Finance and Funding Analysis Report for AHTC Summer Holiday Trip

This report delves into the financial aspects of Angamah Happy Tours Company (AHTC), focusing on its summer holiday trip planning. It begins with an introduction to financial management principles and their application within the travel and tourism sector. The report examines cost-volume-profit (CVP) analysis, emphasizing its importance in determining break-even points, contribution margins, and profit targets. Different pricing methods, including cost-oriented and market-oriented approaches, are analyzed to aid AHTC in setting service prices. The report then identifies factors influencing business profits, such as selling prices, variable costs, and the number of tourists. Furthermore, it explores various management accounting information techniques, including budgeting and variance analysis, to improve decision-making. Finally, the report discusses investment appraisal techniques and identifies potential internal and external sources of funding for developing a new hotel, concluding with a comprehensive overview of the financial strategies and recommendations for AHTC.

Finance and Funding

Table of Contents
INTRODUCTION......................................................................................................................1
TASK 1......................................................................................................................................1
AC 1.1 Concept of CVP analysis and its importance............................................................1
AC 1.2 Analysis pricing method for travel and tourism sector.............................................2
AC 1.3 Factors influenced on the business profits................................................................4
TASK 2......................................................................................................................................5
AC 2.1 Different types of management accounting information for AHTC.........................5
AC 2.2 Different types of investment appraisal techniques..................................................6
TASK 3......................................................................................................................................7
AC 3.1 Analysis and interpretation of financial statements..................................................7
TASK 4......................................................................................................................................9
AC 4.1 Internal and external sources available to develop a new hotel................................9
CONCLUSION........................................................................................................................11
REFERENCES.........................................................................................................................12

INTRODUCTION
Financial management concerns with planning, organizing, directing and monitoring
the financial activities of business. It mainly aims at procurement and utilising the funds in an
efficient manner. Therefore, it applies some management principles in terms of organizing
financial resources. Angamah Happy Tours Company often shortened to AHTC is a travel
and tourism organization. Operations of the company prevail in service industry that provides
accommodation and meal services to the tourist. The company is planning a summer holiday
trip for the tourist. Therefore, it needs finance for the capital projects and for the operational
purposes. This report will helps in identifying the finance sources that are available for
fulfilling its finance requirement. Moreover, cost and pricing decisions are also discussed to
set prices for rendering services to the customers. Further, importance of investment appraisal
techniques and management accounting information techniques that helps management to
take effective decisions are analysed.
TASK 1
AC 1.1 Concept of CVP analysis and its importance
Cost volume profit relations: It is a concept that is used by management to understand
the relationship between cost, sales volume and profit. Further, analysis determines the cost
and volume relationship with the business activities and assesses its impacts. It helps business
management to take effective and efficient decisions and assesses business risk.
Importance of cost and volume relationship for AHTC: Company can determine the
cost and volume relationship along with its impacts on business operations. Under the cost
factor, there are two types of cost that are fixed as well as variable. Fixed cost is not directly
relate to the business production and remains constant. However, variable cost gets changes
with the production changes. In relation to the given scenario, AHTC variable cost gets
inclined with the number of tourist increases and vice versa. Cost and volume relationship
helps organization to ensure effective financial management. Importance of this analysis for
AHTC is explained below:
Breakeven point: This analysis is mainly used to determine the breakeven point. The
point indicates the sales level at which AHTC will not incur any loss or profit. At this point,
business sales and the total of fixed and variable cost will be equal (Osazevbaru, 2014).
Therefore, AHTC can determine minimum sales level so as to not incur any loss which
affects negatively to the company's operation.
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Contribution: Another, the most important benefit of the analysis for AHTC is that it
helps in determining contribution through deducting the variable cost from the business sales.
Moreover, it identifies per unit contribution and contribution margin ratio (Vanhove, 2013). It
helps managers to identify that how much of the sales are required to cover the business fixed
expenses to reach up to the breakeven point. Further, after covering all the fixed expenses,
business sales will contribute to the business profits.
Profit: The excess of contribution over the fixed cost helps to ascertain the
profitability. Thus, AHTC can determine profits by identifying the difference between
business revenues and expenditures. AHTC generates revenues through providing distinct
kinds of services to the customers. However, meal, accommodation, hospitality and other
kind of services such as entertainment facilities are required to make payments by the
organization. Therefore, it is clear that AHTC can evaluate the operational results.
Target Profit: CVP analysis helps Angamah Happy Tours company to determine
sales level to achieve its profit targets. It can be determined through adding the fixed cost to
the target business profits and the divided to the contribution margin ratio (Page and Connell,
2006). Therefore, company can met profit targets effectively. Moreover, the analysis helps to
decide sales per unit and the total business sales to meet its business goals. Therefore, AHTC
can make effective business policies in order to fulfil its sales targets that help to meet its
profit goals.
AC 1.2 Analysis pricing method for travel and tourism sector
Deciding service prices for the tour and travel company is a strong market strategy
decision. Angamah Happy Tours Company is planing for a summer holiday trip at
Carribbean. The company is providing airplane and hotel accommodation facilities to the
tourists. Therefore, company is required to determine the prices for the services provided.
Distinct pricing methods are available to AHTC to decide prices that can be charged to each
customer that are explained below:
Cost Oriented Method: Cost plus pricing and mark up pricing are the cost oriented
method for setting e prices. Under the cost plus pricing method, AHTC has to determine the
total cost and then added a profit percentage that is expected by the company (Cooper, 2005).
For instance, if the total cost is 200£ and company expects profit @20% than the price will
be calculated as follows:
Price = Total cost + Profit expectation
= 200£ + (20% of 200£)
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= 200£ + 40£ = 240£
Another, under the mark up pricing method, price is calculated by adding the mark up
percentage. Difference between the cost plus pricing method and mark up pricing methods is
that under this method mark ups are calculated as percentage of selling price (Allen, 2015).
For instance, if the cost is 300£ and profit percentage on sales is 20%. Therefore, company is
required to calculate the profit percentage on cost and then price will be calculated as under:
Assume sales = 100£
Profit = 20£
Cost = 100£ - 20£ = 80£
Profit percentage on cost = 20£/80£*100£ = 25%
Price = Total cost + mark up percentage
300£ + 25% of 300£
= 300£ + 75£ = 375£
Market oriented method: Going rate pricing is the market oriented pricing method.
Under this method, prices can be decided on the basis of competitors’ prices. The prices may
be discounted or addition with the same amount on the basis of company's perception
(Narangajavana and et. al., 2014). Deciding prices through this method helps organization to
compete effectively in the market. The reason behind that is if company charges higher
prices from the competitors, then sales will be declined and vice versa. Therefore, profits may
go up in adverse direction as it will be reduced.
Differentiated pricing method: It includes the consumer based pricing method. In this
method, company analyses customers and determines its target one. After that, effective
market analysis has been done to identify the customer’s need and their buying behaviour
(Evans, Stonehouse and Campbell, 2012). Therefore, company can evaluate the value of
given services for the customers and setting prices at which services are acceptable by the
customers.
Decision: Both the cost plus pricing and marks up pricing are the best methods for
Angamah Happy Tours Company to set prices. The reason for such decision is that these are
the cost oriented methods that help to cover all the cost. Further, under this method, company
can meet its profit objectives through attaining the required sales volume.
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AC 1.3 Factors influenced on the business profits
Different factors are existed in the organization that affect the business profitability to
a great extent. Some of the important factors are set out below:
Selling prices: Angamah Happy Tours Company's profit is highly affected by the
business sales prices. Higher the prices will contribute to high amount of profitability and
vice versa. Reason for such impact is that profit is calculated by subtracting total sales to the
total of fixed and variable expenses.
Variable cost: Another factor that is influenced the company's profit is variable cost
per unit. Increase the variable cost per unit will decrease the business contribution and also
the profit (Swarbrooke and Horner, 2001). Therefore, it becomes necessary for the company
not to increase their variable cost as it affects negatively.
Number of tourists: Company has planned a tour at Caribbean for the customers.
Therefore, number of customers that will go on the tour impact AHTC's profits. For instance,
increases in the number of tourists will incline the business total sales that helps to increase
business profits and vice versa.
Competitors’ prices: It is the external factor that relates to the prices charged by the
competitors of AHTC. Lower the competitors prices will reduce the number of customers
hence, reduce the business sales and profits (Sanjeev, 2007). However, in case, when
competitor’s prices are relatively high than total sales and profit of company will be inclined
due to higher the number of customers.
Facilities or services: Number of services that are provided by AHTC are also
influenced the profitability. For instance, increase the number of services and its quality
contribute to increase the number of tourists and also the profits and vice versa (Middleton
and et. al., 2009).
Viability of the holiday trip: In case, when 90 customers are interested to go on the
company's planned trip, then profits can be calculated as under:
Particular Per unit Amount
Sales 750 67500
Less: Variable cost
Meal charges 125 11250
Airline and Accommodation
charges 50000
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Total cost 61250
Profit (Sales – total cost) 6250
Interpretation:
In case, when 90 customers desire to book for the tour than AHTC will have profit
amounted to 6250£. However, company's target profit is 10000£, therefore the decision will
be that AHTC should not organize the tour because of lower profitability. For increasing
profit, company requires to increase the total sales, number of tourist and reduce its
expenditures. For instance, if airline and accommodation charges get declined from 50000£
and meal charges per tourist get declined from 125£, then company's profits will get
increased.
TASK 2
AC 2.1 Different types of management accounting information for AHTC
AHTC requires to adopt modern management accounting decision making techniques
in order to improve their decision making process. Available modern management
techniques help AHTC to take effective business decisions that help to achieve its business
objectives. Most important management accounting techniques are budgeting and variance
analysis method.
Budgeting: AHTC can prepare budget through estimating its total revenues and its
expenditures. Moreover, difference between total cash revenues and expenditures helps to
determine available cash balance. AHTC as a travel and tourism company can make budget
through forecasting expenses and revenues that can be incurred from distinct type of services
provided (DRURY, 2013). The technique helps to monitor and control its business operating
activities on the regular basis. Moreover, AHTC can make policies so as to increase the total
incomes and decrease its expenditures hence; company will be able to have positive cash
balance.
Variance analysis: Another management accounting information technique is
variance analysis. Under this method, management identifies the variance through comparing
the budgeted and actual cost as well as revenues. Variance may be of two kinds such as
positive or negative. For instance, actual expenses are higher and actual revenues are lower
than budgeted, then it affect AHTC negatively. However, if the actual revenues are higher
and actual expenses are lower than budgeted target, then it affect positively. In case, when
company possesses any negative variance, then this technique helps to take corrective actions
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in order to mitigate it (Eagles, 2002). Therefore, it is clear that AHTC can control business
operating functions, reduce the business expenditures and increase its incomes. This
technique helps to improve the business activity and its performance that help to get adequate
amount of profitability.
AC 2.2 Different types of investment appraisal techniques
All the travel and tourism sector companies are required to make investment in
different types of available proposals. Investment appraisal techniques helps to take effective
and strategic investment decisions. It is a financial planning tool that facilitates the
determination of concerned firm investments and evaluates their relative profitability. By
employing these techniques, company can identify the investment proposal that yield higher
the benefits.
Angamah Happy Tours Company requires to make investment in property,
equipment, innovations as well as research and development projects for fulfilling its targets
(Jacob and et. al., 2003). Different investment appraisal techniques are available to AHTC for
the investment purpose that include payback period method, accounting rate of return
method, net present value method and internal rate of return method, described here as under:
Payback period: It is the time period in which AHTC can get its initial investment. It
is very easy to calculate as it can be computed by dividing the initial investment to the annual
cash flow (Lasher, 2013). Lower the payback period will be preferred by the companies.
Average or accounting rate of return: It compares the profit that can be earned on
different investments. The decision rule says that higher the accounting rate of return
indicates high amount of profitability hence, it must be accepted by the company and vice
versa.
Net Present value method: It evaluates the business discounted cash flows through
taking a discount factor. It is the comparatively a good method as it considers time value of
money (Turner and Guilding, 2013). Difference between the discounted cash inflows and
outflows is known as net present value.
Internal rate of return: It is the rate at which net present value of the investment will
be zero. The decision rule of this method is that if internal rate of return is higher than
discount rate than company should invest the funds and vice versa.
For instance, AHTC has an investment proposal that requires initial investment amounted to
100000£, discount rate 10% and the cash flows are stated below:
Year Cash flows Cumulative cash Present value of Present value of
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flows
1£ at 10%
discount rate cash flows
0 -100000 -100000 1 -100000
1 20000 -80000 0.909 18180
2 28000 -52000 0.826 23128
3 35000 -17000 0.751 26285
4 60000 43000 0.683 40980
5 75000 118000 0.621 46575
Total 118000 55148
IRR 25.38%
Payback period = 3 year + 17000/60000 = 3.2833 year
Accounting rate of return = (118000/5)/100000*100
= 23.6%
Net present value = discounted cash inflow - cash outflow
= 55148
Internal rate of return = 25.38%
Interpretation: on the basis of above calculation, it can be concluded that AHTC should
accept the proposal. The reason for such decision is that net present value is positive.
Another, payback period is 3.28 year and the project will generate accounting rate of return at
23.6%. Further, IRR 25.38% is higher than discount rate 10% hence, it is clear that company
should invest funds as it will provide good return to the company.
TASK 3
AC 3.1 Analysis and interpretation of financial statements
TUI Travel Plc is a UK travel company founded in the year 2007, headquartered in
Crawley, West Sussex, and UK. The company operates at international level as it operates in
180 countries and serves large number of customers through rendering travel and transport
services to them. Performance of the company can be analysed through analysing its
produced financial statements (Bresciani, Thrassou and Vrontis, 2014). Ratio analysis can be
used for analysing the company's financial statement that computes variety of ratios such as
profitability, solvency, liquidity and efficiency ratios.
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Ratios Formula 2014 2013
Profitability ratios
Gross profit 1692.216 1655.61
Operating Profit
Ratio 329 297
Net profit 53 60
Net Sales 14844 15051
Gross Profit Ratio (Gross Profit/ Net Sales) *100 11.40 11.00
Operating Profit
Ratio (Operating Profit/ Net Sales) *100 2.22 1.97
Net Profit Ratio (Net Profit/ Net Sales) *100 0.36 0.40
Return on Equity 4.57 3.98
Return on capital
invested 2.42 2.42
Liquidity ratios
Current Assets 31.77 34.13
Current Liabilities 66.31 61.6
Closing Stock 0.64 0.6
Current Ratio Current Assets / current Liabilities 0.48 0.55
Quick ratio Quick Assets/Current liability 0.46 0.43
Activity ratio
Total Assets
Turnover Ratio Net Sales/ Total Assets 1.59 1.66
Inventory turnover
ratio Net sales/ Inventory 210.43 227.03
Receivable turnover Net sales/Receivable 9.27 31.79
Solvency Ratio
Debt 12.22 7.97
Equity 10.09 15.22
Debt Equity Ratio Debt/ Equity 1.21 0.52
Investment Ratios
earnings per share 0.05 0.05
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Dividend 0.14 0.12
Share Market price 1119 1118
 Profitability ratio: Gross profit and operating profit ratio of the company get inclined
to 11.40% and 2.22%. However, net profit gets declined to 0.36%. Further, the return
on equity gets increased to 4.57% while return on capital employed remains constant
to 2.42. Thus, profitability ratios indicate that company's gross profitability gets
increased. However, declining in net operational results indicates that indirect
business expenditures get increased. Therefore, it is considered advisable that TUI
Group plc requires to reduce and control its expenditures so as to increase its profit
margin.
 Liquidity ratio: It is the measurement of company's ability to discharge its short term
liabilities. Current ratio gets decreased to 0.48 while quick ratio gets increased to
0.46. It indicates that less working capital is available in business for the operational
purpose. However, quick ratio indicates that higher the quick assets is available in the
company.
 Efficiency ratio: Total assets and inventory turnover ratio get decreased to 210.43
and 9.27 respectively. It indicates that TUI Group is using its assets and inventory less
efficiently. Further, the receivable turnover ratio is highly decreased to 9.27.
Therefore, it can be advised that TUI Group requires in improving its efficiency level
so as to use its assets in an efficient manner.
 Solvency ratio: It measures the company's ability to repay its long term obligations.
Debt to equity ratio of the company gets increased to 1.21 due to decrease the equity
and increase its debt. Therefore, it brings higher the risk to the business as high level
of debt is required to create financial burden to the company. Further, it is beneficial
because it is comparatively easier and lenient source of finance.
 Investment ratio: Earning per share remains still same to 0.5 however, dividend and
market price of share get inclined from 0.12 and 1118 to 0.14 and 1119 respectively.
Therefore, it is clear that company is provided high dividends to the investors that
helps to get higher level of investor’s satisfaction.
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TASK 4
AC 4.1 Internal and external sources available to develop a new hotel
AHTC desires to construct a hotel at Caribeean that requires investment amounted to
25£ million that can be acquired through internal and external finance sources. Internal
sources are available inside the organization while external finance sources are available
outside the company.
Type of source Name Description
Internal source Personal resources Personal savings, borrowing money
from friends and family as well as
earned profits by the business can be
invested by AHTC to open a hotel at
caribeean (Tourism Funding Source
Guide, n.d.)
Internal source Cash squeezing operations AHTC can negotiate its payables and
receive earlier from the receivables.
Through the cash squeezing
operations, company can avail higher
cash balance for the investment
purpose.
External sources Borrowings AHTC can borrow funds through
banks for different time duration.
Banks provide loans for different
time duration at an interest rate
(Brigham and Ehrhardt, 2013).
Furthermore, AHTC requires to keep
any security against the amount of
loan taken.
External source Share capital AHTC can issue shares to the public
for getting the required funds. Main
advantage of this method is that
AHTC do not require paying regular
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