Financial Factors Affecting Airport Retail Expansion

The assignment analyzes the importance of financial management in expanding airport retail operations. It highlights the advantages and disadvantages of debt financing, including control and tax implications. Additionally, it explores the role of non-financial factors such as customer expectation and service introduction in driving business growth. The assignment concludes by emphasizing the need for effective management of these factors to ensure success in airport retail expansion.

Financial Decision Making

EXECUTIVE SUMMARY
In following report the company will analyse the financial performance with the help of
evaluation of profit and loss account. The financial position of company will be evaluated along
with cash flow position. The company will look after operating cash cycle of two years that is
2018 and 2017. the market segmentation of company will be analysis with the help of this report.
In the following financial making decision of easy flights plc there will be analysis of the
investment appraisal decision. The management forecasting will be analysis where the critical
evaluation will take place taken for next 10 years by easy flights plc. There will be proper
evaluation of the investment appraisal techniques in which company has used payback method
along with accounting rate of return and net present value. The company will analysis the
different alternative sources for financing of company. The company was to expand in airport
retail which will be discussed so that the profitability of business can be developed. In report the
easy flight plc will be evaluated for financial decision making of the company in extent to
expansion in France.

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................1
Part 1 ...............................................................................................................................................1
1.1 Statement of Profit or Loss....................................................................................................1
1.2 Statement of Financial Position.............................................................................................3
1.3 Statement of Cash Flows.......................................................................................................4
1.4 Market Segment Analysis......................................................................................................6
Part 2: Investment Appraisal ..........................................................................................................8
2.1. a Management Forecast........................................................................................................8
2.1.b Investment Appraisal Techniques.......................................................................................9
2.2 Sources of finance................................................................................................................10
2.3 Non financial factor in expansion of airport retail...............................................................12
REFERENCES..............................................................................................................................13
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Part 1
1.1 Statement of Profit or Loss
Profit & Loss Statement
Profit & Loss statement (P&L) refers to the type of financial statement which is being
prepared by various profitable and non-profitable companies for an entire accounting period in
order to analysis the financial performance. It is also known as Income Statement. It summarized
the revenues generated, costs beared and expenses incurred by the organization for entire
accounting year (Robinson and et.al., 2015).
Ratios Related to the Profit & Loss Statement
For the analysis of the financial performance of the Easyflight PLC, Company will
calculate and analysis following ratios which are such as -
Gross Margin Ratio – It is also known as Gross Profit Ratio. This ratio shows the result which
comes due to comparison of the gross margin (profit) to the net sales of the company.
Gross Margin Ratio = Gross Margin
Net Sales
Net Sales = Gross Margin – Cost of Goods Sold
Analysis & Interpretation -
In the case of Easyflight PLC during 2018,
Gross Margin Ratio = 3,211
1736
= 1.85 (Rounded Off)
Net Sales = 3,211 – 1,475 = 1736
In the case of Easyflight PLC during 2017,
Gross Margin Ratio = 3031
1535
= 1.97 (Rounded Off)
Net Sales = 3,031– 1,496 = 1535
From the above two years' gross margin ratio, it can be interpret that in comparison of
2017, the gross profit ratio decreases.
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Net Margin Ratio - It can be define as Gross Profit Ratio. This ratio shows the result as a
percentage of revenue after all the expenses and costs are deducted from the total revenues of the
company.
Net Margin Ratio = Net Income After Taxes
Total Revenue
Analysis & Interpretation -
In the case of Easyflight PLC during 2018,
Net Margin Ratio = 541
4,686
= 11.55 (Rounded Off)
In the case of Easyflight PLC during 2017,
Net Margin Ratio = 443
4,527
= 9.79 (Rounded Off)
From the above two years' gross margin ratio, it can be interpret that in comparison of
2017, the net profit ratio increases in year 2018. .
Critical Evaluate the financial performance through the analysis of the profit & loss
statement of the company
For the critically evaluation of the Profit & Loss Statement of the Easyflight Company,
organization must have to look upon the various aspects of the P&L statement which are as
follows -
Sales – Through the selling of airline services, Company is able to generate revenues. In year
2017, company's total sales or revenue was £4,527 million which increased in year 2018. The
revenue was in year 2018 was £4,686 million. It is indicating that sources of the income is
profitable for the company.
Cost of Goods Sold - It refers to the cost of products which is being sold by the company to
their customers. In year 2017, it was £1,496 million and year 2018, it was £1,475 million. There
is decrease in cost of goods sold, which is beneficial for the company as it will lead to increase in
profitability.
Net Income – Net income refers to the remaining income which is calculate as subtraction of
total expenses from the total income of the company. Net income for the company in year 2017
was £443 million and in year 2018 was £541 million which shows that there is increase in net
income which is considered to be the most important part of the company.
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From the above interpretation and analysis, it can be say that financial performance of
Easyflight plc according to the Profit & Loss Account is good growing and improving.
1.2 Statement of Financial Position
Financial Position Statement
It is a type of financial statement which is also known as Balance Sheet. It is one of the
most important statement prepared by the every companies at the end of the accounting year. It
summarized the assets, liabilities, capital and debt of the company. It is considered to be the
snapshot of the company's financial position. It has two main heads – Assets and Liabilities
(Rule, 2015).
Ratios Related to the Financial Position Statement and Critical Evaluate the financial
performance through the analysis of the Financial Position Statement of the company
For the analysis of the financial position of the Easyflight PLC, Company will calculate
and analysis following ratios which are such as -
Current Ratio - Current ratio refers to the type of liquidity ratio which indicate the ability of
the company to pay its short term liabilities within an accounting year or financial year.
Current Ratio = Current Asset
Current Liability
Analysis & Interpretation -
In the case of Easyflight PLC during 2018,
Current Ratio = 403
538
= .75 (Rounded Off)
In the case of Easyflight PLC during 2017,
Current Ratio = 1,382
576
= 2.40(Rounded Off)
From the above two years' current ratio, it can be interpret that in comparison of 2017,
the current ratio decreases in year 2018. Decrease in current ratio tell that the currently
company's ability to pay the short term obligation is lower than the previous year. This will
affect the financial position of the company.
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Debt to Equity Ratio – Debt to equity ratio can be define as the metric through which a
company get to know about the proportionate of its financial structure through the debt versus
equity. It analysis the ability of the equity to pay outstanding debt of the company.
Debt to Equity Ratio = Total Liability
Total Equity
Analysis & Interpretation -
In the case of Easyflight PLC during 2018,
Debt to Equity Ratio = 2,214
4,802
= 0.46
In the case of Easyflight PLC during 2017,
Debt to Equity Ratio = 2,230
4,402
= 0.51 (Rounded Off)
From the above two years' debt to equity ratio, it can be interpret that in comparison of
2017, the ratio increases in year 2018. Higher debt to equity ratio reduces the value of the
shareholders' shares in compared to the assets which lead company to have liquidated or sell
their asset in order to reduce the impact on the financial position.
From the balance sheet ratio, it can be said that company's financial position is not strong
in year 2018 as compared to the year 2017.
1.3 Statement of Cash Flows
Cash Flow Statement
Cash flow statement can be define as the part of the financial statement which is prepared
by the companies to know about the generation of cash and its equivalents in a given particular
accounting year. This statement is divided into three activities related to the cash. These three
activities are such as -
Cash Flow from Operating Activities – It involves the cash flow generation from the buying and
selling of the products & services of the business.
Cash Flow from Investing Activities – It involves the cash flow generation from the purchasing
and selling of the investments made by the company.
Cash Flow from Financing Activities – It involves the cash flow generation from the raising of
the capital and paying it back to the investors (Anyushenkova and Samorukova, 2019).
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Cash Position of the Company
Cash position of the Easyflight during 2018 was went down due to a lot of expenditures
incurred by the company. Company's net cash flow from operating activities was positive that
means company is able to manage its business successfully. But company was not able to proper
generate the cash from investing activities as company did buy property, plant and equipment
which lead to pay cash. Company take long term loan which lead to addition of cash in the
company. But the generation of the cash is less than the expenditure of the cash. This lead to low
generation of the cash in the Company.
Calculation of Operating Cash Cycle
Operating cash cycle refers to the ratio which arise due to average period of time in
which company can convert its inventory into the cash. It is also known as Cash Conversion
Cycle and Operating Cycle.
Formula of Operating Cash Cycle
OCC = Day's Sales in Inventory + Average Collection Period
Day's Sales in Inventory (DSI)= 365 Days
Inventory Turnover Ratio
Average Collection Period (ACP) = 365
Accounts Receivable Turnover Ratio
Inventory Turnover Ratio (ITR) = Net Sales
Inventory
Accounts Receivable Turnover Ratio (ARTR) = Net Sales
Average Accounts Receivables
Operating Cash Cycle in the context of the Easyflight Firm
Company’s 2018 Dividend Policy
Easyflight Company's dividend policy is Constant Dividend Policy. In this type of
dividend policy, company will pay high dividend to their shareholders, if company's profit has
risen. But in case of low profits, company will pay low dividend to their investors. In year 2017,
company's profit was £443 million and year 2018, it was £541 million. Increase in profit lead
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company to paid high dividend in year 2018 as compared to year 2017. In 2017, company paid
£100 million and in year 2018, company paid £125 million.
Yes, Easyflight was right to make this dividend payment in 2018 because company's
earnings was and still remain stable and slowly increasing at the low rate which lead company to
pay dividend accordingly. Also, it will attract more shareholders as company is increasing its
dividend payment to their existing shareholders.
1.4 Market Segment Analysis
Compare between England and France
Following basis will be taken by the company for the compare and contrast between both
segments -
Gross Profit
Segmentation 2017 2018
England 2,037 2,181
France 43 78
Here, in both year, England earned better gross profit as compared to France.
Operating Cost -
Segmentation 2017 2018
England 1,791 1803
France 103 40
Here, in both year, France incurred low operating costs as compared to England.
Compare between France & Scotland
Following basis will be taken by the company for the compare and contrast between both
segments -
Gross Profit -
Segmentation 2017 2018
Scotland 951 952
France 43 78
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In both year, Scotland has more profit as compared to France.
Operating Cost -
Segmentation 2017 2018
Scotland (665) (678)
France 103 40
In both year, Scotland has better cost structure in compared to the France.
Compare between Scotland & England
Following basis will be taken by the company for the compare and contrast between both
segments -
Gross Profit -
Segmentation 2017 2018
England 2,037 2,181
Scotland 951 952
Here, England has better gross earning in compared to the Scotland's earning.
Operating Cost -
Segmentation 2017 2018
England 1,791 1803
Scotland (665) (678)
Here, Scotland is incurring less operating costs as compared to the England.
Recommendations -
From the above analysis and interpretation, it can be recommendation given to the
company that England has better business policy so same policy can be implemented in Scotland
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and France. But in the terms of Cost Structure, England incurred most in compared to the other
segmentations. Thus, company can focus on the cost structure of the England and try to reduce it.
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Part 2: Investment Appraisal
2.1. a Management Forecast
Investment Appraisal - France expansion
YEAR 1 2 3 4 5 6 7 8 9 10
£ mill £ mill £ mill £ mill £ mill £ mill £ mill £ mill £ mill £ mill
SALES 100 150 300 450 585 702 842 927 1019 1121
Sales
growth rate
%
50 100 50 30 20 19.943
019943
10.095
011876
5
9.9244
875944
10.009
813542
7
variable
cost
25 38 75 113 146 168 202 222 234 258
Variable
growth rate
%
52 97.368
421052
6
50.666
666666
7
29.203
539823
15.068
493150
7
20.238
095238
1
9.9009
90099
5.4054
054054
10.256
410256
4
profit 75 112 225 337 439 534 640 705 785 863
profit
growth rate
49.333
333333
3
100.89
285714
29
49.777
777777
8
30.267
062314
5
21.640
091116
2
19.850
187265
9
10.156
25
11.347
517730
5
9.9363
057325
Forecasting is the process of projecting the future sale demand of the services of
company in future. The forecasting is done by analysis the current trends and estimation of
futuristic trends in the economy so that the proper decision an be taken to conduct operational
activities in company to achieve the goals and objective.
Management forecast of company Easy flight plc was done as the expansion in France as
a business strategy for the development of business. Over the last 20 years the company has
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served UK as short haul airline delivery market leading returns to shareholders. The forecasting
of the company is unrealistic in starting two years as it is not possible for company to have the
rate of growth in economy where expansion has taken place for first time. The management has
estimated the forecast as growth rate of 50% in first year and 100% growth rate in the next year
which is not practically possible as France previously had a large number of airlines which is a
great competition to the company. Forecasting should be done on basis of analysis current teams
and condition of country along with certain policy and rules regulation of company. At the time
of expansion of company in France, there is economic and political stability as company was
leading in Dollar and Euro. So the forecasting for first two is not acceptable as there cant be such
increase in growth rate and it is lost possible to have a country to have such a boom in economy
after being disturbance in political condition. At the time of expansion of company in France,
there is economic and political stability as company was leading in Dollar and Euro
The another reason about project is that in following year there is high steep in
downwards direction which moving growth rate from 50% to 10% of sales revenue. It is not
possible for company to work in just a condition where growth rate is declining year by year.
This will affect the profitability of company . There are cant be any existence of economical and
political instability that will prevail for longer period. From the year 2020 to 2026 steep downfall
as there is no survival of company as this rate of growth in economy. So the technique sued by
management of company to asses the forecast of company for next 10 years is not accurate.
2.1.b Investment Appraisal Techniques
Before the development of new venture there is high degree of requirement yo understand that
whether the business is profitable or not. The company has used the various investment appraisal
techniques for the development of structure of the finance in easy flight plc. The company has
invested an amount of 3000 £ mill. The various method that has be used by company are
Payback period- The method is to calculate the evaluation to determine the number of years it
will take to recover initial amount of investment(Trisakti, 2018).. This helps in calculating the
economic feasibility of project. The company has invested a amount of 3000 £ million and have
a payback period of 7 years and 11 months.
Advantage- it is most simple method to calculate and help in comparison of other projects with
shorter period of time. There can be easy comparison between the feasibility of assets in
organisation.
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Disadvantage-the biggest disadvantage of payback period is that it ignore the time value of
money along with profitability of project. The method also used to ignore the cash flow of assets
after the payback period is over. The method doest keep in account the return of project on
investment.
Accounting rate of return- The accounting rate of return is also known as average rate of return
as a financial ratio to calculate capital budgeting. The net income calculated the return , net
income of proposed capital investment(Panigrahi, 2019). A percentage rate of return is called as
average or accounting rate of return. The advantage of accounting rate of return as it is
accounting information and no other special reports are not required with proper
understandability. The disadvantage of this method is it ignore time value of money and cash
flow. The accounting rate of return 11.4% which is type of pretty good at the particular moment
of time.
Net present value - this method is the best way to calculate to analyse the profitability of
investment in company or any project. It is not the end solution like financial investment
decision it too has advantage and disadvantage. There is importance of time value in net present
value. In calculation of after cash flow and before cash flow so the life span be considered in
project. There is high priority given to profitability and risk. Same as the disadvantage are it is
difficult to understand as it doesn't give accurate decision because of discount rate
differentiation. The calculation of NPV for this project by company is 28% with cost of capital
of 3%
2.2 Sources of finance
The company is this time is investing in airport retail business for the amount of 2000 million
pound for the year 2019. the choice of choosing the sources of finance will depend on
availability and accessibility of cash flow and most important the control of principal owners.
There are two basic option available with company is having the equity financing or debt
financing. the choice of choosing the sources of finance will depend on availability and
accessibility of cash flow and most important the control of principal owners. There are various
advantage and disadvantage of the two different type of financing in company.
Equity financing- the process of raising capital through the issue of shares of business in public
or in business from the more appropriation of other sources of finances for eg- bank loans as it
can place different demands.
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Advantage
No more credit issues- with the help of equity financing in company there is zero degree of risk
of credit issue. The company has no pressure of returning loans to the investor. It will work
according to profitability of company. The stakeholders have the high degree of control over the
money matters along with planning and decision making process.
Commitment to business- The funding generated by equity financing is totally committed to the
business and to intended project. The investor will only analysis the working of their investment
in company and have contribution in development of company.
Disadvantage
Profit are shared- as the reward of investment , the company has to share the profit with its
investor in the term of dividend to its shareholders. This can be turn as the advantageous
exchange as it give more potential investors to company.
Loss of control – as there is investor in company there is loss of control over decision of
company along with liability to share profits with investors. The company has to share the
control and decision making process with its investors in accomplishing the goals of
organisation.
Debt financing
Borrowing of money to finance the operation and decision making for growth and development
of organisation under as the proper circumstances. In borrowing money and repayment of
interest there is the liability of owner of organisation as there is no burden of sharing profit and
loosing control over decision making of organisation.
Advantage
Control- the company does nor loose control over the decision making in organisation as the
relationship ends with repayment of loan. The lender doesn't have any control over profit sharing
and decision making of company(Perçin and Aldalou, 2018).
Taxes- the interest on investment is tax deductible. whereas the dividend paid to shareholders are
not tax deductible.
Disadvantage
Qualification- the company should have the good credit rating as to have the acceptability of
loan from any investor. if the company don't have good credit rate then there will be high rate of
interest by lender.
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Collateral- in debt financing, the company has to put something as collateral security against the
loan. This may be turn as security against the loan to company.
2.3 Non financial factor in expansion of airport retail.
The company want to developed in expansion of airport retail by easy flight plc as it has turn as
important success key factor which require a lot of management in sourcing policy and effective
selection process that will enable the company as the best operator. There is ha high level of
factor that will effect the expectation of company to be successful factor in development of retail
on airport. The company should expand with the development of product at diverse range in
availability of customer at airport. The company should introduce the service of direct hotel
booking to customer from airport will certain concession on new city. It will give easy
accessibility to customers of flight and add to goodwill. Thee company should introduces the
counter . The counter should add the essential and luxury product to add revenue to company.
The list should consist of perfumes and cosmetics, fashion and accessories. the company should
add these products in retail sector at airport for expansion of company in France.
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