Analysis of Thomas Cook's Financial Performance and Funding Strategies

This report provides a comprehensive financial analysis of Thomas Cook, a leading UK-based tour company. It examines the importance of cost and volume in financial management within the travel and tourism sector, analyzing how these factors influence pricing decisions and profit margins. The report explores various pricing methods employed by the industry, including competitive, discounting, and seasonal pricing, and assesses the factors that affect profit margins, such as seasonality, government support, and development. It further discusses the application of management accounting information, including budgeting and financial statement analysis, in decision-making processes. The financial statements of Thomas Cook for 2014 and 2015 are interpreted using ratio analysis to assess profitability, liquidity, and solvency. The report concludes by identifying potential sources for funding capital projects and offers recommendations for financial improvement. The analysis highlights the company's financial challenges and the need for strategic financial management to enhance its performance in a competitive market.

Finance and Funding in Travel
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EXECUTIVE SUMMARY
In the present scenario, travel and tourism sector is growing with very high pace. Hence,
business unit can achieve success by offering the innovative services to their customers. The same
can be achieved by the firm only when it manages the financial resources in the best possible
manner. For this assignment Thomas Cook has been selected which is one of leading tour company
of UK. It can be summarized from the report that by making analysis of the cost and volume aspect,
business unit can take suitable decision about the production and price aspect. Further, it can be
stated that management accounting information provides high level of assistance to the firm by
making suitable decisions which will aid in its productivity and profitability. Along with this, it can
be inferred that in the accounting year 2014 and 2015 financial health and performance of Thomas
Cook was not sound. Thus, it needs to undertake effective action for making improvement in its
financial aspects.
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TABLE OF CONTENTS
INTRODUCTION................................................................................................................................3
Main body.............................................................................................................................................3
Explaining the importance of costs and volume in the financial management of the travel &
tourism sector...................................................................................................................................3
Analyzing the pricing methods that are undertaken by the travel and tourism sector....................3
Assessing the factors that influences the profit margin of travel and tourism sector......................4
Explaining the types of the management accounting information that can be used by the firms
operated in the field of travel & tourism .........................................................................................5
Assessing the use of management accounting information in the decision making aspect ............5
Interpreting the financial statements of Thomas Cook for making effectual decisions ..................5
Analyzing the sources that can be undertaken by Thomas cook for funding the capital projects .7
CONCLUSION ...................................................................................................................................8
RECOMMENDATIONS......................................................................................................................9
REFERENCES...................................................................................................................................10
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INTRODUCTION
Finance is the crucial element which closely influences growth and development of the
companies operating in the travel & industry. Moreover, now needs, taste and preferences of the
customers are changed with the high pace. In this regard, travel and tourism sector places high level
of emphasis on doing R&D activity with an aim to offer innovative services to the visitors. Hence,
for this purpose it is highly required for the travel and tourism firms to manage their financial
resources in the best possible way. The present report is based on Thomas cook that is a leading tour
company of UK and offers its services at the global level. In this, report will describe the factors
which business unit needs to consider while setting the strategic framework. Further, it will also
shed light on the financial health and performance of Thomas Cook through the means of ratios
analysis.
MAIN BODY
Explaining the importance of costs and volume in the financial management of the travel & tourism
sector
In the travel and tourism sector, cost and volume are the main factors which help the
company in making suitable decision that contributes in the financial management. Moreover,
Thomas Cook can make suitable pricing decisions only when it has information about the cost
incurred for offering services to the customers. For providing tour services to the customers,
business organization has to incur several direct and indirect expenses (Xu and et.al., 2012). Along
with this, there are also some other expenses which business unit has to incur such as R&D,
marking etc. for ensuring the smooth functioning of the firm. Hence, by taking into account all such
aspects Thomas Cook can set suitable price of the packages. Through this, company will be able to
get profit by recovering its all the expenses.
Further, break even analysis is the most effectual technique through which the business unit
can decide the number of tour packages it needs to offer for achieving the situation of no profit and
no loss (Chong, Ding and Li, 2015). Along with this, by analyzing the cost volume profit
relationship Thomas Cook can also assess the tour packages which it should offer to get the desired
level of profit or margin. In this way, by taking into consideration such techniques business unit can
decide the volume which it should offer for getting the economies of scale.
Analyzing the pricing methods that are undertaken by the travel and tourism sector
Companies operating in travel and tourism industry include Thomas Cook which employs
following methods for setting the suitable price of tour services are:
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Competitive pricing method: In the tourism sector, perception level of the customers is
highly influenced by the price and quality of services offered by the firm. Thus, by taking into
account such aspect, Thomas Cook sets prices in accordance with the competitors. Moreover, now
customers take decision after making thorough analysis of the destination, services offered and
prices charged by other tour operators (Sun and et.al., 2014). Hence, by employing the competitive
pricing strategy, the firm can enhance its customer base and thereby productivity as well as
profitability.
Discounting method: With the aim to increase the demand of customers for tour packages or
services Thomas adopts discounting pricing strategy (Pricing strategy for tourism, 2016). Hence, by
considering such aspect, business unit offers discounts to the customers on tour packages which
results in increasing the sales revenue.
Seasonal pricing method: Thomas cook sets high prices at the time of holidays with an aim
to maximize the profit margin. On the other hand, business unit offers discount to the visitors at the
time of off season.
Assessing the factors that influences the profit margin of travel and tourism sector
There are several factors which closely influence the profit margin of firms of travel and
tourism industry including Thomas Cook is:
Season: It is one of the main factors which have high level of impact on tourism. Moreover,
each destination has at least one set of high and low season. Usually, visitors prefer to visit the place
where environment is highly pleasant (Brigham and Ehrhardt, 2013). In this way, season affects the
number of visitors to the large extent as well as profitability of the firm.
Government support: Initiatives which are taken by the government for the growth and
development of tourism also impacts the profit level of Thomas Cook. For instance: UK
government spends huge amount on promotion of tourism or destination places. In this way,
Thomas Cook is not required to spend more on marketing campaign to the large extent. Besides
this, programs such as Olympic etc. (Factors Affecting Marketing in Travel and Tourism, 2016).
which are organized by the government at the international level have impact on the revenue
generated by the travel and tourism sector. Thus, support which is provided by the government may
result into increase in e profit margin and vice versa.
Development: In the present era, visitors want to go at the places which are highly
developed and maintained. Hence, if government fails to develop and maintain museums and other
historical monuments then it may result into decrease in number of tourism (Titman, Keown and
Martin, 2015). In this way, such aspect influences the profit margin of the travel and tourism firm.
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Explaining the types of the management accounting information that can be used by the firms
operated in the field of travel & tourism
Thomas Cook which operates in the travel and tourism sector can make optimum use of its
financial resources by framing suitable budget. Hence, by making estimation of the income and
expenses, business unit will be able to draft suitable budgeting framework. This is turn provides
deeper insight to the personnel about the money which they need to spend in varied activities.
Further, budget also assists the firm in assessing the deviations which take place in its financial
performance (Oikonomou, Brooks and Pavelin, 2012). In this regard, by making comparison of the
actual expenses with the budgeted figures, business unit can identify the deviations more
effectually. Such information enables the manager to take strategic action within the suitable time
frame and thereby facilitates optimum utilization of the financial resources.
In addition to this, by making analysis of the income and cash flow statement as well as
balance sheet Thomas Cook can make competent policy framework. Moreover, all such financial
statements clearly reflect the effectiveness of the strategic adopted by the firm (Corsatea, Giaccaria
and Arántegui, 2014). Hence, by making comparison of the actual performance with the set
standards, business unit can determine the extent to which it has attained the goals and objectives.
Assessing the use of management accounting information in the decision making aspect
Management accounting information is highly significant and make contribution in the
effectual decision making. Thomas cook can evaluate its financial performance by making
comparison of the financial statements with the previous year. Further, it also aids the firm to
measure their performance in against with the competitors (Ge, Kim and Song, 2012). Thus, by
making evaluation of the monetary aspects in against to the set criteria, company can assess its
solvency, liquidity and profitability aspect. Further, by making use of the output of variance
analysis, business unit can properly forecast about the income and expenses (Succurro and
Costanzo, 2016). This in turn helps the firm in making suitable and highly realistic budgeting
framework for the near future. Along with this, company can also take suitable decision by making
use of management accounting information system. It enables the firm to organize and evaluate the
data of different departments in the highly structured manner.
Interpreting the financial statements of Thomas Cook for making effectual decisions
Ratio analysis may be defined as a financial tool which helps the business organization and
its stakeholders in evaluating the financial statements in the best possible way (Lazonick, 2014).
Hence, by this Thomas Cook can assess its profitability, liquidity and solvency aspect in the best
possible way.
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Ratio analysis of Thomas Cook for the year of 2014 and 2015 are:
Particulars Formula 2014 2015
Current assets (CA) 1829 2035
Current liability (CL) 3894 3702
Stock 34 32
Prepaid expenses 390 317
Liquidity ratios
Current ratio CA / CL 0.47 0.55
Quick ratio
Current
assets –
(Stock +
prepaid
expenses)
/ current
liability .36 .46
Profitability ratios
Gross profit 1868 1772
Sales 8588 7834
Net profit -118 23
Gross profit ratio (GPR)
GP / sales
revenue
*100 21.75% 22.62%
Net profit ratio (NPR)
NP / sales
revenue
*100 -1.37% 1.3%
Efficiency ratio
Net profit -118 23
Capital employed 247 340
ROCE NP / - 0.07
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Capital
employed
Fixed asset turnover ratio 11.04 10.03
Inventory turnover ratio 216.08 183.70
Receivable turnover ratio 32.87 34.59
Debt-equity ratio
Sharehold
ers
equity /
long term
debt 3.49 3.49
Profitability ratios: From the above mentioned ratio analysis it has been assessed that gross
profitability aspect of the firm increased in 2015 as compared to 2014. In the accounting year 2014,
GP ratio of the firm was 21.75%, whereas as it reached on 22.62% at the end of 2015. Hence, by
considering such aspect it can be said that sale revenue of the business unit increased from previous
years. Thus, Thomas Cook lays more emphasis on social media marketing to enhance the sales
aspects. However, NP ratio of the firm was very poor in both the years 2014 and 2015. During such
years, net margin of the firm was -1.37% and 1.3% which was not good. Hence, company needs to
make competent strategic and policy framework which helps in exerting control over the expenses.
Liquidity ratios: In 2014 and 2015, current ratio of Thomas Cook was .47 and .55. This
aspect shows increasing trend but still company is not highly capable in relation to meeting its
current financial obligations from the current assets. Thus, company needs to focus on maintaining
the current assets. This in turn helps in improving the liquidity aspect to the large extent. Further,
quick ratio of the firm shows that it has enough current assets which can be easily converted into
cash. Hence, Thomas Cook is able to meet its quick financial obligations more effectually.
Efficiency ratios: Inventory and fixed asset turnover ratio shows that company failed to
make effectual use of its resources for generating more sales. Hence, Thomas Cook is required to
encourage their workforce to give their best efforts while performing the business activities and
functions. Further, company also failed to generate high level of return from the capital employed
by it. Thus, for getting the desired level of outcome or success, company needs to make changes in
its existing policy framework according to the external business situation.
Solvency ratio: Debt -equity ratio of Thomas Cook was 3.49 in both 2014 and 2015. This
aspect shows that business unit has fulfilled more of its financial needs debt instruments rather than
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equity. Further, debt-equity ratio of the firm is higher than the ideal ratio (.5:1) which is not a good
indicator for it. Moreover, debt instruments impose fixed financial burden in front of the company.
Thus, business unit needs to keep in mind the ideal ratio while setting the financial structure.
Analyzing the sources that can be undertaken by Thomas cook for funding the capital projects
There are several internal and external sources of finance which can be used by Thomas
Cook for funding the capital projects which are as follows: Retained profit: Thomas Cook can finance the proposed investment by making use of
retained profit. Moreover, it is the amount which business unit keeps with itself rather than
distributing the whole amount of profit in the form of dividend. In this, by making use of
such money, business unit can invest money in the most suitable project (Gander, 2013). It is
the most effectual method which does not impose any financial obligation such as interest
etc. in front of the company, However, if company makes use of its retained profit to finance
the project then it would not able to give dividend to the shareholders. This in turn will
affect the brand image of the organization in the negative direction. Selling assets: Each business unit has some assets such as land, furniture, machinery etc.
which are not used in the productive activities (Lin and et.al., 2012). In this, by selling such
kind of unproductive assets, Thomas cook can generate funds to the great extent. Issue of share capital: Funds can also be raised by Thomas cook for capital projects through
the means of issuance of shares. Hence, by issuing shares to both existing and potential
shareholders, business unit can generate funds to the significant level (Desai, 2014). This
method of rising finance is highly economical and also reduces the financial obligations to
the large extent. Moreover, in the case of shares, business unit gives dividend to the
shareholders only when it earns enough amount of profit margin.
 Bank loan: Company can also raise money for the purpose of investing in the capital
projects through bank loan. Moreover, banks are always ready to provide financial
assistance to the company whose credit rating is good. Hence, on the basis of the collateral
security, organization can approach bank for loan and thereby gets the financial support
(Cerqueiro, Ongena and Roszbach, 2016). However, such source of finance imposes
periodical financial burden on the organization in terms of interest.
Besides this, company needs to distribute funds in the varied projects by taking into account
the tools and techniques of investment appraisal. Hence, by assessing the NPV, payback period and
IRR of the proposed project Thomas Cook can determine the viability of the project. Besides this,
by making competent financial plan business unit can allocate funds in the suitable projects.
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CONCLUSION
From the above report, it has been concluded that cost and volume is one of the main factors
which helps the company in making effectual and suitable pricing decisions. Besides this, it can be
revealed from the report that discounting and competitive pricing methods are used by Thomas
Cook to influence the decision making of the customers. Further, it has been articulated that by
making use of management accounting information, business unit can control cost to the large
extent. In addition to this, it can be inferred that information in relation to cost also helps the
company in making suitable decision which aid in the profit margin of firm. It can be summarized
from the report that profitability, liquidity and solvency position of the firm is not sound. Hence,
firm needs to take strategic measure within the time frame which can improve its financial aspects.
RECOMMENDATIONS
 In accordance with the outcome of ratio analysis, it is recommended to Thomas Cook to
make changes in the existing strategies by thorough analyzing the market conditions. This in
turn helps the company in improving its profitability, liquidity and solvency aspects.
 Further, it is suggested to Thomas Cook to select the suitable source for funding the capital
project by making evaluation of its implications in terms of legal, financial and dilution of
control.
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REFERENCES
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Factors Affecting Marketing in Travel and Tourism. 2016. Online. Available through:
<http://smallbusiness.chron.com/factors-affecting-marketing-travel-tourism-54570.html>.
[Accessed on 5th October 2016].
Pricing strategy for tourism. 2016. Online. Available through:
<http://www.tourismindustryblog.co.nz/2010/03/pricing-strategy-for-tourism-businesses/>.
[Accessed on 5th October 2016].
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