Financial Analysis of TUI Group

This assignment focuses on the financial performance analysis of TUI Group. It utilizes ratio analysis to evaluate the company's profitability, liquidity, and solvency over two years: 2014 and 2015. Key ratios like gross profit margin, net profit margin, current ratio, quick ratio, debt-equity ratio, and inventory turnover ratio are calculated and analyzed to provide insights into TUI Group's financial health and performance trends.

UNIT 2: FINANCE AND FUNDING IN THE
TRAVEL AND TOURISM SECTOR

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
A) Concept of CVP analysis and its importance (P1.1).........................................................1
B) Analysis of pricing methods (P1.2)...................................................................................2
C) Factorial analysis (P1.3)....................................................................................................3
TASK 2............................................................................................................................................4
A) Types of management accounting information (P2.1)......................................................4
B) Investment appraisal techniques (P2.2).............................................................................5
TASK 3............................................................................................................................................6
A) Interpretation of financial statements (P3.1).....................................................................6
TASK 4............................................................................................................................................7
A) Sources of funding (P4.1)..................................................................................................7
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10
APPENDIX....................................................................................................................................11

INTRODUCTION
Travel and tourism management [TTM] is a crucial part for every country in which many
type of services are provided to tourist. It is a holiday activity by which people go for the
relaxation with their family (Travel & Tourism, 2016). Tourism and travel are two different thing
where travel is simply a movement on which people go for journey by any transport such as
train, bicycle, and airlines and so on.
In this report The Carib happy Tours Company is a private entity who deals in the
summer holiday packages and different services. In which it’s provide a private charter only for
their tourist guest and company also focuses on accommodation which arranged in hotel and
aeroplane for customers comfortability. CHTC charge £800 per tourist and total cost for
accommodation for 2 weeks is £60,000. I n addition CHTC evaluate CVP importance in decision
making process related to the travel-tourism. In this management accounting, financial
accounting is considered in context of TTM. Moreover in these report proper analysing the
source of funds that will be assists for the development in TT sector.
TASK 1
A) Concept of CVP analysis and its importance (P1.1)
Cost volume profit analysis is a proper analysis in which variable cost, fixed cost, selling
price, volume of sale are evaluated. It is also assists for determining net income and operating
income. For systematic analysis various assumptions can be perform such as production
management, fixed and variable cost are constant or not and many more (Goodall and Ashworth,
2013). In travel and tourism sector, CHTC evaluate importance of cost and volume and they are
as follows:
Contribution Margin: It is a margin percentage in which contribution is divided by the sales so
that percentage will be find out. CHTC use this term to find out the contribution margin in their
holiday packages. For these following formula is used to find out the percentage.
CHTC company total sale is 1 lac and its margin is 40000. so that CM ratio is
CM ratio = contribution margin / sales
CM ratio = 100000 /40000
= 40%
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CHTC Company has adopted 40% margin in their holiday packages. It will assists for the set
margins and also its effectiveness in total sales.
MOS: MOS is stand for margin of safety and this is used in a travel-tourism sector to compute
total amount of sale after excluding break even sales. It will assists for set high margin so that
there is a low risk in the tourism sector. In other words it is also a forecasting which expressed
safety margin for better sale in future.
Break even analysis: It is often called sale mix in which total selling part are evaluated. CHTC
has many holiday packages and all having different margins so that Company can use sale mix in
the calculation of total selling (Becker, 2016). BEP manage the balance between profit and loss
and compute a point where no profit and loss is there. All above points are playing very
important role in travel and tourism sector for better consideration of budgets and so on.
B) Analysis of pricing methods (P1.2)
CHTC has adopted pricing methods for systematic analysing in context of travel and
tourism. CHTC has mainly three choice to select their pricing method which are based on cost,
demand and competition. There are various pricing methods which are discussed below:
Cost based pricing: In these method some of the percentage is added in the cost price to set the
final price. In other word it is a selling price in which profit margin is included so that it’s often
called cost plus pricing. CHTC has adopted this method for set their packages pricing (Hall,
Timothy and Duval, 2012). It will assists for gathering the minimum information and calculate
the price in a simple terms.
Demand based pricing: In these price is deciding according to the tourist’s demand in which
CHTC has used high price if demand of product is more in the market. On the other hand if
demand is low so there is a deduction in the price. This strategies are helpful for attracting tourist
towards the products (Xiang, Magnini and Fesenmaier, 2015). It is based on a market analysis in
this evaluation of demand is helpful in the reaching success. When CHTC has low demand, at
that time they deduct the all prices to cover the loses and obtain more capital if customer happily
accept the all changes.
Competition based pricing: Prices are to be formulated in a strategy so that competition cannot
overtake company's market share. This process in which prices are formulated with regards to
competition is called competition based pricing. CHTC use different prices such as low, high and
equal according to the other competitions.
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In additions to that company may reduce charges for some routes where competition is higher so
that tourist attract more over the company. Entity also publish different discount voucher
according to their clients with spouse, family and family group.
With the help of above methods CHTC has adopted different analysing methods for development
of tourist and travel sector.
C) Factorial analysis (P1.3)
In travel and tourism sector, so many factors influence the profit margins. CHTC (Carib
happy Tours Company) analyses all these factors so that they can assist for less influencing
profits in these sector. There are many factors who affects the profits and some of them are as
follows:
Sales: Every company computes their per annum sale and these total selling is effected the profit
in a two way. In first if selling is compatibility high so that it’s positively affected the profit. In
contrary if per year selling is low so that it’s negatively impact the profit (Levinsky, 2012).
CHTC should try to balance between profit and loss so that there is less chances of loss.
Cost and Selling price per tourist: Selling price per tourist must be analysed and decided in such
a way that profit margins are not worst affected. Company has to make effective pricing
strategies so that customers will feel a value for money experience during their travelling time.
Cost price is the amount at which services are bought by company. Both these prices are
contributors to profits. Any sot of negligence in formulation of cost and selling price will disturb
complete financial dynamics of travel company.
Cost: CHTC must evaluate its costing method which is based on three dimensions such as
demand, competition and cost based so that it can be assists for the cost related loss in profits.
Customers have many choice so that CHTC has adapted best cost for their products so that
customers easily attract towards the price. Moreover cost is less influencing the profit.
Promotions: For promotions of travel and tourism packages, CHTC used many advertisement
and for that company invest in promotions activity. If they are not select appropriate way of
advertisement so that there is no effects of all these promotions activities (Kaplan and Atkinson,
2015). Moreover its influence the profit and there are also reduction in consumers for visit.
Quality of services: Every customer want a better service because individual is paying for these
so that they want perfection in the service. In TT sector, quality of services always create always
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matter (Kaplan and Atkinson, 2015). If entity is not providing best services and customer became
dissatisfaction with the services so that it directly influenced to the profit.
Technology: If company not adopted new technology such as online bookings, customer
services and so on, its affects its profit because customer always demand for new one in their
services.
Number of tourists: Profits are extracted from tourists. If CHTC will not meet their minimum
requirements of tourists then it is obvious that the company will face loss. Adequate number of
tourists ensures smooth and even flow of economy and a balanced financial structure.
TASK 1C
Item Cost
Accommodation cost 60000
Variable cost per customer 200
Total number of tourists 90
Total variable cost 18000
Total cost of trip 78000
Particulars Amount
Sales income 72000
Total cost 78000
Profit/loss -6000
According to the table, it can be seen that at £900 selling price per customer, CHTC will bear
loss of 6000 henceforth, it can be suggested to the company to not organize tour package.
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TASK 2
A) Types of management accounting information (P2.1)
Management accounting information is for gathering information related to finance part
in this total consumption of produced goods and services are evaluating. It is an important part
every company to determine the work effectiveness and how well work is going. It will also
assist for collecting information in the decision making process. Here different type of
information discussed below that could be used in travel and tourism:
Cost allocation reports: With the help of allocation of cost manger prepare a report in which
total capital invested and according to these evaluate that how much goods and services
allocated. With the help of job costing, process costing allocation of resources become easy
(Belfo and Trigo, 2013). CHTC is also assist for ensuring that demand and supply in tourist
sector is an accurate amount of costs. It is also helpful for the reputation of the company. If
demand is not fulfilled by the company it’s negatively impact on the company’s performance.
Budgets: Companies have to devise budgets so that they can gather an estimated value of
revenues and expenses during one financial year. CHTC manages its budgets with accounting
facilities. Every company should prepare a budget in this systematic distribution of fund can be
assists for the evaluation. Travel-tourism is a sector where lots of expenditures are made and for
this a business budget is necessary for the management finance (Jiang and Wu, 2015). Company
must prepare individual department budget so that it can easy to manage master budget. It is also
helpful to taking a flexible rates for maintains demand and supply.
Forecasting: The process in which a financial perspective is gained on past and present status of
a company is forecasting. The analytical information so gained, is based on historical trends and
situations that will help CHTC to safeguard itself from threats. It is assists for the travel and
tourism to evaluate economic factors and more. CHTC forecast customers demand before the
season and putting efforts in the accomplishment of their demand. In these strong decision trees
should be made for forecasting model. These information is assists for increasing selling in the
peak session.
Variance Analysis: The process of budgeting or management accounting is incomplete without
variance analysis. It is the diversions of actual results from estimated ones. The end result can be
beyond or below expected values. For example, CHTC has kept an estimated expenditure of
£60,000 but manages to expend £62,000. Then variance value will be £2,000.
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B) Investment appraisal techniques (P2.2)
In a decision making tool, investment appraisal play a vital role in which accounting
information can be use. CHTC use all these investment appraisals to deciding that in which
department fund is require. The use of appraisal techniques as decision making tools is described
ahead:
Accounting rate of return (ARR): When a company proposes certain capital
investments, then ARR technique is used for calculating net income that will be returned after
this investment. It helps in getting an insight of profits. Major weakness of this method is that it
doesn't include cash flow as its element. Which reduces its accountability for money value.
Payback period: Stipulated time in which invested amount is recovered is called payback
period. In these only recovery is the main objective (Gupte, 2015). CHTC has not adopted these
technique because it is not appropriate for small firms which tends to be its weakness. With
calculation of this time, the company will be able to understand the type of investment it can
make and get recovered quickly.
Discounted cash flow: CHTC has to evaluate its investment opportunity according to the
feasibility conditions that are related with the investment. Hence, discounted cash flow method is
used in this situation. Decision of investment can be made with help of this analysis. If analysed
or resulting cost after calculation is higher than current cost then opportunity is favourable. The
advantage of this method is to provide estimates regarding future growths.
Net Present Value (NPV): Also referred as Net Present Worth(NPW), this method or
technique is used for measuring profit outcomes of current undertaking. Its role in decision
making is based on predictions that revive values of investment that will be additional to the
company. Major pitfall regarding NPV is risk adjustment. The rate of interests in investments
depend on the amount of risk it involves. Hence, NPV parameters are less considerate.
Internal Rate of Return(IRR): IRR is systematic management of investment to cover
the profitability of considerate investments.. It is often called break even in which no profit and
loss can be evaluated (Goodall, B. and Ashworth, 2013). The favour-ability conditions with
selection of this method is greater IRR values, more chances of opting for the investment. CTHC
can use IRR values for making quick decisions.
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TASK 3
A) Interpretation of financial statements (P3.1)
Ratio Analysis: Financial statements of a company are utilised for conducting ratio
analysis. This technique is used for getting knowledge about complete economic structure of a
company (Brigham and Ehrhardt, 2013). From cash flows to financial position all aspects are
covered in this analysis. Sole existence of this technique is not possible. Certain other gauges are
applied for stabilising financial ratios. These are industry norms, aggregate economy and
company's past records of performance. Following limitations occur with ratio analysis
(Weygandt, Kimmel and Kieso, 2015).
1. Functioning of large firms involves different working divisions. They are unable to
formulate average industry ratios for each functioning division.
2. Travel and tourism industry is a seasonal business. Its complications increase when
climatic conditions are not in favour. Ratio analysis gets distorted when business seasons
are affected frequently.
3. Interpretation of financial statements through ratio analysis is highly affected by inflation.
Comparative ratio analysis of all companies is thus distorted.
4. Stability of a company is determined through ratios. But differencing data that is good
and bad ratios make it difficult to conclude whether a company is strong or weak.
From present ratio analysis gross profit ratio is decline from 12.17% to 11.97% from
present ratio analysis gross profit ratio is decline from 12.17% to 11.97% may be due to high
overheads and less proportionate increase in turnover as compare to % increase in direct cost.
While, on the other hand, net margin shows an increasing trend to 1.70% which is good as it
indicates that TUI group improved its operational performance in 2015 may be due to decrease
in indirect spending. Contrary to this, CR and QR got improved to 0.70 and 0.57, both the ratios
demonstrates that TUI group enhanced its capability to make timely payments to their short-term
business obligations. It indicates that business liquidity position is improved, but still, by further
increase in CA and repayment of some CL, TUI group can achieve the ideal CR and QR of 2:1
and 1:1 respectively. Debt/Equity ratio of the company remains constant to 0.36 because of
change in composition of debt and equity (Becker, 2016). Besides this, inventory turnover ratio
of the company got enhanced from 147.36 to 148.24 which show that managers are utilizing
business stock in the best manner to get better return.
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TASK 4
A) Sources of funding (P4.1)
There are two types of sources of funding for the development of capital projects. CHTC
has used these sources for funding their project of a new Hotel in following ways:
Internal sources: Internal Profits: CHTC must have earned profits earlier on past projects. These can be
used as a personal source of funding. It will help the company to reinvest their net
income. Squeezing cash from daily finances:Personal savings are highly useful in extracting
money for investments. Although this solution is short term and takes a long time to
gather funds but it reduces reliability over other sources. It can only be applied when
investment is not planned in near future. Sale of Assets: Current assets or fixed assets can be sold and money that is gained from
these selling practise can be used for investment.
Advantages and Disadvantages:
1. No charging of heavy interest rates is experienced in internal source of funding. They are
feasible and debt ridden.
2. Flow of cash is limited to the company. Hence, no third party will be involved as partners
in profits. Sole ownership belongs to the business.
3. It lessens the amount of loan or capital that has to be borrowed. This means company will
not face much difficulty in paying debts.
4. Major drawback of internal sources is loss of savings. If current investment fails then
company will suffer massive losses with loss of assets.
External Sources: Debt equity: Debt capital is a loan for the raising of business and loan amount have to
pay in a fixed date. It is fully differ from the equity and share because it is not a part of
business person. Bank loan is return on fixed percentage it is called interest. CHTC has
taken loan from respective bank for the development of new facilities and should return
in a specific time so that it maintain a goodwill of the company. Equity capital: For the development of business, company issues share to generate
financial resources. It is done through marketing, distribution and allocations of new
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issues. CHTC has issued share and get their financial resources. It is provide additional
capital for business and it is fully dependant on the information that is gathered by the
financial situation based on the estimations or a perfects. Government fund: It is a financial reward given by the local, federal and state
government for encouragement of their performance. In the travel and tourism sector
government provides funds to their private sector to enhance their facilities. (Hall,
Timothy and Duval, 2012) For that government also organise training and counselling for
better use of resources.
Advantages and Disadvantages:
1. Trade credits are useful in boosting daily finances. They help in developing better
personal relations with marketeers.
2. Limits are clear when choosing external sources. It helps in getting required finances
which doesn't incur excess debts.
3. Substantial ownership is lost during usage of these resources. This drawback is often a
non supportive factors. People have to repay their loans by losing ownership.
CONCLUSION
Present report is based on travel and tourism sector in context of financial management.
In these CHTC has evaluated importance of cost and volume on the basis of contribution margin
and so on. It is helpful for managing better prices set up. Entity also adopted various methods of
pricing in which competitive price strategy should adopted. For development of travel and
tourism sector CHTC used different information on the basis on management accounting so that
it can assists for the fornicating in the supply and demand chain. Moreover different source of
can be adopted by the CHTC for recovering the capital sources.
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REFERENCES
Books and Journals
Becker, E., 2016. Overbooked: the exploding business of travel and tourism. Simon and
Schuster.
Belfo, F. and Trigo, A., 2013. Accounting information systems: Tradition and future
directions. Procedia Technology. 9. pp.536-546.
Brigham, E. F. and Ehrhardt, M. C., 2013. Financial management: Theory & practice. Cengage
Learning.
Goodall, B. and Ashworth, G., 2013. Marketing in the Tourism Industry (RLE Tourism): The
Promotion of Destination Regions. Routledge.
Gupte, M.J., 2015. Paucity of Public Funds and Growth of Professional Colleges in
India. Global Journal of Human-Social Science Research. 15(3).
Hall, C. M., Timothy, D. J. and Duval, D. T., 2012. Safety and security in tourism:
relationships, management, and marketing. Routledge.
Jiang, K. and Wu, J., 2015, August. An analysis of gap of funds supply and demand of region a
based on GM (1, 1) model. In 2015 IEEE International Conference on Grey Systems and
Intelligent Services (GSIS). pp. 318-326.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Levinsky, W. J., 1969. Fatal air embolism during insertion of CVP monitoring
apparatus. JAMA. 209(11). pp.1721-1722.
Weygandt, J. J., Kimmel, P. D. and Kieso, D. E., 2015. Financial & Managerial Accounting.
John Wiley & Sons.
Xiang, Z., Magnini, V. P. and Fesenmaier, D. R., 2015. Information technology and consumer
behavior in travel and tourism: Insights from travel planning using the internet. Journal of
Retailing and Consumer Services. 22. pp.244-249.
Online
Travel & Tourism, 2016. [Online]. Available through: <https://india.gov.in/topics/travel-
tourism>.[Accessed on 29th September 2016].
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APPENDIX
Ratio table
Ratio analysis of TUI
Ratios 2015 2014
Net sales 20012 18715
Gross profit 2395 2278
Net profit 340 105
Gross profit ratio GP/ net sales * 100 11.97% 12.17%
Net profit ratio Net profit / net sales * 100 1.70% 0.56%
Current assets 5379 4473
Current liabilities 7699 7515
Inventory 135 127
Prepaid expenses 843 777
Current ratio current assets / current liabilities 0.70 0.60
Quick ratio
Current assets – (stock + prepaid
expenses) / current liabilities 0.57 0.47
Debt 740 695
Shareholders equity 2045 1913
Debt- equity ratio Debt / shareholders equity 0.36\ 0.36
Fixed assets 9614 8647
Inventory 135 127
Inventory turnover
ratio Sales / inventory 148.24 147.36
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