Unit 2 Managing Finance Resource Assignment Help
1.1. Importance of cost and volume in financial management.
A business organisation is the one that seeks onset of an objective and conversion of that objective into vision. The forces behind this conversion are strategic operational activities, logical and thoroughly planned financial activities and sound financial management.
To achieve desired results it is a mandate to ensure that it is known beforehand that which forces are prone to vary and also that none of the forces go vary. Amongst them financial management holds the key specific value and proper nexus upon the same needs to be made. The most important variable of financial management is cost and volume which are inter-dependant and directly proportional as well (Drury, 2012).
Role of cost and volume in financial management and management accountancy?
The role of cost and volume is integral in the attempt to manage financial structure of an organisation. It is worth being noted in the said reference that, an organisation has to bear various types of costs and there incidence upon profits also differs. The various types of costs and their underlying relationship with the volume are denoted by the cost-volume relationship (Dowd, 2002). These factors are crucial for enabling a viable financial planning and sound decision making.
Since, we have already discussed about the importance of cost and volume in designing the financial hierarchy of an organisation. It becomes critically important to understand the various forms of the costs and the various techniques to analyse adequate volume so as to facilitate the process of decision making. Since, we are core specific about the travel and tourism industry hence, the analysis has been made in accordance of Thomas Cook PLC, one of the most reputed players in the UK travel and tourism industry.
Types of cost to be borne by Thomas Cook PLC:
- Direct Cost:These are the cost that is directly traceable with the business operations i.e. they form the part of the main services offered by the organisation (Lucey, 2008) for example, the cost of airfares in the package offered to the customer.
- Indirect Cost:Indirect cost are the cost that are not directly traceable but are essential in framing the final bouquet of the product or services offered by Thomas Cook. For an instance, the cost of the salary to the customer support and sales staff is an integral part of the final offering however cannot be directly traced with the final services offered.
- Fixed Cost:Fixed costs are the cost that are fixed in nature that is there quantum remains fixed irrespective of the number of final goods or services offered for sale. For an instance, the cost of the
- Variable Cost: Variable cost is the cost that changes with the level of services offered. For example the cost of power of the office which changes with the level of consumption or the telephone charges.
Role of Volumes in Thomas Cook PLC: Volume refers to the direct quantification of the offerings for the sales of goods of services to the customers. Thomas Cook PLC majorly deals in customized travel packages, offerings of hotel and other similar travel and tourism industry products. The volumes for this industry directly involve the number of packages or services sold to the passengers. For a sound decision making it is very important for the management to understand and determine the level of volumes that are required for the organisation to operate feasibly (Atrill, 2011).
From the view point of a financial and management accountant an organisation should operate at a level where it is able to cover all its costs i.e. it is able to reach no profit-loss state or as it is called the ‘Breakeven’ state. The breakeven level is the level of sales at which entity is able to cover all its costs and any sales made beyond that level shall help the organisation to earn profits. Reaching at the level of at least breakeven hence becomes critically important for any decision maker, and same applies to Thomas Cook as well. Breakeven analysis hence holds immense value in decision making as it enables deriving the break-even level for any entity. Actually, the importance of volume lies in the capacity of the same to define the scale of operations for any organisation. Where, scale means the quantum of production to be made or services to be offered.
Economies of Scale: Operating on scale defined after analysis is thoroughly important because, it helps the organisation to reap maximum benefits in form of allowing for maximum utilization of organizational resources. Economies of scale help in form of cost advantage because of size, output or scale of operations which leads to fall in the per unit cost of output with increasing scale of output as the overall costs including fixed cost get spread over larger number of units.
Diseconomies of Scale:It is also worth mentioning when we have discussed about economies of operating on scale that at times, economies of scale do not function any longer. Rather than experiencing cost reduction with increased output. Organisations experience a rise in the marginal cost with the rise in the output.
1.2. Pricing methods used by the Travel and tourism industry:
Pricing is one of the most effective decisions that have to be taken by the management. It is essentially important for an organisation to price its goods or services at a level that enable covering its costs and providing optimum level of margins and also not be against the market levels or the prevailing rates. Pricing decisions are made upon a thorough analysis of costs and volume and there are also present several techniques for facilitating the pricing of goods or services.
Thomas Cook PLC, as we know is the major player in tour and travel sector and has for offering a wide range of goods and services, pricing of which remains to be a key issue. The various methodologies used by the management in the same regards are,
- Cost plus Pricing: Thomas cook actively uses this method of pricing in which the management accountant, first adds up all the costs and then adding to the aggregate costs the desired mark-up profits. It actually is the most tried and tested pricing method used by organisations worldwide (Adams, 2006). It is fairly simple to employ and understand and hence, Thomas Cook is also found using the same in pricing of its service offerings.
- Market led pricing: Market led pricing is another famous methodology that is also used by Thomas Cook in pricing of their service offerings. In this methodology an organisation chooses the price similar to the general market rates and then may decide to maintain it lower than the general to cut out some market share (Lucey, 2008). Thomas Cook being an aggressively managed organisation is found using this method of pricing.
- Absorption pricing: It is another widely used method by Thomas Cook in which the organisation is found pricing its goods in the way that the product and the service includes all the variable cost and the fixed cost to some proportion so as to recover all the cost (Atrill, 2011).
- Marginal Costing: Marginal costing involves setting up of costs in the form that change in the cost with every additional unit produced is recorded. Marginal costing helps in understanding the key areas of cost management for the organisation. It thus helps in pricing.
1.3. Factors influencing profits of the travel and tourism industry:
The main motive behind operations of a business is maximization of benefits in form of increasing the profits year on year of operations. Profit in sense is the financial reward of strategic business operations and sound financial application. The level of profitability in actuality defines the level of operational efficiency of the organisation.
The various factors that influence the profits of Thomas Cook PLC are,
- Production capacity of the company: The main source of revenue for an organisation is the amount of saleable goods and services offered by the entity. Thus, for Thomas Cook also it remains to be the matter of decision to offer as much as services in the period for sale to the clients. The more offerings entity will have so shall be its profits.
- Seasonal Factors:Another major factor influencing the profits of Thomas Cook remains to be the seasonal factor i.e. the tourism peak in which maximum people choose to travel like, the new year etc. and the fall seasons in which usually lesser people travel. The profits are usually the maximum in peak season and lesser in the fall seasons (Owen, 1998).
- Economic factors:Another important factor influencing the profits remains to be the various economic issues like selection of an adequate mark-up and managing its terms with the suppliers so as to get cheaper and better rates, efforts to reduce costs so as to be able to offer to clients the packages at much cheaper rates and hence be able to garnish a market share in peak seasons and also maintain the consistency in sales in lean seasons as well (Adam, 2006).
- Use of resources: Maximisation of profits can only be made in case where there is an optimum utilization of existing resources. Utilising resources adequately become bare minimum requirement to achieve greater profit and optimum maximization of the benefits.
- Reducing losses: Thomas Cook should always try to reduce the losses integrated in the business model like, bad debts, suppliers turn out etc. If no heed to manage them is made than the profits shall be greatly impacted time on time.
2.1. Different types of management accounting information used by the travel and tourism industry:
Management accountancy seeks to provide material information’s for the decision making bodies, so as to facilitate the process of sound decision making and also ensure that the sustainable growth of the organisation is not hampered due to hurried or irrational decisions. Since, it remains to be a major source of information thus; decision makers largely seek out for information’s from management accountancy which are material in execution of operational strategies and formulation of plaintiffs for deciding how and when to do and what to do. The type of information that may be needed is basically dependent upon the nature and size of business operations. The various types of information and there sources for the requirement of Thomas cook Plc are:
- Financial statements: Financial statements are the statements that depict the reflection of business operations for a fiscal. They are one of the most optimum sources of information for any entity. They are the main accounts and formal records of the various cost and profit centres of the organisation. A decision maker may derive several meaningful information’s from the financial statements of any business organisation. The financial statements are comprised of,
- Balance sheet depicts the true and fair financial position and the status of holdings of assets and liabilities of an organisation on a given point in time. A decision maker may get information regarding the assets and the liabilities that the entity has and analyse its movement over time, analyse the net worth of the entity and many more relevant information’s.
- Profit and loss statement is the statement representing the sources of revenues and the costs that are to be borne to earn that revenue. This statement is a very important source of information for understanding the cost and revenue pattern of the organisation and also analyses the performance of various cost and profit centres within the entity.
- Statement ofcash Flow-Cash remains to be the most liquid asset amongst all types of assets hence, this becomes important for an organisation to ensure that they have adequate supply of cash in the business operation to avoid any liquidity crunches. The cash flow statement helps analyse the movement of cash in form of inflows and outlays for an organisation during a fiscal and hence enables derivation of several meaningful information. (Lacy, 2001).
- Budgets: Budget is an estimate of the forecasted revenues and expenses for a period under review. Budgets are in actuality the most concrete source of information for understanding the business strategies and analysing the performance of the business by enabling comparison.
- Variance Analysis: Variance analysis helps comparison of the variation that exists between the actual and the budgeted expenses. By analysing the variation the decision makers may be helped with a basis of decision making regarding strategies for management of business operations.
- Forecast: Forecast as the word goes is the estimate of the future results of a company’s operations. Basis for its preparation is the historical cost data’s and the various financial statements of the entity.
2.2. Use of management accounting information as a decision making tool in travel and tourism industry:
Information’s for decision making as already discussed may be procured from variety of sources listed above. Management accountancy helps in representing the information’s of key importance in a manner that they hold key relevance in framing the decision about the ways to manage organizational activities.
The management information’s as discussed above may be derived from the financial statements, the budgets, the forecasts etc. This information may be used by Thomas Cook PLC to make sound decisions about their monthly operations or for some future strategies. The various information’s that may be used by Thomas Cook PLC are;
- Financial Statements- from the financial statements, the management may evaluate the pattern of revenue and the financial position as well as the cash flows of the entity. These are evident source of information’s about several important variables relating to management of business operations. (Atrill, 2011).
- Budgets and Forecasts – They are another important basis of deriving information’s about the course of management of business activities in future.
- Variances – By performing a variance analysis, management may understand the key areas of action restructuring and the methodologies for the fixing them up so as to enable proper management of the organisation.
3.1. Ratio based analysis of TUI Travels PLC
After having conducted a thorough analysis of various imperatives of decision making and financial management of an organisation we must have reached a basis of understanding that how formal decision making is done in an organisation. But, this is worth being mentioned at this point in time that decision making in management and finance is not just made by the aforementioned manners rather there is also present a litmus test sort of practice which is known as ratio based analysis. Ratio based analysis is the most tried and tested methodology of understanding the financial performance of any businessorganisation.
Ratio based analysis helps in understanding the various essential elements of the business organisation like liquidity, profitability in a much concise manner and also enables comparison. This enable analysis and evaluation of the organisation in a much precise manner (Lacey, 2001).
In this part of the report a thorough ratio based analysis of the financial and operational performance of Tui Travel PLC, one of the major players in the travel and tourism industry in UK is being conducted underneath,
- Current Ratio-Current ratio is a ratio that helps understand the liquidity risk management of an organisation. It helps analyse the capacity of the organisation to honour its debts as and when they are due. For TuiTravel PLC, It is computed underneath ,
Current Ratio of TUI is observed to have increased from 1.15 in 2012 to 1.38 in 2013, this is a welcome signage in sight of effective liquidity risk management of the organisation. Howsoever, the ideal ratio is expected to be 2.
- Acid Test Ratio – Acid test ratio is another most tested method of liquidity risk measurement of an entity. This ratio also helps ascertain the ability of the firm to make good its debt payments as and when they fall due. For TuiTravel PLC, It is computed underneath,
Acid test ratio ideally is expected to be around 1 and in the case of TUI it may be seen that this ratio has been 0.54 in 2013 and 0.44 in 2012 which is lower than expected, it is a matter of concern for the management as it poses a threat to the liquidity of the entity.
- Return on Capital Employed – ROCE is the most tried and tested ratio for testing organisation’s profitability status. It helps in determining the management’s operational ability to maximize the benefits out of the resources provided to it. For TuiTravel PLC, It is computed henceforth,
Where, Capital employed – Total Assets- Current Liabilities
The ROCE for TUI has increased year on year (APPENDIX). This is a good movement and a positive signage for potential and existing investors of the entity.
- Return on Net Assets –This ratio depicts the relationship between the returns generated by the firm and the net amount of assets held by it. This ratio depicts efficiency of the management to utilize the organisation’s resources. For TuiTravel PLC, It is computed henceforth,
The ROA for TUI is observed to be almost similar in 2013 as was in 2012. This is a signifier that the operations of the firm have not added a significant substance to the overall value of the entity.
- Debtors Collection Period – Debtors collection period reflects the time taken by the collection wing of the firm to collect the amount due with the debtors of the organisation. For TuiTravel PLC, It is computed henceforth,
The debtors’ collection period for TUI has been moving on a better trend than 2012 and this is an indicator of good performance of the debt management team.
- Creditors Payment Period – It refers to the time period allowed to the organisation to pay its trade creditors. It reflects the capacity of the firm to negotiate with its suppliers. For TuiTravel PLC, It is analysed henceforth,
TUI has a very long creditor payment period to its advantage. It is an indicator of strong creditor relationship management of the organisation.
- Stock Turnover Ratio –Stock turnover ratio depicts the number of times TUI is able to sale of its available stock of goods. It is test for ascertaining the performance of the sales wing of the organisation. For TuiTravel PLC, It is computed henceforth,
The stock turnover ratio has been increasing for TUI over the years under review which is an indicator of good performance by the sales team.
- Ratio of Administration Cost to Sale- Administration cost is the cost of forces managing the business and its operations, it is one of the major expenses that are made by an organisation operating in the tourism industry because this industry is service oriented. This ratio helps determine the relationship between the administration costs to be borne by an organisation in regards to the sales generated by it. For TuiTravel PLC, It is computed henceforth,
The administration cost of TUI has increased over the period however a control on it is also made to restrict any unjustified hike. Some more approach to manage it into level lower than current shall ultimately help with lesser charge on the revenues and hence make available more profits for the entity.
- Gross Profit Ratio– Gross profit ratio shows the gross profit the organisation earns out of every pound of revenue that it generated. For TuiTravel PLC, It is computed henceforth,
The gross profit ratio for TUI has increased over the year under review. This howsoever is not very good and attempts to retain more of the revenues generated are a must for the management.
- Net Profit Ratio- Net profit ratio enables evaluation of the net percentage of the profit that entity make out of the sales made by it. For TuiTravel PLC, It is computed henceforth,
The Net profit ratio, for TUI has been very low which is a clear cut signage for the management to ensure a check on the operational expenses so as to ensure that more funds are available for the entity.
- Capital Gearing Ratio –This ratio is an indicator of the relationship between the relationship between fixed interest and dividend yielding shareholder funds. It helps in understanding the risk to the organisations finance providers by understanding the exposure and composition of debt instruments in organisations capital structure (Atrill, 2011). For TuiTravel PLC, It is computed henceforth,
TUI appears to be heavily financed with debt instruments which have further increased in 2013. This poses a threat on the liquidity of the organisation and lower earnings available for equity shareholders.
4.1. Source and Distribution of Funding for Public and Non Public Tourism Development
In the aforementioned parts of the report we had analysed the various variables that were capable of influencing decision making in an organisation. This becomes critically important to understand in the said reference that, the factor that majorly involves decision making and management of financial resources is the sources of generating funding for business operations and capital intensive projects (Dowd, 2002).
Finance is actually the seed for planning and providing for business strategies. Any business activity is the outcome of backing up with a supportive financial plan to help assist the strategies. Planning for finance in actuality is a pervasive activity and is found across levels of operations in all kinds of entities. Business plans just cannot be fulfilled in the desired colours in absence of adequate finance. Travel and tourism is another organized industry with a promised growth over the time. Hence, planning for finance for future strategies and activities becomes important.
Travel and tourism is also a major factor in the GDP of any organisation and hence the state also has some role towards the development of this industry in form of providing for tourism and tourists the excursion spots, information and management centres, proper maintenance and upkeep of tourism centres etc. So public sector and as well as the private sector both need to work hand in hand for sound development of the overall travel and tourism industry (Owen, 1998).
The various sources of funding available for a public and non-public tourism development are being discussed underneath,
- Public Financing –One of the major sources of funding for development of projects in travel and tourism sectors is the once that are provided from the state and the entities formed by it. As already discusses tourism remains to be one of the major source of GDP for any economy, hence public sector financing is available for this sector from various vents in forms of direct or semi participation. The various entities established by the government bodies includes,
- Department of Culture, Media and Sport-The department of culture, media and sports was developed with a mission of establishing an entity that facilitates the maintenance and upkeep of tourist heritage sites and also ensures accreditation and management of monuments of historical values, provision of funds necessary for maintenance of tourist spots and proper conduct of tourism activities in the union.
- Regional Development Fund – Regional development fund is the body that is primarily entitled to allocate and plan for the budgetary allowances of tourism importance. This fund has been used to provide for the development of tourism information centres in various parts of the country and is also entrusted with proper management of the established entities. This fund allocation unit was established with the aim of unbiased growth of tourism across the union.
- Non-Governmental Public Bodies –Since, we have already understood that tourism continues to be an important sector for all hence there are also present various non-governmental public bodies to facilitate the tourism industry. These bodies are mainly self-financed in nature and are established with the aim of supporting the growth of the overall tourism industry by tying up with the public and private players in the industry.
- Non Public Financing –Non Public financing refers to the providing of capital for development of the sector from non-governmental bodies and majorly from body corporate and retail investors. The major drivers for fund availability in this sphere remains to be the growth potential of the industry and the desire of capital appreciation while contributing to the development of the industry at large. Usually capital intensive projects are funded by this route. This type of financing may be in form of equity financing as well as debt financing.\
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