Finance And Funding In Travel And Tourism | Assignment

Finance And Funding In
Travel And Tourism

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1. Concept of CVP analysis and its importance in the financial management of
EUROCARIB .............................................................................................................................1
1.2. Analysis of pricing methods that EUROCARIB can use to determine the price:.............3
D1. Desire profit..........................................................................................................................5
TASK 2............................................................................................................................................5
2.1 Different types of management accounting information that could be used in
EUROCARIB..............................................................................................................................5
M2. Variance analysis helps in improving the performance of company: ................................6
2.2 Investment appraisal techniques as decision making tools: .................................................7
TASK 3............................................................................................................................................9
3.1. Financial statement of travel and tourism company............................................................9
M3. Appropriate Management Approaches..............................................................................10
D2. Collect and analyse the company financial statements......................................................10
D3. Concluding whether the company is financially stable in the long term on the basis of
ratios..........................................................................................................................................10
TASK 4..........................................................................................................................................11
4.1 Different sources and distribution of funding for development of new hotel ....................11
CONCLUSION .............................................................................................................................12
REFERENCES................................................................................................................................1
APPENDIX......................................................................................................................................2

INTRODUCTION
Finance is defined as the management of money and includes activities like investing,
borrowing, lending, budgeting, saving and forecasting. There are various sources available for
the firm that assist in getting adequate or sufficient level of finance for long term as well as short
term (Byrne, Sipe and Dodson, 2014). Finance is also important and necessary for tourism
industry in order to gain knowledge and information of the different concepts related to the
financial performance or condition of the business. Main purpose of this report is to identifying
the significance of finance and funding in travel and tourism organisation. In this report, given
organisation is “EUROCARIB TOURS” which is a major European tour operator in London
and focusing on Caribbean holidays. This study is divided into different parts which includes
importance of costs, volume and profit and use of management accounting information in travel
and tourism. This assignment is also cover financial statement of the tourism company and
different sources of new hotel development (Kurowski, 2014).
TASK 1
1.1. Concept of CVP analysis and its importance in the financial management of EUROCARIB
Concept of CVP:
Cost-profit-Volume analysis get applied for the motive of determining variation in costs
and volume that impact on operating income and profit of EUROCARIB. There are few
assumptions made within this procedure such sales price per unit is constant. In addition, it is an
effective planning tool which is used by the management in order to predict future volume of
activity, sales made, costs incurred and profit received. Through cost volume analyse, break even
point for different sales volumes and cost structures is analyse which can be useful for
EUROCARIB for making taking short- term economic decisions.
Importance of CVP:
CVP plays an important role to make financial decision for an organisation. CVP helps to
know the variables in cost and volume and its affects in operating expenses and net income. CVP
analyses help to know the relation between cost, sales and price. Financial management is a
process which involve planning, organising, controlling and monitoring financial resources for
the achievement of organisational goal (Chen and et. al., 2014.). CVP analyse is important in the
financial management of EUROCARIB because of the following reasons like- it helps to know
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the cost or expenses which occurred in the whole tour. It helps to know the volume, for a tour
operating company it is important to know the expenses involve in services which are provided
to tourist. By analyse the cost and volume EUROCARIB can take financial decision. CVP
analysis determines the how much changes in company's cost both fixed and variable, sales
volume and price affect a company's profit. Through CVP Analyses EUROCARIB can know its
fixed and variable cost. It these costs will incur more then profit margin will be less so company
tries to minimise these costs. There are following ways to minimise the cost like- be smart when
it comes to fuel means airlines can save money by fuel hedging contracts that secure a fixed
price for fuel over a specific period of time. If an airline has hedged a low fuel prices and when
fuel prices will increase they can get benefited greatly from being locked into the lower price,
sometimes for months or even quarters, consequently saving huge amount of fund. It shows the
effective financial management decision of the company because EUROCARIB is able to
minimise its fuel price and through it they can earn more profit or profit margin will increase.
BEV
Sales 800000
Fixed cost 120000
Contribution 600000
BEP 0.2
2

Sales Contribution BEP
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
BEP Analysis
Column H Column H
1.2. Analysis of pricing methods that EUROCARIB can use to determine the price:
Prices are the important factor for any organisation. Prices strategies are use to attract the
customers because if prices will low then more customers will attract and if prices are high then
customer will not attract. As customers wants the better products and services at low cost. If an
organisation has monopoly in the market then it can charge high price otherwise customers will
not attract and will not buy high price product (Hillier, 2016). Choosing the appropriate price
strategy is a challenge for the management of an organisation. Prices should be economical so
that it can match with the supply and demand of goods and services. Prices can vary upon a
period of time because of uncertain market conditions. For a tour and travel company, prices
matters a lot because customers are price conscious and they search for low prices with better
quality of product (Floyd, 2015). Customer have many alternatives in the market so they have
many choices and they will buy that product which is getting on low prices and excellent quality.
If EUROCARIB will maintain economic price with better quality of services than tourist will
attracts towards them. There are many pricing methods such as follows:
Marginal cost pricing:
Marginal cost pricing is practice of setting the price of a product to equal the extra cost of
producing an extra unit of output. It helps in determining the extra cost which will occur due to
adding additional tourist (Pricing methods, 2017).
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Particular Amount
Sales 800000
less: Variable cost 200000
Contribution 600000
Less: Fixed cost 120000
Profit 480000
Incremental pricing:
Incremental price is that pricing method which is used by the company to know the
incremental cost of a product. In this pricing method selling price can be determine by the
variable cost. EUROCARIB can use this method to know the incremental in prices due to the
variable cost. For tour and travel company variable cost can occur due to the changes in oil
price.
Break even pricing:
Break even pricing is the practice of setting a price point at which a business face the
situation of no profits or no loss and every company wants to cross its break even point as early
as possible so that they can earn profit. For example, EUROCARIB can achieve its break even if
minimum 20 tourist travel in the air plane and it is point where they will earn no profit or loss.
Total cost incurred in this point that is 1000 pound. But there are 30 tourist want to travel in air
plane and these extra 10 tourist will bring profit of 500 pound for EUROCARIB. It helps in
determining the price that is 50 pound which is needed to be charged from each tourist.(Gunder
and Hillier, 2016).
Mark- up pricing:
Mark-up is the ratio between the cost of a good or services and it selling price. It is
expressed as a percentage over the cost. EUROCARIB can use this price strategy to know the
selling percentage over the cost. This strategy is use when cost estimates can be made with
reasonable accuracy.
M1. Interpretation and analysing of pricing method:
Prices are matters for organisation as well as for the customers. EUROCARIB can use
different pricing strategies like- marginal cost pricing and it helps to know the extra cost incurred
in travelling for an extra tourist. Break even pricing method helps to determining the price which
4

is going to be charged from each tourist of EUROCARIB. These are the pricing strategies which
EUROCARIB wants to apply so that they can analyse and determine the appropriate prices in its
organisation
1.3. Different factors that will influences the profit EUROCARIB:
There are various factors which can influence the profits of EUROCARIB. Profit is the
main aim of any organisation to work. Without profits no one wants to work. Profit is that
situation when organisation covers its cost and after cost covering the remaining margin is
describe as profit (Keough, 2015). It is the difference between amount earned and amount spent.
Without sufficient profits margin organisation can not survive for a long time. There are various
factors which can influence the profit of EUROCARIB. These factors are:
Services:
Services can influence the profits when organisation does not provide appropriate
services according to the demand of customers. For EUROCARIB it is mandatory to provide
quality services to its tourists who is planning a summer holiday trip to a Caribbean Holiday
Resort. Services like: comfortable seat, proper cleanliness, food and water services etc.
Oil price:
High oil price can influence the profit of an organisation. For a tour and travel industry
incremental in prices can affect the cost. High Oil prices can influence the profit of
EUROCARIB. If prices will high then EUROCARIB have to increase the fare prices of tickets
and high fare prices can affect the holiday trip because it can reduce the number of tourist who
wants to travel. If number of tourist will decrease then it decrease the profit of EUROCARIB.
Local transportation:
Local transportation of the country can influence the profit of an organisation. Local
transportation of that country where the tourists want to visit, if local transportation cost will
high then it will reduce the profit of EUROCARIB. Tourist have to pay more price for
transportation and it can affect the holiday trip. Number of tourist can be decrease because of
more transportation expenses so it can influence the profit of company.
There are various factors which can influence the profit of EUROCARIB and
EUROCARIB should try to control it for the high profit margin (Kumar, 2016).
D1. Desire profit
Particular Amount
5

Number of tourist 90
Sale prices per tourist 120000
Less: variable
charges 36000
Contribution 84000
Fixed cost 144000
Total number of
profit -60000
TASK 2
2.1 Different types of management accounting information that could be used in EUROCARIB
Management accounting information is basically focused at internal managers of the firm and
also the decision makers. It provide the relevant financial data to the manager of EUROCARIB
so that they make the effective business decision for the company. Also helps the them to build
the policies for the firm. The different types of management information are as follows:
Variance analysis:
Variance analysis is used by the company to calculate the fluctuation of actual outcome
from the targeted outcome. The manager analyse the reason of variances and take right decision
to control it. The manager of the firm always consider the variances while preparing the budget.
This analysis helps manager to compare the standard budget with actual budget and if they find
variance in the cost then they can take action accordingly. For Example, EUROCARIB planning
a trip for Europe for 15 people, the estimated budget is 20000 pound but the actual that they
occurred 15000 pound, so there is favourable variance of 5000 pound for company.
Formula:
Variance analysis: Actual cost- budgeted cost
Particular actual cost budgeted cost Variance
Trip for 15
people 15000 20000 5000(f)
Budget report:
This is used by the EUROCARIB to control the production cost. It provides the roadmap
and required activity to achieve the business objectives. The manager of the firm used this tool
so that they may compare the performance activity of the company with the budget to take the
correct action for the organisation.
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Cost Report:
Cost report is used to show the expenditure and the income of all the projects of the
company (Leigh and Blakely, 2016). With the help of cost report the manager of the
EUROCARIB get to know that which project gains the high profit and which incurs loss.
M2. Variance analysis helps in improving the performance of company:
Variance analysis is process of measuring and analyzing the difference between the
actual and estimated budget. In management accounting, variance analysis may have favorable
that is cost is lower than the expected or adverse which revenues are lower than expected. It
helps the managers to identify the cause of variance between the actual and planned budget. This
evaluation helps the managers to take corrective action where needed. This analysis can be
helpful for the EUROCARIB also to improve its performance and generate more revenues. For
an example, EUROCARIB is planning a tour to Asian continent countries for the group of 30
people. There managers have estimated cost of trip would be around 95000 pound but the actual
cost they occurred 90000 pound. So the deviation of 5000 pound is favorable for the company.
This means company have more revenue in compare to the cost of trip. So it helps in evaluating
the cost by previous trips and planned the future trips accordingly. So excess cost can be cut and
more revenue can be generated. As excess cost will reduce and it will help in improving the
financial performance of company.
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2.2 Investment appraisal techniques as decision making tools:
(Source: Investment appraisal techniques)
Investment appraisal is a techniques which is used by the company to determine the
quality of an investment. It's purpose is to evaluate the practical projects, portfolio decisions and
the value that firm generates. EUROCARIB used the investment appraisal techniques to place
the financial value on profit so that the cost of the company were justified. Following techniques
which were used by the company as a decision-making tools:
Cash flows amount is million
Year Cash flows PV of 10% Present value
0 -25 1 -25
1 12 0.9090909091 10.9090909091
2 15 0.826446281 12.3966942149
3 10 0.7513148009 7.513148009
4 8 0.6830134554 5.4641076429
Total PV 36.2830407759
NPV 11.2830407759
IRR 31.17%
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Payback period 2.4years approx.
Pay back period:
Payback period is the easiest techniques of the investment appraisal, which is always
expressed in years. It is the length of time required to recover the cost of an investment. It is
considered as a decision making tools as it helps the EUROCARIB to take decision in which
year they may recover the cost of investment. For example, If EUROCARIB is planning to
undertake a project requiring initial investment of £25 million for their new hotel. It will take
around 2.4 years approx to cover its total investments. It is more reliable aspects for the
Eurocarib to determine their capital and make investments in its new projects.
Internal rate of return(IRR):
It is commonly used to ascertain the expected return from an investor for the project. It is
the interest rate at which the net present value of all the cash flows ( both positive and negative)
from a project or investment equal zero. It helps in determination of attractiveness of a project. If
IRR will more than the required Internal rate of return then project is desirable. If it is low then
the requirement then project will be rejected. From the above calculation, it has been found that
EUROCARIB is making a total investments of 25 million from which they are getting a total of
31 % of return after 4 years. It will be more suitable option for the company to make investments
in their projects.
Net Present Value(NPV):
The difference between present value of cash inflows and out flows over the period of
time is known as Net Present value(NPV). It is used as a decision making tool as it more
effective process to evaluate the company projects. It is considered as a effective tools as it uses
the discounted cash flow analysis. For example, the NPV of a project which requires an initial
investment of 25 million for four years. They are going to get a decent amount of value after four
year as 11 million. It means that the company is not so sure that they are able to earn sufficient
amount of profit in coming four years. Hence, it would be easy for them to go for some other
options that can help them to choose right methods for the calculation of reliable profitability. In
this case NVP is 11million pond which is not so reliable, when NPV is positive then the firm
project is accepted and when it is negative then the project is rejected. According to it
EUROCARIB can take financial decision for the investment in the projects. (Lu and Yu, 2014).
9

TASK 3
3.1. Financial statement of travel and tourism company
Trafalgar tourism is one of the finest travel and tourism company of United Kingdom.
Trafalgar provides luxurious hotels and comfort vehicle for travelling at reasonable rate. Here is
the proper analysation of its financial performance by analysing the profitability ratios, current
ratios and investment ratios.
Ratio Formula 2017 2016
Liquidity ratio
Current ratio
Current Assets/ Current
Liability
181957 / 15307 =
11.89:1
166158/15969 =
10.40:1
Total Asset turnover ratio
Net sales/ Average total
assets
92682/291431=
0.318
109181/291431
= .374
Return on Equity Profit after tax/ Net worth
9794/239752 =
0.0408
-511/192563 =
−0.00265
Current ratio =
Current ratio give the sense of efficiency of a company's operating cycle or its ability to
turn its product into cash.
Working note:
Current Assets For 2016 = 166158 and Current Liability : 15969
The company have very less expenses on its liabilities the ratio shows that 11.89 assets
over 1 liability, the reason being company is not using its much of assets.
Total Asset turnover ratio:
It measure the value of a company's sales or revenues generated relative to value of its
assets. It shows the efficiency with which company is deploying its assets in generating
revenues. It can be calculated as:
Working note:
Net sales for 2016 = 109181, Average total assets for both year = 315833+267029/2 = 291431
Total Assets Turnover: This data shows that company is not using its assets to generate
better revenues. As company is generating only 37.4% of sales from its assets. In 2017 the
10

company assets ratio is lower than 2016 which clearly shows company's assets are not used in
effective way.
Return on Equity:
It is a measure of the profitability of a business in relation to book value of shareholders
equity. It can be calculated as below:
Working note:
Profit for the year 2016 = (511) and net worth (2016) = 192563
As return on equity is negative for the year 2016 for company and negative equity means
company bear some losses and expenditures.
Profit For the Year 2017 = 9794 and net worth = 239752
In compare to 2016 return on equity is positive which shows some financial stability for
the particular year. It shows company raised some funds from public issues also.−0.00265
M3. Appropriate Management Approaches
Management is an art of getting things done through others. To support this art there are
approaches which helps manager of company to achieve their goals. As this can help the
EUROCARIB to achieve the goals efficiently. The social system approach helps in
understanding the behaviour of groups and individuals. And this will help EUROCARIB because
the company is in tour and travel industry where different kinds of people come together for a
tour. This will help the management to take decisions in interest of all parties rather than any one
group. Apart from this, decision approach is also there which will help the management to take
quality decisions.
D2. Collect and analyse the company financial statements
According to the calculated ratios it has been analysed that quick ratio of the company
has increased up to 0.38 from 0.62 which is good for the organisation's performance. Current
ratios of the organisation has decreased as compare to previous it is declined up to 0.59 from 2.
The financial statements of the company has provided all these information which is used to
assess actual organisational position (Wey, 2015).
D3. Concluding whether the company is financially stable in the long term on the basis of ratios
From the calculation of ratios it has been concluded that Liquidity of the company is not
increasing because current ratio for 2016 is 10.4 and for 2017 is 11.89 which means the company
11

have good liquidit but company is also not using its current assets in effective way. Company
needs to manage its liquidity effectively to achieve higher profits. Return on equity ratio has
increased from −0.00265 to 0.0408 which is a good sign for the company. As there is not much
variance in the ratios and return on the company's equity has been increased from previous year
so it can be said that the company will stable financially in forthcoming years. The return on
equiity is increasing which shows company earning good profits. Therehore company will
enough funds for upcoming years. (Wynn, 2017).
TASK 4
4.1 Different sources and distribution of funding for development of new hotel
EUROCARIB is intending to gather the accurate amount fund from external and internal
source of funding. It could be applied in order to decrease interest rate and increase long run
sustainability at marketplace. Beside this, EUROCARIB run to make its own hotel in the
Caribbean, having obtained a suitable site. That will cost £25 million. There is more requirement
to apply this effectively which could assist them to maintain better reputation at marketplace.
There are various internal and external source of funding which are described as follows:
(Planning Commission, 2011):
Internal Source-
Internal Source of capital is the capital which is generated internally by business. These
are as follows:
Retained earnings:
It is refer as one of the main source which can be applied in order to gather sufficient
amount of capital for developing new hotel. In the balance sheet of company, retained earning
recorded as a part of shareholders' equity. It is calculated by adding net income and subtracting
any type of dividends. Therefore, remaining value is essential for the company to used this in
their expansion.
Debenture:
It is identify as an effective process which is used by company in order to rising liability
from public by issuing debenture. The business entity is needed to pay sufficient quantity of
interest rate to the public in relate with those liability value.
Owners investment:
12

It is also introduce as an effective way of gathering accurate amount of fund from the
internal source such as personal savings. It is taken by the business owner within an enterprise
for the purpose of operating business operation in an effective and systematic manner. It is
considered as a safe side investment for owner as one does not need to pay any interest to
outsiders and no worry of repaying loans. The investment will help to owner to establish their
own business as well the it will develop the tour and travel industry also. (Zheng, and et. al., 2014).
External Source:
An external source of business is the capital generated from outside the business, which
are described below:
Bank loan:
It is identify as one of the essential and important source of funding which is used by
company to gather accurate amount of fund from developing their new business in another
country. There is less limitation in bank rates which is imposed by lenders. Capitals are easily
accessible to the enterprise for the accomplishment of their future goals more effectively.
Basically bank loans are the most considerable source of funding for setting a new venture. As
main reason for this is, it can be availed easily against the collateral security. (Ozanne, Biggs and
Kurowski, 2014).
CONCLUSION
As from the above report, it can be concluded that the company EUROCARIB is
planning a trip to Caribbean Island, for that company have analysed the different factors that
could affect the profitability of company. The financial statements for two years have also been
evaluated, the data shows the stable situation of the company. Somewhere it has been from the
statements that company is not using its current assets effectively due to this current ratio has
risen up. Apart from this various kinds of internal and external sources have also identified for
raising the fund for company to start new projects.
13

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APPENDIX