calculating return on capital employed is operating profit / capital employed.
Return on capital employed for 2014 = 124,992,000/ 244,524,000 = 0.51
Return on capital employed for 2015 = 135,535,000/283,560,000 = 0.47
The return on capital employed has decreased from previous year which indicates that the management is not making the proper use of its capital. So it can be concluded that the company is not making the proper use of the capital which it has brought in 2015.
Return on net assets- Return on net assets is calculated to check the efficiency with which company is utilizing its fixed assets. This is done by comparing net profit of the company with its net assets to check the return. The formula used for calculating return on net assets is net profit / fixed assets.
Return on net assets for 2014 = 66,999,000/368,576,000 = 0.18
Return on net assets for 2015 = 68,886,000/403,640,000 = 0.17
The company has acquired the net assets in 2015 which has reduced the return on fixed assets.
Inventory turnover ratio- This ratio helps in checking the efficiency with which the company is utilizing its inventory. It is done by comparing cost of goods sold with average inventory. It checks weather the company is overspending by buying too much inventory and wasting resources by buying non salable inventory (Velten, 2014).
Inventory turnover ratio for 2014 = 113,900,000/10,615,000 = 10.73
Inventory turnover ratio for 2015 = 126,890,000/9,154,000 = 13.86
The inventory turnover ratio of the company has increased from the previous year which indicates that the company is making the effective use of its inventory in the current year as compared to previous year.
From the above report about Merlin entertainments Plc and The Restaurant Group (TRG) Plc with regards to finance and funding procedures and methods in travel and tourism sector, it can be concluded that the financial analysis and cost analysis is quite relevant for the service industry. The manager uses the financial statement to effectively manage all its activity and creating the future policies of business. In recent year there is increase in the number of tourist all over the world. Due to which there is a great increase in competition in this industry.
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