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Unit 2 Financial Management in Travel & Tourism Sector Assignment
Diploma in Travel and Tourism
Unit Number and Title
Unit 2 Financial Management in Travel & Tourism Sector
Finance and funding is the important concept that is required appropriate amount of time and attention by the business for the better growth of the business as well as economy. Unit 2 Financial Management in Travel & Tourism Sector Assignment is the important part of the economy so it becomes essential that finance and funding in this relation be focused with full capacity and potential. So in that context a travel and tourism company called Carib Happy Tours Company is planning a trip to Caribbean for one month. So accordingly cost volume and profit analysis is done along with appropriate pricing strategy in this concern. For the better performance all the factors that would constitute profits are also analyzed. Next is the management accounting and the investment appraisal report is also made so that no problems may arise in that regards in future. Interpretation of the travel and tourism company is made by its ratios. Company also wants to build a hotel in the Caribbean so sources and distribution of funds in that regards also mentioned in this assignment in the detail form.
1.1 Explain the importance of costs and volume in financial management of travel and tourism businesses.
It is the type of analysis in which there is the finding of the cost and volume in relation to breakeven point. For the purpose of determining this various equation are used. Apart from that various assumption are taken into consideration for finding the cost and volume. There are certain assumptions in this respect like all the units are sold, there are two types of cost i.e. fixed and variable and sales, variable per unit and fixed cost remain constant. In relation to travel and tourism CVP analysis plays a key role as it enables to make plan and control of the financial matter of the company. This carries certain importance as-
- All the future needs are planned and analyzed in an effective manner in the hotel industry such as CHTC. It helps to make correct and proper decisions so that no chances of loss may occur.
- It is the highly effective tool that enables to determine the breakeven point that ultimately helps to access the all the necessary information that would help to achieve the profit or no loss situation.
- For the effective performance a most suited combination of all the cost i.e. variable, fixed is taken into account. Along with this cost, sales, volume and all the other necessary financial data re considered that enables growth of the business.
- This method or technique is easy and simple as all the data can be analyzed with simply applying formula to derive the answer. So no extra efforts are applied in that concern that enable it as an easy toolto be taken into practice (Younis et.al, 2010).
1.2 Analyze pricing methods used in the travel and tourism sector
Every business can only survive when it earns profit from the cost spent on the product or services. So determine that aspect pricing the product or services is important to attain the profit for the business. There are many methods in this concern like cost oriented pricing, market oriented pricing, target pricing, transfer pricing, going rate pricing many others as well.
- Cost oriented pricing method- In this pricing method certain margin is added to the cost that enables to derive the profit from the business operation. This is the easy way to determine the profit as method of pricing is easy and understandable.
- Market oriented pricing method- In this method, price is determine as per the competition that prevails in the market as prices low or high is based on the prices that prevails in the market by competitors (Capinsk et.al, 2012).
CHTC is planning for the trip to the Caribbean in which £ 60,000 will be charged for hotel accommodation and airplane fares. Apart from that £ 150 is charged for the meals that are the variable cost that is charged as per the tourist. Cost oriented pricing method is used in this business environment as this method would enable to adjust the best margin for the business that would help to attain the profit for the business even this method is easy and understandable to all the related party. Apart from that market oriented pricing method can be used as to compare the pries with its leading competitors that can able it to stand it the competitive market in the long run.
1.3 Analyze factors influencing profit for travel and tourism businesses.
Factors the influence the profit of the CHTC business are-
- Good and effective management strategy is the best tool for the purpose of attaining profit. If the planning is formulated in a proper manner then there are chances that by implementation profit can be generated in an accurate manner.
- Advertising and promotion campaign also plays an important role in that context as in the competitive market this marketing planning is important to increase the profit of the business.
- In tourism business travelling expenses is also important to determine as there are less chances that if airplane or any other mode of transport fare is high then margin in profit would be low.
- A better accommodation facility is also required to earn profit for the business. Astravellers live in hotels and are charges area affordable then there are fewer chances that business would suffer any problem (Tokunaga et.al,2013).
CHTC trip evaluation-Hotel accommodation and airplane fares cost amounts to £ 60,000. This is the total cost whereas £150 per tourist is charged for the meal that is the variable cost. There are 90 tourist so total variable cost £ 150*90 which is equal to £ 13,500. Total cost is the addition of fixed and variable cost which amounts to £ 73,500. But business is charging only £ 800 per tourist so total money charged by them is £ 72,000. That concludes that business is having a loss of £ 1500. But business wants to earn at least £ 10,000 so it has to charge £ 927.77 from each customer to gain at least this much profit.
2.1 Types of management accounting in travel and tourism business
Management accounting helps the management to collect and manage all the internal working of the data time to time so that if any problem arises then it can be solved without any default. This is important as all the defaults, flaws or any other aspect that would affect the business are critically analyzed before any penalty. Different types of management accounting is as follows-
- Budget report-All the expenses that would occur in future are estimated and then documented in the budget report. By this management accounting all the expenses that can occur in future are reported that can enable to make plan accordingly. This is the best way performing accounting.
- Job cost report-In this technique, all the main area of the business where profit can be earned is focused so that no extra time and efforts are wasted on any non-profitable project. All the aspects through which profit can be generated are analyzed and then reported to make correct elevation of the profit generating projects.
- Cost allocation report - In this report, allocation is made to each and every resources present in the business at early stage so that no ambiguous situation in any relation may arise in future. This helps the managers to keep a track record on the functioning of the business and there related outcome.
In context with the CHTC, business has planned to earn at least £ 10,000 from the trip to the Caribbean but the planned budget and the actual expenditure differ drastically as if business charged £ 800 per tourist then it would suffer a loss of£ 1500 which leads to no exchanges of the profit earning from the trip. This evaluation is performed and a bad management accounting is showcased by the company. So now it is important that CHTC chose the best technique for the purpose of accounting (Hopper et.al, 2016).
2.2 Assess the use of investment appraisal management accounting information as a decision-making tool
Business invests their funds in the capital projects for the purpose of obtaining profit or return from it. So the techniques through which various capital projects are analyzed from which profit can be earned are listed below-
- Payback period-This is mostly used by the small business for the better control over the cash flow rather than on profits. It shows the time within which business would be able to gain amount from the investment. CHTC is required to invest in the capital project that would help it earn more cash flow (Gorshkov et.al, 2015).
- Discounted cash flow-It is the discounted rate at which return can be gain from the future value in the present scenario. CHTC has made many wrong decision in management accounting so it become important that it uses the best sources to minimize its loss to the full extent.
- Accounting rate of return-It shows the difference between the amounts the business invests to the amount it is liable to earn from it. It is the easy and simple approach to perform the task. CHTC has the estimated to earn attest£ 10,000 but it would incur the loss of £ 1500 so to reduce it the best technique to be formulated.
- Investment risk and sensitivity analysis-All the risk that are associated with the investment that would about to be made should be properly analyzed so that no risk can affect the growth of the business and the return associated with it (Akkoyun, 2012).
Task 3 Interpretation of ratios
TUI group is the tour and travel company that owns many cruise, hotels and resort. It is the German based company which is the largest company in concern to tour and travels. It is the company that is listed on two most reputed stock exchange i.e. London stock exchange and Frankfurt stock exchange. It has many tour operators like Thomson holidays, star tours etc. A financial interpretation in that concern is shown below-
Ratios analysis of TUI group
Return on assets
Return on equity
Earnings per share
- Profitability ratios-This ratio shows the capacity of the business in relation to the ability to earn profit from the cost that is incurred for this matter. Rate of return, gross profit ratio, net profit ratio, return on equity and many others are the ratios that determine the business capability in regards to its profitability (Parsian et.al, 2014). Two such ratios are determined below-
- Return on equity- It shows the return earn by the company from the shareholders equity. This is one of the most important ratios that determine company’s worth in the long run business. Company has shown improvement in relation to the previous year that is the good sign for the betterment of the company.
- Return on assets- It shows the capacity of the business to earn profits from its assets. From the two year of comparison it was reviewed that company has gain momentum in utilizing its assets to the great extent as in the year of 2015 company’s ratio has increased in comparison to the previous year.
- Liquidity ratio-They are basically two such ratios i.e. current and quick ratio. Both ratios are used to determine the short term ability of the company to have liquidity in its possession. It also indicates the ability to pay the entire obligation associated with the debt along with margin of safety (VASIU et.al, 2015). These two ratios are described below-
- Current ratio- It is calculated by dividing current assets to the current liability. It is determine to check the capacity of the company to pay its short as well as long term debt. It is one of the easiest ways to determine the aspects of the company. This company ratio is decreasing that shows company has to work on its ability to pay its debt on time and without any difficulties, default and penalties.
- Quick ratio- It shows the ability of the business to pay its obligation on time without any difficulty and defaults. If this ratio is low then it indicates that company is not performing well in terms of its ability to pay short term obligation. So it is important that this ratio be appropriate for the company. Company quick ratio has increased from the previous year that showcases the good sign for the company. It also shows that company is performing well in this aspect that can reduce its defaults and flaws.
- Investment ratio- It shows the ability of the company to earn profit from the investment made by it for that concern into any projects that may able it to achieve goals on the long run basis. Various investment ratios are present that helps to analyses the perspective of the investment. These ratios may be earning per share, price earnings ratio, price to sales ratio, debt to equity ratio, equity ratio and many others (Rydlewska et.al, 2010). Two such ratios are listed below-
- Earning per ratio- This shows the company earning in accordance with its outstanding shares. This ratio shows the profitability of the company along with the investment capacity it possesses in it. This ratio is highly beneficial for making various financial decision s that would be effective for the company on the long run of the business. Company’s earning per ratio has increased from the previous year that indicates as a good sign for the company betterment and progress. Company has to put some more efforts in its working to earn more earning in future.
- Equity ratio- This ratios shows the proportion of the funds invested by the company in comparison to the creditors. This is a sort of the leverage for the company. Company which works in this industry of travel and tourism require to maintain an optimum equity ratio for the purpose of investing and liability of long running of business. Equity ratio has decreased from the previous year so it becomes important for the company to make certain amendment in its policies for the betterment of the company.
4.1 Analyze sources and distribution of funding for the development of capital projects associated with tourism.
CHTC incurs the loss from the trip to Caribbean due to its poor management accounting. Now it is planning to build a hotel owned by it at the Caribbean. So for this purpose it would require funds that would help it to make a hotel. There are various sources of funds that can enable in the construction of the hotel. These funds are listed below-
- Loans- They are the external sources of funds where funds are accumulated from the borrowing performed by the company by putting the collateral security. It is the fast way accumulating the funds. Company would only require paying fixed rate of interest to carry out the loan. Loan can be further categorized into short term loan and long term loan. Short term loans are the loans that are taken over a small period of time for the better allocation of resources in need. They are usually the bank overdraft. On the other hands the loans that are taken for many years then that loan is called long term loans. It is the capital project so long term loan would be required(Bhattacharya et.al, 2014)
- Retained earnings- Profits that are earned are also used as the source in the capital projects. A certain proportion of profit is reinvested in the business so that some is retained in the business in need of contingency or emergency.
- Equity- Another way through which sources can be accumulated is the issue of the share capital so that funds of the business can be increased. This the long but better way to accumulate funds as compared to different sources. There are many alternatives in this options that can be followed by the company for the purpose of collection of funds from different sources (Du et.al, 2012).
- Another way that business uses is the retaining the funds for the longest time so that funds can be increased and can be invested in the required projects. This is followed by the business as it is practical with no measure issue associated with it. This method is known as capital stretch method. It is an easy and simple method which consist of bills of exchange and many other receipts related to creditors of the business.
Distribution of the funds is the next step after the sources of funds. Business has budget of about £ 25 million so company would take the loan of £ 10 million from the banks by paying interest monthly after putting collateral security to the bank. Another source is the amount from retained earnings from which £ 4 million is taken into account. Another source is the capital stretch from which company is estimating about £ 2 million. A short term loan is also planned of about £ 4 million that would work as a bride loan. Apart from that rest £ 5 million would be allocated from the share capital (Sokolitsyn et.al, 2016).
Travel and tourism is the important sector of the economy from which suitable amount of income is generated so it become necessary that finance and funding be made accurate and suitable. CHTC has planned a trip to Caribbean for a period of one year. It was analyzed that a company pricing strategy along with other strategy are not proper that leads to the loss to the company so company require to make correct policy in that regards. Apart from that company also requires to make necessary changes in the current management accounting technique along with correct investment appraisal technique that would enable a better growth in relation to the correct decision making. TUI group is the company that is associated with travel and tourism so it is also essential that all the necessary changes be made for the progress of the company. Sources and the distribution of funds in this regards be selected more appropriately
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