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Unit 2 Finance and Funding in TT Sector Assignment
BTEC Higher National Diploma in Business
Unit Number and Title
Unit 2 Finance and Funding in TT Sector
P1.1 Explain the importance of costs and volume in financial management of travel and tourism businesses using Merlin Entertainments Plc. as your case study
Importance of cost and volume in financial management
Cost is the amount of expense incurred or to be incurred for a particular event or activity. Volume is the quantity which is used or procured by incurring such costs or the quantity proposed to be produced from such costs. With regards to the travel and tourism business, cost is the amount incurred for developing the tour packages or products or providing the travelling services and volume is the number of customers purchasing the tour products or number of passengers covered in tour package. Cost volume profit analysis requires use f various tools to identify the impact of cost and quantity and changes in these factors on the profits. These include marginal costing method, calculation of contribution, break-even analysis etc. The importance of cost and volume analysis is the determination of effect of changes in cost and volume on the profits and level of activity to assist the management in making the financial decisions for the business which relate to the investment of capital funds appropriately and achieving the objective of earning high returns (Trifan, 2011). In this way cost volume and profit analysis is used as an effective tool for managing the financial resources of travel and tourism business in a way that the is a service industry and thus it is very essential to manage the costs. Merlin Entertainments Plc. uses the cost volume and profit analysis to identify the contribution of each event proposed or conducted by the company. The contribution of each event helps in determining whether such events shall be conducted by the company in future or not. Also the break-even point for number of customers or bookings of the event is important for the company to identify the target sales for the event.
P1.2 Analyse pricing methods used in the travel and tourism sector. You need to use examples from different types of businesses in travel and tourism.
Pricing refers to as the method which is used to determine the amount for which a product or service is sold by a business to its customers. It relates to determining prices for each and every individual product or service considering various factors such as costs, volume, economies and diseconomies of scale, level of activities etc. In travel and tourism business pricing relates to the setting of amounts for the products and services for travel and tour packages either on individual basis or in the form of combined price for the package. Various pricing methods are used by different kinds of business strategy in the travel and tourism industry. The pricing method adopted by a business depends on the pricing strategy of the business framed in accordance with the analysis and evaluation of effect of market forces and market needs and requirements (Theurilat. Et al, 2010). The different types of pricing methods used by different businesses in travel and tourism sector are as follows:
- Cost plus profit margin: This method includes calculating the total costs incurred in development of the product or provision of service and adding a profit markup to the total cost to arrive at the price of the product. This method is used by the entertainment businesses such as Merlin Entertainment Plc.
- Retail Pricing: In this pricing method the total distribution costs are calculated and added to the net rate calculated by adding the profit mark up to the total costs. This price is higher than other pricing methods since it includes distribution costs in addition to the costs and profit margin. This method is generally used by the transportation business in travel and tourism sector (Faure, 2013).
- Competitive pricing: Under this pricing method, the prices of competitors and other companies operating in same business segment are considered as the base for determining or setting the price of the products or services of the company. This strategy aims at overcoming competition and penetrating market. Sometimes the price is even less than the costs.
- Package pricing: This method involves setting an overall price for all the components of the tour product or package such as meals, accommodation, transport etc. The combined price of the package is determined rather than charging separate prices for each element of the package. This method is generally used by the tour operators.
P1.3 Analyse factors influencing profit for travel and tourism businesses using Merlin Entertainments Plc. businesses as your case study.
Merlin Entertainments Plc. is indulged in the business of conducting events, providing facilities for access of theme parks, resorts, vacations and trips etc. Therefore, the profits of business of the company is affected by various direct and indirect factors such as seasonal variations, competition, pricing strategy, current trends in the travel and tourism business, market demand, micro and macro environment, etc. The travel and tourism sector is the kind of business which is greatly influenced by the seasonal variations creating a huge impact on the market demand for the products and services. Thus the seasonal variations result in fluctuating demands in context of number of bookings by customers for the resorts and theme parks. Apart from this, the current trends in travel and tourism industry in UK which relate to number of tourist arrivals in the country also affect the profit of Merlin Entertainment since this factor results in decrease in the number of customers for the business of company resulting in decline in market demand. The macro environmental factors such as regulatory policies, legislations, political environment, social and cultural impact etc. also affect the profits of the business of the company since they affect the policies of the company that relate to profit making and pricing of its products and services. In this way the profits of the company fluctuate due to various internal and external environmental factors of the business of the company (Medlik, 2012).
3.1 Interpret financial accounts of The Restaurant Group (TRG) Plc. for the year ended 27 December 2015 showing at least two years performance (for example comparing 2015 to 2014).
Interpretation of final accounts
About the company
The Restaurant Group Plc. (TRG) is the company based at United Kingdom indulged in the business of operating restaurants and pubs which are more than 500 under various different types of brands. The portfolio of the business operations of company comprise of table service, customer service, sandwich shops, pubs and bars. It has also a diversified business of concessions which is operated through airports of United Kingdom. This business environment provides catering solutions to clients through partnerships.
Calculation of ratios
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%
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
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 = 1.5
Analysis of Financial Performance
- Profitability: The calculated profit ratios of the company include profit margin ratio and Return on equity ratio for two years for the analysis of profit potential of the company during these periods. It can be observed that the net profits of the company as the percentage of sales for the year 2015 was 10.05% which decreased from 10.555 in the year 2014. Since the decline in the profit margin rate is low it can be considered that the net profit has remained constant for the two years. The Return on Equity of the company also declined from 2740% in the year 2014 to 24.90% in the year 2015. This shows that the ability of company to attract more finances in form of investments has declined. However, the rate of returns are high as compared to the industry average rate of returns, which means that the company has a high profitability potential and the business is capable to earn returns for investors.
- Liquidity: The liquidity of the company can be analysed using the current ratio and quick ratio calculated for the two years. It can be observed that the current ratio of the company increased from 0.24 to 0.28 in the year 2015 and similarly the quick ratio also increased from 0.20 in 2014 to 0.23 in 2015. It means that the company is performing below the standard performance level required for the solvency, since the ideal current ratio is 2:1 and ideal solvency ratio is 1:1. The current assets of the company are not sufficient enough to finance its current liabilities from the proceeds of realisation of current assets of business. The liquidity position of the company is not sound even after high profit potential (Cartney, 2011).
- Efficiency: This measure of financial resources performance requires the measurement of how efficiently the assets of the business can be used to generate revenues from the business and increase profits. The efficiency of TRG can be evaluated through the inventory turnover ratio and asset turnover ratio of the business calculated for the last two years. It can be observed that both the asset turnover ratio as well as the inventory turnover ratio of the business of the company declined in the year 2015 as compared to that of 2014. This means that the assets of the company are not utilised effectively to generate revenues and profits for long term since this capability of the business has declined. However the revenues generated per unit of asset is high as compared to the industry average.
- Investment potential: The investment capability refers to as the effectiveness of the business to attract investors for procuring funds to finance the operations of the business. The investment potential of the company can be analysed with the help of measures such as Earnings per share and Dividends per share which help in identifying the profit potential of each share of the company. The Earnings per share of the company in the year 2015 increased to 34.55 pounds as compared to that of 33.39 pounds in the year 2014. This means that the company is capable to earn returns for its shareholders where each shareholder will get some amount as profit r consideration. The dividend per share of the company has also increased from 15.40 pounds to 17.40 pounds in the year 2015. It can be observed that out of the earnings of the company, the company is paying almost half of the earnings to the shareholders as dividend and remaining half earnings are retained for future purposes. The companies operating their businesses under the travel and tourism sector do not generally pay dividends but TRG has a good track record of payment of dividend for past few years. This means that the company is performing above industry average to attract the investors.
Conclusion and Recommendation
From the analysis of the financial statements of the company, it can be observed that the financial performance of the company in terms of profitability and liquidity has declined. However the decline is not huge and the rate of profits of the company are still high which shows high profit potential of the company. The company is not in a sound liquidity or solvency position. The earnings per share and dividend per share of the company is high which means that the company is earning good returns for its shareholders and has high investment potential also. The company is recommended to reduce its dividend pay-out ratio and increase its retained earnings to improve its solvency or liquidity position (Huggett & Pownall, 2010).
financial analysis 2016, , 6th edn, Oxford University Press.
Cartney, D. 2011, Strategic financial analysis & cashflow for company directors, Thomson Reuters, Pyrmont, N.S.W.
cost-volume-profit analysis 2010, , 4th edn, Oxford University Press.
Trifan, A. & Anton, C. 2011, "USING COST - VOLUME - PROFIT ANALYSIS BY MANAGEMENT", Bulletin of the Transilvania University of Brasov. Economic Sciences. Series V, vol. 4, no. 2, pp. 207-212.
Theurillat, T., Corpataux, J. & Crevoisier, O. 2010, "Property Sector Financialization: The Case of Swiss Pension Funds (1992-2005)", European Planning Studies, vol. 18, no. 2, pp. 189-212.
Faure, M.G. & Weber, F. 2013, "Security mechanisms for insolvencies in the package travel sector: an economic analysis", Journal of Consumer Policy, vol. 36, no. 4, pp. 425-442.