Analysis of Financial Performance and Capital Projects

The assignment involves analyzing the financial performance of TRG Plc, including its cost management, profit margins, liquidity ratios, and funding for capital projects. It also requires an assessment of the company's ability to manage its assets and liabilities effectively, as well as a recommendation for improving its financial position and performance.

FINANCE AND FUNDING IN THE TRAVEL AND
TOURISM SECTOR

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Explaining the importance of cost and volume in financial management.............................3
1.2 Analyze pricing methods used in travel and tourism sector..................................................4
1.3 Factors affecting travel and tourism business........................................................................5
TASK 2............................................................................................................................................6
2.1 Different types of management accounting information that can be used in business..........6
2.2 Use of management accounting information as decision making tool..................................7
TASK 3............................................................................................................................................8
3.1 Interpreting financial statements of TRG Plc for the year of 2014 and 2015........................8
TASK 4..........................................................................................................................................12
Analyzing sources and distribution of funding for capital projects...........................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
In the recent times, travel and tourism industry of UK is growing with the very high pace.
Every year, several inbound and outbound customers prefer to visit the attraction points of
London. Now, travel & tourism is one of the sectors which make remarkable contribution in
GDP of Britain. Further, on the basis of forecast worth of tourism industry will be £257 billion at
the end of 2025. This aspect clearly shows that growth of travel sector is high, so in this regard, it
is highly required for the concerned firms to make optimum utilization of financial resources and
provides tourists with high quality services. The present report is based Merlin Entertainments
Plc which has around 115 attractions in 23 countries. Major brands of Merlin Entertainment
include Legoland, Alton Towers, Chessington etc. In this, report will provide deeper insight
about the significance of cost and financial management in travel sector. Besides this, report will
also shed light on the pricing methods and other factors that have significant impact on the profit
margin of firm. It also depicts the extent to which financial position and performance of The
Restaurant Group Plc is sound in the period of 2015 over 2014.
TASK 1
1.1 Explaining the importance of cost and volume in financial management
Cost and volume is one of the main aspects that have high level of influence on the aspect
of financial management. Moreover, in the case of high cost firm is not in position to generate
high profit margin. Thus, cost is the major factor that closely impacts the pricing decision of
Merlin Entertainment Plc. Cost may be served as sum of all the expenses which are incurred by
the firm for delivering services to the customers. There is huge importance of cost and volume
in the business because cost and volume are associated with each other. When volume is high
then in that case cost on each unit of sale is very low. Similarly, in case sales volume is low then
cost on each unit is high. Thus, it can be assuemed that there is contrast relationship between cost
and volume and both move in different direction. There are varied sort of expenses that form
part of cost and need to be controlled so that on each unit sold less cost can be observed in the
business.

 Fixed expenses: These are those expenses that remain constant in every condition even
volume increase or decrease (Lam, 2010). Thus, it can be said that fixed expenses have
not much impact on cost and volume relationship until fresh capital expenditure is not
made in the business. Variable expenses: Variable expenses are those that keeps on fluctuating consistently. It
is very important to control variable expenses in business so that cost reduce at fast rate
with increase in volume. Semi variable expenses: These are those expenses whose some portion remain fixed and
some remain variable. With increase in volume proportion of semi variable expenses on
each unit also reduce.
It can be said that it is very important to understand the cost and volume relationship in
business. Main focus must be always on increasing volume. If at current price level firm
failed to increase volume then it can reduce price of its products.
1.2 Analyze pricing methods used in travel and tourism sector
There are number of pricing methods that are used by the business firms for pricing of
their products. It can be observed that there are multiple pricing strategies that can be used by the
business firms. It depend on them that which of pricing strategy they prefer to use in their
business (Irwin and Scott, 2010). Usually, it is observed that firms select pricing strategy which
they think is most suitable to their business in terms of competition with rivals. Some of the
pricing methods that can be used by the business firm are given below.
 Competitor based pricing: Competitor based pricing is the one of the most important
approach that is used for pricing of the product. Under this pricing strategy price that is
set by rivals of Merlin entertainment is taken in to account to determine price of the
product. By doing so it is ensured that firm will be able to compete with its rival and
customers will be indifferent towards Merlin and its rivals in terms of price. Market based pricing: Market based pricing is another strategy that is used to price the
products in the market. This is because under this strategy price that is prevailed in the
market is taken in to consideration for determining price of the product. It can be said that
market based pricing is also one of the best alternative that is available to the business
firms (Gatti, 2013). By determining price according to prevailed price Merlin

entertainment can give tough competition to those firms also that are not in direct
competition. Cost plus pricing: Cost plus pricing is another strategy under which market factor or
competitors are not taken in to account. Under this strategy simply cost of production or
service is computed and on same margin is added to compute price of the product. It can
be said that cost plus pricing is the one of the important pricing strategy that can be used
by the firms. However, in the industry where already there is tough competition it is not
possible to follow cost plus pricing strategy because people would like to take service of
the firm which is offering product at low price. Return on investment: Return on investment is another approach that is used for pricing
of product. Under this strategy it is identified that if investment is made in any product
then in that case how much return is obtained on same at specific level of pricing. If
return is sufficient then in that case relevant price can be determined as final price of the
product. Break even analysis: Break even analysis is used by many firms irrespective of their size
and shape. Under this approach it is identified that at determined price level what amount
of units firm need to sale so that cost can be covered (Ayyagari, Demirgüç-Kunt. and
Maksimovic, 2010). Hence, if sales target is too high to achieve then in that case firm
may decide to make change in price of its products. It can be said that it depends on the
business firms that which of approach they selected for pricing of their products.
1.3 Factors affecting travel and tourism business
Buiness environment is the factor that have due influence on the business firms. There
are number of factors that have due influence on the profitability of the firms that operate in the
travel and tourism sector. Some of these factors that are relevant to Merlin entertainment are
explained below.
 Inflation rate: Inflation rate is the one of the most important factor that have influence on
the travel and tourism sector. It can be observed that inflation rate refers to the rate at
which price of products is changing in the market. Inflation rate have direct impact on
profitability of the business firms. This is because when inflation rate increase price of
products also enhanced. Due to increase in price of products people prefer to spend less

amount and due to this reason profitability of firms like Merlin entertainment declined to
great extent (Zarutskie, 2010). On this basis it can be said that inflation rate is the one of
the most important factor that have direct influence on the travel and tourism business. Poor economic condition of nation: Poor economic condition of the nation have heavy
impact on people sentiments to increase consumption of products. This is because when
economic growth declined in the nation then in that case profitability declined at fast rate
in the business. Due to this reason some times firms start curtailing their workforce and
more people become unemployed in their business. All these things put heavy impact on
spending power of people as less of them preferred to make heavy expenditure on the
leisure. Thus, it can be said that if economic condition of nation will be poor then in that
case it will suerly have direct and negative impact on people spending or saving
capability. Thus, if global and domestic economy are not in good condition then in that
case profitability of travel and tourism firm declined. Less savings and fear of unemployment: Less saving and fear of unemployment is the
reason due to which less profit is earned by travel and tourism firms. Many times it is
observed that because nation economy was in recession people adopt money saving
behaviour and due to this reason their spending on entertainment and tourism get reduced
(Ferguson, 2014). Apart from this, if an economy is in recovery stage then in that case
people have fear of being unemployed and due to this reason their main emphasis is on
saving of more and more amount of money. Hence, it can be said that less savings by
people and for of unemployment are one of the reasons due to which their spending get
reduced and firms operating in travel and tourism industry earn less profit in their
business.
TASK 2
2.1 Different types of management accounting information that can be used in business
There are different sort of management accounting information that can be used in the
business for making business decisions. Some of the specific type of management accounting
information that are commonly used by firms including Merlin entertainment are given below.

 Budget: Budget is prepared by most of business firms because in same assumptions of
cash inflow and outflow is made. There are different type of budget that are prepared by
the business firms like production, sales and marketing budget etc. All these budgets are
used by the business firms for making business decisions. It can be observed that in
Merlin entertainment also cash budget and sales as well as marketing budget is prepared
(Lins, Servaes and Tufano, 2010). This is because under these budgets cash flows are
pre-determined and firm try to receive and pay amount in line to determined values. By
doing so cash outflow is controlled to great extent by the business firms. In case it is
identified that it is possible that over expenses can be made in the business then in that
case on time action is taken to control expenses and in this way budget assist in making
business decisions. Variance analysis: Variance analysis is another technique under which difference
between determined value and actual performance is identified and on that basis it is
determined whether firm perform good or bad in its business (Ayyagari, Demirgüç-Kunt
and Maksimovic, 2010). In case of any element it is identified that variance is negative
then in that case steps is taken to improve firm business performance. Hence, it can be
said that variance analysis is the one of the most important method that can be used to
make business decision in right direction. Break even analysis: On the basis of breakeven analysis Merlin entertainment identify
that up to what number of customers it need to create in its business at determined price
level so that fixed and variable expenses can be at least covered in the business. It can be
said that break even analysis is the one of the most important method that can be used to
receive inputs that need to be taken in to consideration for making good business
decisions (What is a break even analysis?, 2017). It depend on the firm that which of the
method it used for making business decisions. Firms can use multiple methods to analyze
their performance and to receive inputs for making business decisions. There are multiple
alternatives that are available to the business firms and they must prudently select one of
the best approach to make business decisions.
2.2 Use of management accounting information as decision making tool
Management accounting information can be used as decision making tool by the business
firms. This is because management accounting information reflects the area or direction in which

there is need to do work. Use of management accounting information as a decision making tool
is explained below.
 Budget: In the budget when comparison is made areas where firm performance is weak is
identified. This acts as input about area where firm need to do work in order to improve
its business. Lack of control in context of Merlin entertainment can be observed in case
of increase in variable expenses or any other thing. Based on identified negative variance
research can be carried out and it can be identified that what are the probable reasons due
to which such kind of negative variance comes in existence (Irwin and Scott, 2010).
Thus, management accounting information that is received through budget act as
important tool that help managers in making prudent decisions. Variance analysis: Variance analysis is another tool that is used to obtain management
accounting information for making business decision. It is also considered as one of the
best way tha cann be used to find out area where work must be done to improve business
performance. Break even analysis: Break even analysis can be used to evaluate pricing strategy or
evaluating sales targets. If sales price is kept constant then it is possible that sales units
that need to be sold may be high. In case sales target is high then it is possible that
management and employees may find themselves unable to achieve target (Wong,
Mistilis and Dwyer, 2011). Thus, it can be said that break even analysis acts as tool on
basis of which management accounting information is generated and used to make
business decisions.
TASK 3
3.1 Interpreting financial statements of TRG Plc for the year of 2014 and 2015
Ratio analysis may be served as most effectual technique which provides high level of
assistance in evaluating and summarizing the financial aspects of firm. It is the ratio analysis that
help business firms in making business decisions. By using ratios business performance is
measured in proper manner and in different ways. By doing so areas where firm need to work is
identified and strategy is formulated to solve business problem. It can be said that there is huge
importance of ratio analysis for the business firms because by using same in accurate way

business decisions can be made by the managers. In this, with the motive to analyze monetary
performance of TRG Plc in relation to the year of 2015 over 2014 tool of ratio analysis has been
undertaken.
Ratios Formula 2014 2015
Profitability ratios
Sales Revenue 635 685
Gross profit (GP) 114 127
Net profit (NP) 67 69
EBIT 80 89
Capital employed (CE) 245 284
Total assets 424 468
Gross margin Gross profit / sales revenue * 100 17.95% 18.54%
Net margin Net profit / sales revenue * 100 10.55% 10.07%
Return on capital employed
(ROCE)
EBIT / CE * 100 32.65% 31.34%
Return on net assets Net income / total assets * 100 18.87% 19.02%
Interpretation: The above depicted table shows that GP margin of TRG Plc was 17.95%
& 18.54% in the accounting year 2014 and 2015. Such outcome shows increasing trend in GP
but growth rate is not highly significant. Hence, due to the high level of direct expenses TRG Plc
failed to generate high GP. Along with this, NP margin of TRG Plc declined from 10.55% to
10.07% at the end of 2015. Thus, by considering the overall performance it can be said that due
to high direct as well as indirect expenses TRG Plc was not good in 2014 & 2015. Hence, TRG

Plc is required to lay emphasis on undertaking budgeting technique which in turn helps in
making control on expenses and thereby enhances profitability aspect of firm.
Ratios Formula 2014 2015
Liquidity ratio
Current assets 29 38
Current liabilities 122 136
Inventory 6 6
Current ratio Current assets/current liabilities 0.24 0.28
Acid test ratio (Current assets -Stock)/Current liabilities 0.19 0.24
Solvency ratio
Debt 39 31
Equity 245 284
Capital gearing (Long-term liabilities/Equity capital
employed
0.16 0.11
Interpretations:
 Current and quick ratio: By doing assessment of balance sheet, it has been identified
that current ratio of TRG Plc increased from .24 to .28 times. However, as compared to
ideal ratio such as 2:1, liquidity position of TRG Plc was not good in both the concerned
years. Thus, it can be stated that TRG Plc failed to maintain enough current assets which
can be used for meeting obligations. Further, quick ratio of TRC Plc accounted for .419
& .24 times in the year of 2014 and 2015. Hence, in against to the ideal ratio such as .5:1,
outcome of TRG Plc’s quick ratio is lower. On the basis of such aspect, it can be depicted

that in the year of 2014 and 2015 company was not highly capable in relation to
converting its assets into cash for meeting obligations. Overall performance trend shows
that liquidity position of TRG Plc was not sound in 2014 and 2015.
 Debt-equity ratio: From financial statement analysis, it has found that debt-equity ratio of
TRG plc accounted for .16 & .11 significantly in the year of 2014 and 2015. By
considering such trend it can be entailed that TRG Plc has fulfilled most of its financial
needs from equity sources rather than debt. Besides this, as per ideal ratio, business unit
should issue 2 equities in comparison to 1 debt. Hence, overall performance and standard
shows that capital structure of TRG Plc was not good or optimal. Thus, company should
keep in mind ideal ratio while taking decision in relation to raising fund.
Ratios Formula 2014 2015
Efficiency ratio
COGS 521 558
Debtors 2 2
Creditors 51 56
Stock turnover ratio Cost of goods sold / Inventory 86.83 93
Debtors receivable period Trade debtors / Revenues * 365 1.15 1.07
Creditors payment period Trade payables / Cost of sales * 365 35.73 36.63
 Inventory turnover ratio: Graphical presentation shows inclining trend in the stock
turnover ratio of TRG Plc from 86.83 to 93 times. This in turn clearly shows that
inventory of TRG Plc was sold and replaced more frequently in FY 2014 and 2015.
Outcome of such ratio clearly indicates that manager of the restaurant unit managed its
inventory level more effectually.
 Debtor’s turnover ratio: Tabular presentation shows that receivable period in the year of
2014 & 2015 accounted for 1.15 and 1.05 days. Such trend exhibits that company

received payment from its debtor within the suitable time frame which in turn places
positive impact on working capital aspect.
 Creditor’s payment period: Outcome of ratio analysis presents that payment period of
TRG Plc increased from 35.73 to 36.63 days. In accordance with such aspect, such
restaurant unit was allotted with more time period in relation to making payment to
creditors.
By taking into account overall assessment, it can be mentioned that TRG Plc dealt or
managed both assets and liabilities in the best possible way.
TASK 4
Analyzing sources and distribution of funding for capital projects

CONCLUSION
From the above report, it has been concluded that cost and profit management is highly
essential in the travel sector for getting the desired level of outcome or success. Besides this, it
can be inferred that Merlin Entertainment Plc should make focus on undertaking either
penetration or competitive pricing strategy. This in turn helps firm in attracting large number of
customers and thereby make contribution in profit margin. Further, it has been articulated that
there are several factors which in turn closely influences profit margin such as seasonality, cost
etc. It can be seen in the report that profitability, liquidity and solvency position of TRG Plc was
not good in 2014 & 2015. Thus, business entity of TRG Plc is required to take strategic action
for making improvement in the financial aspects. Along with this, it can be stated that in the
concerned financial years business unit has made effectual use of stock. Thus, by making focus
on promotional aspects and undertaking budgeting technique TRG Plc can improve financial
position and performance.

REFERENCES
Books and Journals
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Ferguson, E.J., 2014. The power of the purse: A history of American public finance. 1776-1790.
UNC Press Books.
Gatti, S., 2013. Project finance in theory and practice: designing, structuring, and financing
private and public projects. Academic Press.
Irwin, D. and Scott, J.M., 2010. Barriers faced by SMEs in raising bank finance. International
journal of entrepreneurial behavior & research. 16(3). pp.245-259.
Lam, W., 2010. Funding gap, what funding gap? Financial bootstrapping: supply, demand and
creation of entrepreneurial finance. International Journal of Entrepreneurial Behavior &
Research. 16(4). pp.268-295.
Lins, K.V., Servaes, H. and Tufano, P., 2010. What drives corporate liquidity? An international
survey of cash holdings and lines of credit. Journal of financial economics. 98(1). pp.160-
176.
Wong, E.P., Mistilis, N. and Dwyer, L., 2011. A framework for analyzing intergovernmental
collaboration–The case of ASEAN tourism. Tourism Management. 32(2). Pp.367-376.
Zarutskie, R., 2010. The role of top management team human capital in venture capital markets:
Evidence from first-time funds. Journal of Business Venturing. 25(1). pp.155-172.
Online
What is a break even analysis?, 2017. [Online]. Available through :<
https://articles.bplans.com/break-even-analysis/>.