Analysis of The Restaurant Group's Financial Performance

This assignment delves into a comprehensive analysis of The Restaurant Group (TRG)'s financial performance. It examines key factors influencing profitability, such as demand, selling price, cost structure, and external economic influences. The report evaluates TRG's performance in 2016, highlighting challenges faced and the company's ability to maintain liquidity and solvency despite reduced returns. Additionally, the assignment incorporates various financial ratios and industry benchmarks for a thorough assessment of TRG's financial health.

FINANCE AND FUNDING IN
TRAVEL AND TOURISM

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Explain the importance and cost and volume in financial management................................1
1.2 Analyze pricing methods in travel and tourism sector...........................................................4
1.3 Analyze factors influencing profit level.................................................................................5
TASK 2............................................................................................................................................5
2.1 Explain different types of management accounting information in travel and tourism
business........................................................................................................................................5
2.2 Assess the use of management accounting information as a decision making tool...............6
Attached in PPT...............................................................................................................................6
TASK 3............................................................................................................................................6
3.1 Interpreting travel and tourism financial accounts.................................................................6
TASK 4............................................................................................................................................8
4.1 Analyze sources and distribution of funding for the capital projects....................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
Every business whether operates in profit motive firm or service rendering organization
need money to operate their functions successfully with no hazards. Although there are
numerous choices available to an entity for fund acquisition such as bank borrowing, debentures
and equity, still, making an appropriate balance among all is necessary for managing solvency.
Merlin Entertainments Plc (MEP) is a UK based entertainment organization that is currently
operating at around 115 tourist attractions in above 23 countries. The present report targeted at
presenting the use of various popular managerial techniques such as pricing decision, cost
volume profit relationship, budgeting, ratio analysis and others. Moreover, lastly, it will present
sources of funds from where business can extract required amount of capital for satisfying their
monetary need.
TASK 1
1.1 Explain the importance and cost and volume in financial management
Merlin Entertainments Plc (MEP) is a UK based entertainment organization that is currently
operates in 3 segments, Midway Attraction (indoor attractions in city), Resort Theme Parks
(accommodation, rides and shows) and Legoland Parks (LEGO themed based accommodation,
shows and rides). It is a profit-oriented public company that operates so as to have maximum
return. Revenue and costs are the two important elements that decide profitability of the
organization. Thus, assessing relationship between both the factors is important for the
organizations. In current period, challenging tourism sector, market competition, rising cost
pressure, inflation and others are several key factors that greatly affect its return.
Cost-Volume–Profit (CVP) is the best way to find out that how changes in the volume
and costs will affect the return of the organization. The technique is primarily concerned with
examining the impact of total sales volume and costs over the operational profitability (Weiss,
2010). Fixed costs include expenses which does not change i.e. depreciation, insurance, rent etc
whilst variable cost encompasses expenditures which directly changes with the production level.
Thus, with its use, MEP’s managerial team can easily determine that how their company’s
operating return will be changed as a result of change of different selling price, changing demand
and both the variable and fixed cost. The method also facilitates them to identify the most
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beneficial composition of sales of two or more items in their product portfolio that will give
maximum yield. The mechanism is based on certain key assumptions, provided below:
 Costs are of only two types, variable or fixed.
 Per unit selling price, variable costs and total fixed cost (TFC) does not changes.
 Company is able to sell all the units whatever they produce.
Formula:
PX=VX +TFC + profitability
Here , X : Number of units
P :selling price per unit
V :Variable cost /unit
Importance of cost−volume profit mechanism
Contribution margin: Contribution is the excess or surplus of total revenues over the
total variable costs. In other words, by what amount, MEP’s generate sales above the TVC is
known as contribution (Choo and Tan, 2011). In order to fulfil the corporate goal of high return, it
is necessary for the enterprise to ensure that contribution exceeds its TFC. With this, business
can also find out contribution each unit by allocating total contribution margin to the units
produced.
Contribution=Sales – TVC
Unit contribution :Total contributionmargin/ Number of units
¿
Contribution pe r unit=Selling price per unit – variable cost per unit
Managers must made decisions targeting maximum contribution so that operating profit
can be maximized.
Profit-volume ratio: It is also called contribution-to-margin ratio which can be calculated
by dividing contribution to the total sales received by the MEP. It is one of the important and
highly useful ratios for determining profitability (Choo and Tan, 2011). If MEP increases its
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selling price keeping into account constant variable cost, contribution goes up resultant higher
PV ratio. Likewise, when MEP cut its marginal cost at fixed price, PVR also improves. By using
PV ratio, managers can make decisions whether they must continue producing a specific item or
cease it.
Profit volume ratio :Contribution /Total sales∗100
PVR=Change∈contribution/Change∈sales
Cost −volume ratio=100 – PV ratio
Break-even ratio: In economics, break-even point is the point at where excess of revenues
over expenses is nil. In other words, firm neither suffers any loss nor any return (Weiss, 2010). It
is the point which indicates that firm efficiently used their all the resources.
Break−even point=Total¿ cost /Contribution per unit
BEP units=TFC /Selling price−variable cost per unit
BEP( sales)=BEP units∗selling price
It provides a level of sales which MEP must achieve to avoid any loss, however, sales
volume above BEP gives return to the establishment.
Desired level: In actual practices, firm set target return and accordingly policies and
decisions are being made to reach set profit goals. CVP analysis assist MEP mangers in
identifying the sales level at which they can achieve target return at given variable and fixed cost
using following formula:
Desired sales volume=TFC + desired profit / Profit volume ratio
Net profitability: CVP analysis determines net profit as an excess of total sales revenues
over total costs incurred. In other words, amount by which contribution exceeds TFC is called
net profit which facilitates managers in identifying that whether entity had run their day to day
functions profitably or not.
Net profit=Total revenues – total cost
Net profit=Total reven ue – (total ¿cost +total variable cost )
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Net profit=Total contribution – Total ¿ cost
Margin of safety: TRG can also find out margin of safety by determining the surplus of
total actual sales volume over the BEP units. Increasing safety margin level benefited the entity
with positive return.
Margin of safety=actual sales – break even sales
1.2 Analyze pricing methods in travel and tourism sector
Cost-plus pricing: This is the very basic but most popular method of pricing in which, total
cost is found and added with a needed profit margin to fix prices offered to the consumers
(Bebbington and Thomson, 2013). The best use of this method is that it definitely gives return
and recoup all the costs made by the MEP. Being total cost as a key factor, the method is also
popular as cost-centric method.
Cost − plus pricing=Total Cost + profit mark−up
100+(100∗25 % )
¿ 125
Competition-based pricing: In today’s period, survival in the market is really tough and
there are number of rivalry firms operate in the market which actions, prices and offerings cannot
be avoided (Kaplan and Atkinson, 2015). This techniques initially judges what prices are
charged by the competitors and then rivalry’s product and services are being matched with
MEP’s own offerings. In order to charge premium prices and ensure its acceptability, MEP must
introduce innovation for differentiating their own product which will deliver comparatively
greater value to the final users.
Demand based pricing: This method is often used by the organizations in price decisions.
According to this, if there are large demand in the market, then MEP can easily set higher prices
because user will be ready to pay it to enjoy the best accommodation and other facilities while
services with lower demand is charged with less prices (Huh and Park, 2013). This is based on law
of demand wherein as price increases, demand comes down and conversely which reach to
equilibrium.
Target return: As name implies, price is fixed after considering desirable return on
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investment. It delivers desired return to the MEP as an excess of revenue over total cost.
Going rate: In this technique, many companies set prices considering prices charged by
key players of the industry. This method takes into account market fluctuations or volatile prices
and change their own prices accordingly (Garrison and et.al.,2010).
Seasonal pricing: Under this, according to season when there is huge demand such as
during holidays, MEP can rise their service cost for the users or vice-versa as a strategy of profit
maximization.
1.3 Analyze factors influencing profit level
Merlin Entertainment Plc's return is determined as surplus of total revenues over total
expenditures made in a reporting period. There are various factors that influence net return,
detailed below:
Number of tourists: With the rise in demand, firm can generate higher sales as a result of
increased volume however, as demand goes downward, sales is affected adversely because less
number of consumers use MEP's services. During the period of vacations, more users visit
attractive destinations that drive more demand or vice-versa.
Selling price: If company decides to charge high prices then keeping other things
constant, income will be increased. It is because, law of demand demonstrates that with the price
growth, less number of buyer will be ready to consume MEP's services due to higher cost.
Costs: If selling price and volume remains constant or changes favourably, then, with the
robust cost controlled framework for material, wages and other direct and indirect expenses,
profitability will go upward or vice-versa(Kaplan and Atkinson, 2015). Therefore, in the real
practices, companies often bargain with creditors to convince them to charge lowest price to a
possible extent.
Political factors: Every business need to follow policies and laws throughout their
operations which also influence their return. For instance, rising minimum wages, devaluation of
Pound, environmental management, taxation rates have a significant impact over net return,
increase in such factors resultant less return or vice-versa.
Economic factors: Factors such as inflation rate, boom and recession period, rate of
unemployment in the economy and others affects growth of the corporations (Quattrone, 2016).
In UK, there is moderate inflation rate which increase prices results, as a result, MEP needs to
pay supplier with increased rate affect return unfavourably.
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TASK 2
PPT
Slide 1
Slide 2
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Slide 3
Speaker notes:
Financial statements: MEP requires to prepare financial statements including statement
of profit and loss, statement of balance sheet, statement of cash flow and others. Income
statement provides full details about income received and expenditures made in a given financial
year with the net results, profit or loss. Using this statement, MEP's managers can keep track
over change in revenue, cost whether company had effectively controlled it or not for profit
maximization. However, information about available assets, liabilities and equity can be
extracted from balance sheet. Besides this, cash flow statement is the statement that provides
details regarding sources of cash and its disposal which helps in inspecting liquidity position.
Ratio analysis is the popular method which MEP can use to inspect and analyze financial results.
Slide 4
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Speaker notes:
Budgets: It presents managerial expectations including revenues and possible costs that is
expected to occur in a given fiscal year. Budgets provides a base to inspect actual financial
outcome. Moreover, such analysis also helps in setting realistic projections for the future also.
Budgeting is important because it warns individual against any possible financial consequence
and facilitates all the managers in making proper contingency plans, reserves and decisions i.e.
cost cutting, negotiation and others to maintain cash in the business.
Variance analysis: This is an analytical method wherein budgeted figures are compared
with MEP's actual business results to find out deviation. According to this, firm can easily
determine factors with adverse variance and bring correct measures into action. For instance,
negative material price variance aware production head to contact other suppliers with quality
raw material at lower charges.
Slide 5
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Comparison with trends: With the use of financial statements, MEP managerial team can
compare their current year financial results against preceding year's actual results. They can
determine that by what percentage, their sales got increased or decreased and cost is under
company's control or not. Similarly, other key assets such as debt, equity, assets and other can be
examined through trend analysis.
Forecasting: With the use of financial statements of the company for multiple of years,
an managerial team can predict future trend taking into account previous results and current
market conditions. With the help of this, they can make decisive decisions and mitigate
possibility of any financial consequence.
New product and service: After analysis of company's current revenue and profitability,
managers can find out that whether they need to introduce new item and services and just need to
differentiate currently offered facilities with the aim to drive greater demand and boost net
return.
Slide 6
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Ratio analysis: Merlin Entertainment Plc can use ratio analysis for the purpose of
quantitative analysis of their profit performance and other financial results. For instance,
profitability ratio serves as a indicator of how much gross, operational and net return, MEP had
earned on total turnover. Solvency ratio helps business in finding out their capital structure
composition to assess long-term risk. Liquidity ratio helps in finding out short-term
creditworthiness to pay outstanding payment to suppliers on correct time.
Slide 7
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Investment appraisal techniques help in long-term decisions such as investment in new
machinery, technology and new proposal by examining prospective return on the project.
Slide 8
Slide 9
Slide 10
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TASK 3
3.1 Interpreting travel and tourism financial accounts
The Restaurant Group Plc is one of the successful restaurant chains that are currently
operating more than 470 restaurants and pubs. Frankie and Benny’s, Coast to Coast, Garfunkel’s,
Firejacks, Joe’s Kitchen, Home Counties Pub restaurants, Brunning and price, Chiquito are the
popular brands of it. Besides this, concession division is also operated by the entity that is trading
over 50 outlets. Being a profit-oriented business, it is important for the MEP to assess and
evaluate their financial performance which provides a quick indication towards main areas such
as short-term solvency, debt management, profitability and assets management as well(Egger and
et.al., 2010). It is a champion in the casual dining sector of UK. In order to expand their
operations, it is looking over innovation and further business growth opportunities with its iconic
brands so as to be a champion in the dining sector.
Ratios Formula 27-Dec-
15
1-Jan-17
Profitability ratios
Revenue 685,381 710,712
Gross profit 126,890 2,844
Net profit 68,886 -40,165
EBIT 88,891 -37,520
Gross profit ratio Gross profit/revenue *100 18.51% 0.40%
Net profit ratio Net profit/revenue *100 10.05% -5.65%
Liquidity ratio
Current assets 38,005 49,806
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Current liabilities 136403 139909
Inventory 6389 5,632
Current ratio Current assets/current liabilities 0.28 0.36
Acid test ratio (Current assets -Stock)/Current liabilities 0.23 0.32
Efficiency ratio
COGS 558,491 707,868
Debtors 13366 18782
Creditors 125388 121850
Stock turnover ratio Net sales/ Average Inventory 107.28 126.19
Debtors receivable
period
Debtors/Revenues*365 7.12 9.65
Creditors payment
period
Payables/cost of goods sold *365 81.95 62.83
Solvency ratio
Debt 30527 37882
Equity 283560 209437
Debt to equity ratio (Long-term debts /Equity 0.11 0.18
Weighted ordinary
shares
199,408
,183
200,230,2
99
EPS Net earnings available for
shareholders/Ordinary shares
34.55 -20.06
Analysis of profitability
From 2015 to 2016, TRG’s sales heightened to £710,7m by 3.7% however, like for like
sales dropped by 3.9%. The current year proven really challenging and reported disappointing
performance that exposed key issues in its three main leisure brands, still, pubs and concession
division benefited the firm with positive performance. In order to improve Leisure division
performance, decision actions were being made which cleared that TRG added unsustainable
premium in its pricing mechanism. Moreover, changes in the menus offered were not tested by a
considerable consumer base (The Restaurant Group’s annual report, 2017). In addition to this,
complex operational processes increased and inefficient operational model rose its cost and
resultant less return. In 2016, its financial results showed gross margin of only .40% and net loss
of 5.65%. In FY, the cost pressure will be increase as a result of high National Living Wage,
Minimum Wage, and revaluation of business rate, high rate of energy tax, commodity inflation
and apprenticeship levy. Due to such reason, initial months of 2017 is expected to remain tough,
but thereafter, profitability can be restored because, firm had rigorously planned to implement
cost cutting measures with the aim to transform its business. Its future plans covers re-
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establishing leisure brand, Frankie & Benny’s competitiveness, serve clients with better quality
services, growth of pubs and concession division and build a highly focused business.
Analysis of liquidity
In 2016, TRG’s CR and QR got increased from 0.28 to 0.36 whereas its acid test ratio got
increased from 0.23 to 0.32 shows good creditworthiness. Despite tough times and challenges,
TRG continuously generated strong free cash inflows of 78.9GBP million in this year that
indicates good sound cash generating business from diversified portfolio(Zhou-Grundy and
Turner, 2014). Sufficient cash management along with adequate reserves and bank balance are
the key component of its liquidity management. Firm also monitor continuously their expected
and actual cash flows in order to match financial assets and liabilities maturity.
Analysis of efficiency
Debtors days of TRG goes up from 7.12 days to 9.65 indicates inefficiencies because the
time-lag of sales to debtors and cash inflow got increased to 9.65 days which adversely affects its
cash. However, strong cash flow in the business may be reason behind giving credit for a longer
duration to the debtors result in boosting sales (Kumbirai and Webb, 2013). However, stock
turnover ratio shows up from 107.28 to 126.19 days demonstrates more productive use of stock.
However, on the other side, creditors days dropped from 81.95 to 62.83 days indicates quickly
payment, still, the results depicts that The restaurant Group receive earlier from their debtors and
benefited with the negotiating strategy with suppliers to make them delayed payment within
62.83 days which helps in robust cash management plan.
Analysis of solvency
Debt and equity ratio measures proportion of funds used in their capital structure through
bank borrowings and owner’s equity. In current year, TRG’s ratio shows a moderate increase
from 0.11 to 0.18 that because more long-term debt borrowings were taken while equity has been
repaid (The Restaurant Group’s annual report, 2017). It increases financial burden on the entity
as a result of increased fixed interest burden. However, although company suffered loss this year,
still, due to strong cash generation, restaurant is able to pay their lenders with instalments along
with interest when they fall due. Thus, it can be said that solvency position of TRG is sound and
the business is able to handle debt burden with enough cash, bank and liquid sources in the
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business. With the challenging market, TRG faced loss as a result EPS of 34.55 pence each share
in 2015 dropped to loss of 20.06 pence each share. It is an indication of declining return on
investment resultant loss to shareholders.
TASK 4
4.1 Analyze sources and distribution of funding for the capital projects
Long-term borrowing: It consists of financial obligation that a firm owed from the
financial institution for a long period. Every bank provides loans to the corporations but there are
several key requirement associated with it such as collateral security or either fixed or floating
charge over assets (Jackson, Keune and Salzsieder, 2013). Moreover, schedule is designed as a part
of debt condition, and as per which, Merlin Entertainment Plc need to make regularly payments.
Further, bank only grant fund after satisfying from the company's financial position. Despite debt
covenants, it is cheaper source just because interest is an allowable expense for tax purpose
which delivers higher return on equity due to trading on equity.
Shareholder's equity: Equity is another source wherein desired money can be gathered by
issuing needed shares in the market. The key requirement is that equity provides flexibility in
dividend payment which not only depends upon profitability but also influenced by future plans.
In case, when company suffered loss or have some future long-term investment proposal, then
currently, it can decide to pay less or zero dividend rate (Zhou-Grundy and Turner, 2014).
However, the drawback with heavy use of debt is that ownership is transferred which reduce
managerial flexibility in decision making as investors get voting power and use it to change the
decision.
Retained earnings: In real world, firms does not pay investors with all the remainder return
and keep some proportion in their own hands in the form of reserves and surplus, called retained
earnings (Sources of funding, 2016). In the time of need, MEP can use such balance available in
the firm for meeting their monetary need. The best benefit with this is it does not result in any
financial cost such as dividend on equity and interest on loan.
Funding through government: Tourism promoting bodies in UK such as European Social
Fund and Regional Development, Department of Culture, Media and Sport and other public
bodies also provides financial assistance i.e. government grant, tax subsidy and others which
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satisfy company's capital requirement. The key conditions for government grant is that it cannot
be used for any other purpose than stated and also must be used within mentioned time.
Poster
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CONCLUSION
The findings of the report made it clear that CVP is the best technique by which MEP can
assess their safety margin, determine break-even point, made short -term decisions i.e. selling
price, sales volume to achieve desired return and others. However, the method has certain
assumption which does not remains true in current times i.e. fixed selling price, cost, sales equal
to production level. Therefore, it is found that profit is affected by various economic and political
factors, demand, selling price, cost and others that must be considered by MEP to make decisive
plans. Moreover, the report found that TRG faced tough times during the year 2016 resultant less
return still strong cash flow maintain its liquidity and solvency position very well.
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REFERENCES
Books and Journals
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Boundary crossing. Management Accounting Research. 4(24). pp. 277-283.
Choo, F. and Tan, K.B., 2011. An Income Statement Teaching Approach for Cost-Volume-Profit (CVP)
Analysis by Using a Company’s CVP Model. Journal of Accounting and Finance. 11(4). pp.23-
36.
Egger, P. and et.al., 2010. Corporate taxation, debt financing and foreign-plant ownership. European
Economic Review. 54(1). pp. 96-107.
Garrison, R.H. and et.al., 2010. Managerial accounting. Issues in Accounting Education. 25(4). pp.792-
793.
Huh, W.T. and Park, K.S., 2013. Impact of transfer pricing methods for tax purposes on supply chain
performance under demand uncertainty. Naval Research Logistics (NRL). 60(4). pp.269-293.
Jackson, S. B., Keune, T. M. and Salzsieder, L., 2013. Debt, equity, and capital investment.
Journal of Accounting and Economics. 56(2). pp. 291-310.
Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
Kumbirai, M. and Webb, R., 2013. A financial ratio analysis of commercial bank performance in South
Africa. African Review of Economics and Finance. 2(1). pp. 30-53.
Quattrone, P., 2016. Management accounting goes digital: Will the move make it
wiser?. Management Accounting Research. 31(5). pp. 118-122.
Weiss, D., 2010. Cost behavior and analysts' earnings forecasts. The Accounting Review. 85(4). pp.1441-
1471.
Zhou-Grundy, Y. and Turner, L. W., 2014. The Challenge of Regional Tourism Demand
Forecasting: The Case of China. Journal of Travel Research. 15(3).
p.0047287513516197.
Online
Sources of funding. 2016. [Online]. Available through: <travel-grants-ngos-sources-potential-
funding>.
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The Restaurant Group’s annual report. 2017. [PDF]. Available through:
https://www.trgplc.com/sites/default/files/reports/Annual%20Report%202016.pdf.
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