Analyzing Financing Sources & CVP for Expansion

This assignment requires evaluating diverse financing sources available to a company. A comprehensive Cost-Volume-Profit (CVP) analysis should be conducted to manage expenses effectively and generate significant profits during market expansion. By expanding into new markets while maintaining profitability, the organization aims to achieve its growth targets.

Financial decision making for
travel and tourism

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1. Sources of finance in the travel and tourism sector............................................................1
2. Discussing behaviour of costs and significance of CVP (Cost Volume and Profit)..........3
3. Discussing pricing strategies in travel sector.....................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................7

INTRODUCTION
Financial decisions are required to be made in order to extract benefits quite effectively.
Present report deals with Thomas Cook Group Plc which is British corporation engaged in travel
and tourism sector and able to satisfy customers with much ease. Organisation is planning for
expansion to other market that is not explored by it. Moreover, report focuses on various sources
of finance available to company and various pricing strategies that can be selected by
organisation which suits the most. Furthermore, report highlights CVP analysis and cost
behaviour with relevant graphs and examples. Thus, importance of financial decision is much
relevant to company in attaining objectives in effectual manner.
1. Sources of finance in the travel and tourism sector
There are various sources of finance available to company by which it can expand its
operations in the best possible manner. Thomas Cook Group Plc is one of the successful travel
and tourism company situated in UK. In very short time span, organisation has garnered good
quantum of profits and is able to satisfy customers in effective way. Various sources of finance
can help company to expand its reach to more markets that are not been explored by it. For
expansion, it requires finance from different sources in order to attain its objectives quite easily.
There are internal and external sources which are explained below-
Internal Sources
1. Retained Earnings
This is quite useful source of finance for Thomas Cook Group Plc to arrange funds
internally (Internal Sources of Finance). Retained earnings are also known as ploughing back of
profits for the main reason that whatever amount of profits are generated in the last year are
retained in the business for future course of action. It is retained in smaller amount as major
earnings are provided to shareholders in the form of dividend. Thus, organisation may easily use
this source of finance for expansion purpose in effectual way.
2. Sale of Assets
This is another major source by selling off fixed assets of organisation for generating
funds quite easily. Thomas Cook Plc can sell its assets so that it may be able to produce good
quantum of finance in the best possible way. When business sell fixed type of assets, cash is
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generated that is used for attaining capital requirements for internal purpose with much ease.
This is one of the advantageous source of finance as when assets become old or obsolete and no
longer available for use, then it is better to dispose it off and cash can be easily produced and as
such, organisation may raise funds in effective manner.
External Sources
1. Borrowings from bank
Bank loan is one of the common source of finance which can be used by the company for
raising finance in the best possible manner (Ormond and Sulianti, 2017). Banks usually charges
certain rate of interest that is to be paid along with principal amount. In simple words, principal
amount is paid with interest accrued on the same and as such, timely instalments can be paid.
Thomas Cook Plc may take loan as its solvency position is good enough that means that it may
be able to repay loan amount within stipulated time with much ease. Borrowings from bank is
good source of raising funds and organisation may take advantage of it for meeting capital
requirements quite effectually
2. Share capital
Share capital is another source of raising funds for expansion purpose. Shareholders are
the people who invests in the company and as such, Thomas Cook Group Plc can take advantage
of such source of finance with much ease. This is quite essential for company so that it may be
able to garner funds required for expanding its operations in another market and as a result,
capital requirements can be met in the best possible manner. It is quite easy external source of
finance and organisation may take benefit out of the same (Kransdorff, 2017).
3. Angel investors
Angel investors are another source of external source of finance. These investors provide
funds to company in generally less amount that are sufficient for the organisation to meet its
requirements in effective manner. Investors provide funds for company so that it may attain
finance for carrying out activities quite effectually. Moreover, apart from providing funds, they
also give suggestions and advice to company for easing complex tasks in the best possible
manner.
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Hereby it can be recommended that there are various sources of finance to Thomas Cook
Group Plc. Company should chose option which best suits in accordance to nature of the
organisation. Among these sources, firm should opt for retained earnings as it will help to garner
good funds for expansion purpose as it has overall good profitability position.
2. Discussing behaviour of costs and significance of CVP (Cost Volume and Profit)
Costs are integral part of the concern so that it may be able to function properly.
Behaviour of costs means that how expenses are impacted by change in activities of business
(Mohseni and et.al, 2018). This implies that production costs undergoes change when there exist
any change in production level. Mainly there are three types of behaviour of costs such as fixed,
variable and mixed. These can be discussed with the help of example and graphs.
Fixed costs are those which do not vary with the output whatever be the production is
achieved by organisation. This simply means that these costs are required to be incurred whether
production is attained or not. Thus, if no units are produced, then also it is mandatory to incur the
same. For instance, rent expense, electricity and depreciation are fixed costs. Example is listed
below-
Total Fixed cost
(TFC) 40000 40000 40000
Produced units 5000 10000 15000
Per unit 8 4 2.67
It can be seen that with every increase in units, fixed cost per unit decreases which
implies fixed expense remains same irrelevant to production.
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Variable cost is another behaviour which keeps on changing when production is changed.
This means that variable cost changes in direct proportion when production level undergoes
change. It implies that Total variable cost increase, when units are more produced and vice-versa
(Lovan, Murray and Shaffer, 2017). But these remain constant per unit. For instance, direct
material change with level of production. Example is shown which implies per unit is constant.
Total Variable cost
(TVC) 10000 20000 30000
Produced units 5000 10000 15000
Per unit 2 2 2
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Illustration 1: Fixed cost Source:
accountingexplained.com

Mixed costs means that it contains both aspects of fixed and variable costs. This is also
known as semi-variable cost. For example, internet fee includes broadband fee which is variable
and monthly fee is usually regarded as fixed cost. Thus, all these types of cost behaviour affects
production in either way.
CVP analysis is interrelated to cost behaviour explained in above paragraphs. CVP is
quite useful for company in forecasting future volume in the best possible way. It is a
mathematical tool that studies how changes in costs and volume will affect earnings of the
company. Thomas Cook Group Plc may extract benefit out by carrying out CVP analysis and
assess how sales and expenditures impact on profits (Maresova, Sobeslav and Krejcar, 2017).
This is quite effective tool for designing tour packages by implementing price in accordance to
the preferences of customers. This help company to forecast sales and expenses that directly
affects profits. Costs may be analysed on per head of tourists and assumption can be made
regarding sales and desired revenue may be garnered.
Various costs described in cost behaviour section are relevant to forecast future sales and
expenditures and as such, it directly impacts profit. Management is able to take better decision
and control is initiated for achieving maximum revenue. CVP analysis is essential tool as break-
even point is computed to assess costs and sales volume. Break-even point means that
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Illustration 2: Variable cost Source:
accountingexplained.com

organisation has incurred no loss no profit. This will help Thomas Cook Group Plc to assess
revenue from the tour in international market and as such, costs may be analysed so that revenue
may cover expenditures.
Management will be benefited by carrying out CVP analysis and as such, perfect mix of
costs and volume will be easily found out by it in the best possible way. Expenses may be
controlled in a better way so that more profit may be garnered with much ease. This implies that
Thomas Cook Group Plc may be able to take short-run decisions by evaluating costs, volume and
profit in effective manner (Papatheodorou and Pappas, 2017). Thus, it is useful tool for
management to take enhanced decisions.
3. Discussing pricing strategies in travel sector
There are various pricing strategies which can be used by organisation in order to quote
right price and win the confidence of new customers by satisfying them with much ease. The
pricing strategies are as follows-
Premium pricing strategy
The premium pricing strategy means that company charges high prices when product is
to be launched in new market that has competitive advantage over other goods. Thomas Cook
Group Plc may use this pricing strategy in order to sell its tour packages in global market by
giving concrete evidence to customers that what is the difference between competitor's packages
and organisation. Thus, charging high prices is justified and passengers may purchase the same
at quoted price by the company. This means that organisation can sell packages at higher price
by displaying its unique properties better than rivals (Dodds and Joppe, 2017).
Penetrating strategy
This strategy is used by the company in order to gain market share in the best possible
manner. It implies that to capture market, firm uses this strategy by deliberately reducing prices
in comparison to rivals. This strategy is quite beneficial for Thomas Cook Group Plc as it is
planning to expand its reach to other market and as such, penetrating pricing strategy will help to
garner customers in effective way. By reducing prices, company will be able to gain good market
share and long-term benefits as well. However, it will face losses in short-run but will be
profitable in the long-run. Thus, penetrating strategy will be beneficial for company to enhance
customer base with much ease.
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Skimming strategy
Skimming means to increase prices by organisation in order to garner more profits in
effective manner. This help company to capture more profits in the absence of competitors in the
market. In simple words, prices are charged deliberately high so that organisation may be able to
produce more profits. This is quite useful for the company which has a good reputation in the
market and as such, loyal customers will pay for more prices and organisation will garner good
profits in the best possible way. However, this strategy is not suitable for Thomas Cook Group
Plc as for expansion purpose, it cannot charge high prices to gain new customers.
Economy strategy
Economy pricing strategy is followed by the company to make small profits by keeping
price minimum so that customers may be attracted in effective manner. This is quite useful
strategy by which organisation initiates control on expenditures such as promotion and marketing
expenses in order to keep low price. It is not suitable if firm has to make large quantum of profits
as it incurs more expenditures to achieve revenue with much ease (Gardiner and Kwek, 2017).
Hence, there are various pricing strategies by which organisation can attract customers in
the best possible way. Thomas Cook Group Plc may take penetrating pricing strategy in order to
capture international market and attain its objectives.
CONCLUSION
Hereby it can be concluded that finance is required in travel and tourism sector to attain
objectives. Thomas Cook Group Plc can easily expand its reach to more markets as profitability
position is overall good for expansion purpose. Pricing strategy can be followed and also there
are various sources of finance available to company. Moreover, CVP analysis should be carried
out by organisation so that it may control over expenses and as such, good profit may be
garnered in expansion as well. Moreover, organisation will be profitable in attaining good profits
by expanding to more market.
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REFERENCES
Books and Journals
Dodds, R. and Joppe, M., 2017. The demand for, and participation in corporate social
responsibility and sustainable tourism–implications for the Caribbean. ARA: Revista de
Investigación en Turismo. 2(1).
Gardiner, S. and Kwek, A., 2017. Chinese participation in adventure tourism: A study of
generation Y international students’ perceptions. Journal of Travel Research. 56(4).
pp.496-506.
Kransdorff, A., 2017. Corporate DNA: Using organizational memory to improve poor decision-
making. Routledge.
Lovan, W. R., Murray, M. and Shaffer, R. eds., 2017.Participatory governance: planning,
conflict mediation and public decision-making in civil society. Routledge.
Maresova, P., Sobeslav, V. and Krejcar, O., 2017. Cost–benefit analysis–evaluation model of
cloud computing deployment for use in companies. Applied Economics. 49(6). pp.521-533.
Mohseni, S. and et.al, 2018. Attracting tourists to travel companies’ websites: the structural
relationship between website brand, personal value, shopping experience, perceived risk
and purchase intention. Current Issues in Tourism. 21(6). pp.616-645.
Ormond, M. and Sulianti, D., 2017. More than medical tourism: lessons from Indonesia and
Malaysia on South–South intra-regional medical travel. Current Issues in Tourism. 20(1).
pp.94-110.
Papatheodorou, A. and Pappas, N., 2017. Economic recession, job vulnerability, and tourism
decision making: a qualitative comparative analysis. Journal of Travel Research. 56(5).
pp.663-677.
Online
Internal Sources of Finance, 2018 [Online] Available Through:
<https://efinancemanagement.com/sources-of-finance/internal-source-of-finance>
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