Tourism Industry Financial Analysis

This assignment delves into the financial landscape of the tourism industry. It examines various financing methods employed by tourism businesses, particularly in the context of climate change adaptation and sustainable development. The analysis considers both public and private sector roles in shaping the financial sustainability of tourism, drawing upon relevant research and case studies.

Finance and Funding in the
Travel and Tourism Sector

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Task 1...............................................................................................................................................1
P 1.1 Explain the importance of costs and volume in financial management of travel and
tourism businesses..................................................................................................................1
1.3 Analyse factors influencing profit for travel and tourism businesses:.............................3
Task 2...............................................................................................................................................5
A. Explaining different types of management accounting information that could be used by
Akaglo Tours Company(ATC);..............................................................................................5
B. Use of investment appraisal techniques in travel and tourism company...........................6
Task 3...............................................................................................................................................7
A. Interpretation of financial statements covering ratios.......................................................7
Task 4...............................................................................................................................................9
A. Sources of funding for the business...................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Finance and funding has significant role in the travel and tourism sector in achieving
tasks in effective manner. Present report deals with ATC (Akaglo Tours Company) engaged in
travel sector and is planning holiday trip to Maldives. Cruise yacht and beach chalets will be
provided and as such, per tourist cost will be clarified. Moreover, importance of CVP analysis,
pricing methods are provided which will help company in estimating price. Management
accounting information is also important for taking effective decisions. Use of capital investment
techniques are also listed assisting in decision-making. Financial ratios are also computed for
Thomas Cook Group Plc. Furthermore, sources of funding are also listed in this report.
Task 1
P 1.1 Explain the importance of costs and volume in financial management of travel and tourism
businesses
Financial management is crucial aspect of each business effectively and organisational
professionals need to ensure that, all financial activities is being managed within the business in
more effective manner. So there are some appropriate aspects of businesses described as below:
Importance of costs:
There are several costs is existed in Akaglo Tour Company in order to operating of their
business functions in proper format:
Direct costs: this is the price in business which is directly associated to the costing of
each production of particular products and services effectively. In case of ATC organisation,
they also have some specific direct costing occur at the workplace in order provision of their tour
and travelling services in the industry in efficient form (Bellavitis and et.al, 2017). There are
some direct costs concerned to the business which is depreciation costs, administration
disbursals, insurance costing, interest and all other utilities which is using in furnishing travelling
facilities to their client in effective form. These costs are must be managed by finance manager
of the company in respect to reduce expensed for the business.
Variable costs: Variable costs are those costs which is associated with each production
and service providing business in more effective form. It's frequently changes as per the changed
in the proportion of outputs. As its shows from its name, variable
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Fixed costs: Fixed costs are those cost that does not change with an increase or decrease
with the production of goods and service produced by the company.
Indirect costs: Indirect costs are those cost which are not directly linked or associated
with cost of production. For example general and administration expenses.
Profit: For Betterment of the profit the Akaglo Tours Company needs to identify the
sales changes in changes of sales directly impact on company gross profit. There are several
factors which are directly impacted on sales (Gurtner, 2016). For example internal and external
factors of the company to reduce the impact of that factor Akaglo Tours Company can use
several methods like SWOT analysis and PESTLE analysis.
Cost volume: The cost volume defines that reports a breakdown of costing in order to
getting more relevant issues related to costing in the business. It has been seen that, costing
volume assessment is most necessary things for Akaglo Tours Company organisation in order to
estimation proper costing of the company in industry.
Profit analysis: Profit assessment is one of the most factor for Akaglo Tours Company in
order to analyse profitability of the business in order to examine proper profitability of the
organisation in travelling company.\
In the context of ATC, CVP analysis is highly effectual which helps in reducing cost and
thereby maximizes profit. Moreover, when firm offers products or services to the large number
of customers then it attains high economies of scale. Along with this, fixed cost also decreases
when travel firm offers tour packages to more customers. Hence, it can be presented from the
evaluation that CVP analysis is highly effectual and helps in doing effectual financial planning.
P.1.2 analyse pricing methods used in the travel and tourism sector:
Pricing methods are the monitoring tools which can calculated the price of goods and
services by considering all factors (Internal and External). Akaglo Tours Company needs to
identify which pricing strategies are useful for firm vision expansion and their objectives.
The real meaning of price to be tourist can be context by actual charges of accommodation
facilities cost. For Akaglo Tours Company there are some recommendations pricing strategies :
1. Cost Plus Pricing: Cost plus pricing based on the cost for example direct material
cost, direct labour cost and overhead cost. Akaglo Tours Company takes advantages of this
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pricing strategies (Petrova and Hristov, 2016). In this method the total cost (profit) as is added to
the total cost of the set price.
For the calculation of cost plus pricing Akaglo Tours Company need to identify average variable
cost and mark-up percentage.
Total expenses of the Akaglo Tours Company ÷ NO.of packages offering by the Akaglo Tours
Company
Price :cost per unit ( variable cost * profit of markup%)
2. Competitive Pricing: competitive pricing refers to setting the price of a product or
services according to their competitive company. Akaglo Tours Company need to identified their
competitor price which can be aggressive in the market and make the differences between other
competitor firms. Competitive pricing get directly influencing the customers and making the
competitive advantage in the market. Competitive pricing can be calculated on by calculating the
price index of the product as compare to their competitors .
3. Penetration Pricing: In highly competitive environment in tourism industry customer
can choose which company provide better services or accommodation which perfectly suits their
budget. Penetration pricing is a method which company offers a new product or services which is
lower than the other competitor. Akaglo Tours Company can offer penetration pricing to attract
more future prospects to the company (Chen, Tsai and Liu, 2018). By setting the lower prices
Akaglo Tours Company can capture the market share in the industry and enhance the advertising
of the company making a goodwill for the customer’s mind. By penetration pricing company can
built loyalty among the exist of future prospects and in future company get desired profit from
them. In setting of lower price Akaglo Tours Company can create advertising of the company
totally free and attract more prospects toward the using of company services.
4. Seasoning pricing: In peek season company Akaglo Tours Company gets desired
profit and for off season company should use the mix of pricing. It is a clever strategy for the
company. Akaglo Tours Company can charges the different prices of the product and services
depending upon the tourism season which vary from location to location. By setting seasoning
pricing Akaglo Tours Company can attracting more customer’s to use of the services (Boskov,
2016).
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By studying all the pricing strategies it can be identified that penetration and competitive
pricing strategies needs to be adopted by the Akaglo Tours Company(ATC).both such pricing
strategies directs the firm for gaining the future prospects and retaining the existing customer’s.
These strategies make competitive advantage from the other firms and develop to loyalty of the
customer’s which take edge in the competition.
1.3 Analyse factors influencing profit for travel and tourism businesses:
1. Seasonal variations : In context of tourism industry seasonal factors plays a major role
in the company profit margin. Seasonality in tourism industry means a temporal imbalance of in
the phenomenon of tourism which are expressed into number of visitors and expenditure of
visitors, transportation modes which directly impacted on the company profitability. Due to
seasonality variations demand of hotels and resorts are directly impacted. During the seasonal
variation company gets to offer discounted or attracting prices for the customer to reduce the
impact of seasonality factor.
2. Political Factors: government rules, policy regulation directly impact on the company
cost structure which plays a major role in enhancing profit. Tourism is the emerging industry of
any country . For example if ruling government change result may be changes in taxation policy
in the tourism industry and that directly impacted on the company structure and the financial
position of the company (Van der Sterren, 2017). Political factors contains current tax slab,
policies, rules, regulation which directly impacted on incurred of charges, wages and expenses
etc. This sort kind of factor is state of nature that Akaglo Tours Company cannot take courses of
action. Political stability and effort towards the tourism industry shows betterment profit of
Akaglo Tours Company. If government promotes tourism that result will be more tourist opening
in the country that will helpful for the tourism and hospitality industry.
3. Bad Debt: bad debt shows the excessive side of liabilities as compare to assets side
which is not ideal situations for the organization. level of bad debt indicates the organizational
profit. Bad debt is the debt which is not collectable. sales on credit usually allows increase of
sales but high level of bad debt directly impacted on organisation financial structure and result
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will be the reduced profit in comparison of desired profit. For avoiding bad debts Akaglo Tours
Company should focus on six steps as are follows:-
1. Assess customers creditworthiness by considering lower credit limit..
2. Making and communicate the clear terms and conditions with the customers.
3. Sending and checking the invoice promptly.
4. Involving the professional financial advisor for the auditing of financial records to
reduce the impact of bad debt. Financial advisor develop the basic credit
framework of the company.
4. Current trends: In the competitive environment of the hotel industry trend and
expectation level of the customer’s are rapidly changes (Arbogast, Deng and Maumbe, 2017.).
That directly impact on the organisational profit. For instance: customer’s wants to stay in
luxurious hotels and enjoy service, accommodation for that they want to paid affordable price.
Thus, profitability of the company is negatively affected. In emerging industry of hotels there are
growing options for lower budget travellers that diversified the desired profit of the company.
For facing the current trends Akaglo Tours Company need to identify the flexible strategies
which reduce the impact of the current trends.
Task 2
A. Explaining different types of management accounting information that could be used by
Akaglo Tours Company(ATC);
Management accounting information concerned with the provision and utilization by the
manager for forecasting the company strategies. This comes in the form of financial-ratios,cost
accounting, variance analysis, budget forecasting (Ndivo and Manyara, 2016).
1. Forecasting: Akaglo Tours Company need to identified the basic strategies planning to stay in
competition. Objective of forecasting process is predicted the future outcomes of the company
and predict future outcome action and it need to be identified all courses of action and state of
nature in the company. Akaglo Tours Company can forecasting the activity by the taking the past
record of the company and analytical analysis of the past financial records of the company taking
of forecasting trends analysis takes past revenues sales and past financial records of the
company.
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2. Budgeting: the forecasting process making a raw model of the company and it can be build
for anticipated revenues in the futures. Once forecasting process is completing then second
process of budgeting can be started. Budgeting process sectioned capital money for the future
activity and operations. Estimation of the future costs and expenditure allocation can be
calculated.
3. Variance analysis: comparing the actual realized activities expenses with the pre determined
budget expenses. Akaglo Tours Company need to identified the gap between actual performance
and standard performance (Twining-Ward, Li, Bhammar and Wright, 2018). Variance analysis
contains man hour, machine hour, wages, standard project estimation and compare with the
actual performance. Akaglo Tours Company can anticipated the standard profit and standard
expenditure which incurred in the future.
4. Ratio analysis:Akaglo Tours Company can calculated liquidity and solvency of their
organizational structure and determine the company ability to pay long term and short term debt
of the company.Ratio analysis assist the organization to the optimum utilization of resources,
inventory and raw material which help to Akaglo Tours Company financial management in
decision-making process.
B. Use of investment appraisal techniques in travel and tourism company
There is importance of investment appraisal techniques in tourism sector. ATC Company
is required to use capital investment methods while planning to invest in the project. The
techniques are NPV (Net Present Value), ARR (Annual Rate of Return), IRR (Internal Rate of
Return) and payback period. Organisation should use these techniques so that it may invest
money in high yielding projects (Shone, Simmons and Dalziel, 2016). The use of investment
appraisal techniques are as follows-
NPV
This is useful technique which provides clarity about the profitability aspect of the
project. It is the difference obtained between cash inflows and outflows and as such, potentiality
of investment can be judged. The use of NPV is much relevant to ATC Company so that it may
garner profits by investing in the Maldives trip. This technique will provide clarity to take
enhanced decision by the management. It will provide clear picture to company whether targeted
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profit will be achieved or not. Moreover, NPV also imparts inherent risk associated by investing
in the project. Thus, it is quite useful capital investment technique to extract benefit regarding
investment. The formula of NPV
= Total discounted cash flows - Initial investment
Year
Cash inflow (in
£)
PV factor @
10%
Discounted cash inflow
(in £)
1 50000 0.909 45454.5
2 62000 0.826 51239.7
3 57000 0.751 42824.9
4 76000 0.683 51909
5 90000 0.621 55882.9
Total discounted cash
inflows 247311
Less: initial investment 170000
NPV 77311.1
IRR
IRR is a discounting rate derived from NPV which makes all cash flows of project equal
to zero. It implies that how much return will be generated by investing in new project. This will
help ATC Company to make effective decision regarding investment (Stylidis, 2016).
Attractiveness of project is clarified by using IRR. Major advantage is that IRR depends upon
cash flows provided by NPV and as such, better profitability can be assessed. It is recommended
by market analysts that higher IRR is preferable and company can invest in the project.
Furthermore, IRR considers the concept of time value of money while assessing attractiveness
and effectiveness of project. The formula of IRR
= Net cash flow / Discounting rate * Number of time periods – Initial investment
Year Cash inflow (in £)
0 -170000
1 50000
2 62000
3 57000
4 76000
5 90000
IRR 25%
ARR
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ARR is a capital investment technique based on profits. This implies that average profits
are calculated rather than using cash flow (Accounting Rate of Return (“ARR”), 2018). ARR
provides complete overview of accounting return for new project. It is used to meet targeted
return likely to be provided by investing in the project. The main usage of ARR is that it
provides percentage return of project which can be easily compared with targeted return.
Moreover, whole project's profitability is imparted by using this technique. It is useful technique
as it focuses on shareholders' perspective and as such, overall profitability of the project is
assessed. Thus, it is quite useful method to evaluate project. The formula of ARR =
Average net profit / Initial investment.
Payback period
It is used to assess how much time will be taken by project to yield return. It implies that
project is evaluated on the basis of time. If less payback period is arrived, then investment should
be made by company as it provides clarity that returns will be generated within stipulated time. It
is useful for attaining liquidity aspect of the project. Another use of payback period is that
focuses on risk associated with the project. Furthermore, it is focuses on quick recovery of
invested amount and as such, inherent risk can be evaluated. The formula of Payback period =
Initial investment / Net cash inflow or A + B / C for uneven cash flows
Payback period method is highly effectual which helps in ascertaining time period within
which initial investment will be recouped. Referring payback method business entity would
become able to do profit planning more effectually. However, such method of investment
appraisal presents solution without considering time value of money concept which has high
level of importance in the present times.
Computation of payback period
Initial investment: £170000
Year Cash inflow Cumulative cash inflows
1 50000 50000
2 62000 112000
3 57000 169000
4 76000 245000
5 90000 335000
Payback period: 3 + 1000 / 76000
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= 3.01 years
On the basis of assessed outcome business entity will recover initial investment within the
period of approximately 3 years. Hence, after such period firm would become able to generate
profit margin.
Task 3
A. Interpretation of financial statements covering ratios
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in millions
Particulars 2017 2016
Revenue 9007 7812
Cost of sales 7014 5990
Gross profit 1993 1882
Operating income 267 220
Interest expense 147 146
Other (expense) -74 -32
Profit before taxes 46 42
Income tax provision 34 33
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Net income 12 9
Other income 1 3
Net income 13 12
Earnings Per Share 0.01
Basic 0.01 0.01
Diluted 0.01 0.01
Weighted average shares
Basic 1532 1530
Diluted 1536 1531
EBITDA 431 404
It can be interpreted from the above financial ratios of Thomas Cook Group Plc that it has
overall good financial health.
This is evident from the fact that profitability ratios are good enough.
Starting with Net profit ratio was 15 % in the year 2016 but was reduced by 1 % in next year.
This means that organisation has to control upon its expenses and also requires implementing
well-structured strategies in order to inject net profit up to high extent.
This will help company to have enough profits at its disposal.
Furthermore, Return on Assets ratio is quite steady as in both the years, it was 19 %.
This implies that assets are being utilised in effective manner to generate sales. Liquidity ratios
provide clarity whether firm will be able to pay-off short-term liabilities within stipulated time or
not.
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Current ratio of Thomas Cook Group Plc in 2016 was 0.57 but it was reduced to 0.52 in 2017
financial year.
The ideal ratio is 2 : 1 and it shows that firm has less current ratio.
It will have difficulty in paying short-term obligations.
On the other hand, quick ratio was 0.52 in 2016 and 0.39 in next year which implies that firm
will face difficulty in paying extreme short-term liabilities.
Efficiency ratios are quite useful as they clarify how efficient company is in generating revenue.
Inventory turnover ratio provides how quickly company is using its inventory.
It can be interpreted that ratio in 2016 was 159.73 in 2016 and 165.04 in next year.
This implies ratio is increased and stock is not properly utilised.
Debtors turnover ratio is increased which means that credit policies need to be effective so that
payment can be recovered.
On the other hand, EPS is provided in 2017 while, no earnings were garnered in 2016.
Dividend payout ratio is provided in 2017 which means that company has earned profits and
shareholders are benefited by it.
Task 4
A. Sources of funding for the business
The internal and external sources of funding are as follows-
Internal Sources
1. Retained Earnings
This is quite useful source of raising funds internally. ATC Company can use retained
earnings to construct new hotel in Maldives and which will be useful for it (Li, Wu and Guo,
2017). Profits obtained from the previous year can be used and some percentage can be
transferred to retained earnings. Moreover, remaining profits may be distributed to shareholders
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on the shares subscribed by them. This cost of constructing new hotel may be applied by using
retained earnings as a source. It is advantageous as company can channelise earnings for future
use. However, shareholders are disheartened as no dividends are paid.
2. Sale of Assets
This is another good internal source by which assets can be sold and amount can be
invested with much ease. Generally, fixed assets that become obsolete with passage of time can
be sold. This is good source of producing funds as after long time assets loses their value. Thus,
they could be sold and money can be utilised by organisation. ATC Company can sell-off its
assets and generate money to be invested in project (Ivanovic, Milojica and Roblek, 2016). It is
advantageous as outdated machinery can be sold and amount can be realised. However, lower
amount is garnered because correct value is not ascertained.
3. Share capital
Raising funds through issuing shares is common source of internal finance. This type of
financing can be availed by issuing equity shares by the organisation. ATC Company can extract
benefits by raising funds through shares. This is one of the safest method of raising capital as it
does not contain any liability to repay the debt. Shareholders are given dividends on the amount
of shares subscribed by them. Thus, firm can initiate funds and can apply it for building hotel in
effective manner. Main merit is that no liability arises to pay in future to shareholders. However,
it is not cheaper source of finance.
External Sources
1. Bank loan
Taking loan from bank is common external source of funding. ATC Company can take
loan and as such, can fulfil its requirement. Generally, monthly instalments are required to be
paid along with interest accrued on the same. Bank also analyses debt paying capacity of
company before giving loan. In this relation, ATC Company can easily avail loan from bank as it
has good solvency position. Thus, it can be used by organisation to raise funds in effective
manner (Hess and Kelman, 2017). Main advantage is that it is cheaper source as compared to
equity. However, debt burden increases as principal amount is to be paid along with accrued
interest.
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2. Angel investors
This is another good external source of availing funds. Angel investors are type of
investors who provides funds to company by taking in return some sort of ownership in the
business. This means that ATC Company has to provide percentage of ownership to the
investors. Moreover, angel investors provide valuable advice to the organisation and as such,
business may flourish. Thus, firm can approach to angel investors and raise funds for
constructing hotel.
Advantages
 No fixed financial burden
 Offers additional assistance in legal matters etc along with monetary aspects.
Disadvantages
 Interference in decision-making
 Ownership in shares of company
CONCLUSION
Hereby it can be concluded that finance is required in the travel and tourism sector for
accomplishing activities in the best possible way. CVP analysis is quite useful for estimating
price of per tourist in the package. Moreover, management accounting information is also helpful
in taking effective decisions by the management. Pricing methods are also important to set
correct price and earn profits. Furthermore, financial ratios clarifies regarding performance of the
organisation and as such, it provides clear picture whether it is earning profit or not. Thus, it can
be said that finance is required in travel sector to accomplish tasks quite effectually.
REFERENCES
Books and Journals
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