Finance & Funding: Travel & Tourism Sector Decision Making

This report provides an analysis of finance and funding within the travel and tourism sector, emphasizing the importance of cost, volume, and profit in management decision-making. It explores various management accounting information types and their utility as decision-making tools for tourism businesses. The report interprets financial accounts from the travel and tourism industry and investigates the sources and distribution of funding for capital projects related to tourism development, using Carnival Corporation & Plc as a case example to illustrate cost management, pricing strategies, and factors influencing profitability, alongside discussing the importance of management accounting information for Dalata Hotel Group PLC.

FINANCE AND FUNDING IN THE TRAVEL AND TOURISM SECTOR

Table of contents
Introduction......................................................................................................................................3
LO1 Understand the importance of costs, volume and profit for management decision making in
travel and tourism............................................................................................................................4
1.1 Explanation of the importance of costs and volume in financial management of travel and
tourism businesses...........................................................................................................................4
1.2 Analysis of pricing methods used in the travel and tourism sector...........................................6
1.3 Analysis of the factors influencing profit for travel and tourism businesses............................7
LO2 Understanding the use of management accounting information as a decision-making tool in
travel and tourism businesses..........................................................................................................8
2.1 Explanation of diverse types of management accounting information that could be used in
travel and tourism businesses..........................................................................................................8
2.2 Assessing the use of management accounting information as a decision-making tool.............9
LO3 Being able to interpret financial accounts to assist decision making in travel and tourism
businesses......................................................................................................................................10
3.1 Interpretation of travel and tourism financial accounts...........................................................10
LO4 Understanding the sources and distribution of funding for both public and non-public
tourism development.....................................................................................................................14
4.1 Analysis of sources of funding and distribution of funding for the development of capital
projects connected to tourism........................................................................................................14
Conclusion.....................................................................................................................................15
Reference list.................................................................................................................................16
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Introduction
Financial accounting is one of the most important parts of a business, irrespective of any sector
in which the business operates. The businesses in the sector of travel and tourism also require
efficient management of finances and optimum sources and distribution of funds. With the
advancement of time and rapid development, tourism has become one of the leading sectors in
the entire world. This report discusses on finance and funding in the sector of tourism through
the evaluation of importance of costs, volumes and profits for management decision-making in
tourism and the use of different types of management accounting information, which could be
used in the businesses of travel and tourism. Finance and funding in the sector of travel and
tourism has also been discussed in the report through elucidation of financial accounts of tourism
businesses and investigation of sources and distribution of funds for developing capital projects
within the sector of travel and tourism.
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LO1 Understand the importance of costs, volume and profit for management decision
making in travel and tourism
1.1 Explanation of the importance of costs and volume in financial management of travel
and tourism businesses
It is important to realize the significance of costs and volume in the financial management of the
companies in the sector of travel and tourism (Gean and Gean, 2015). The analysis of costs and
volumes helps tourism businesses in enhancing their financial management. Cost and volume
analysis also helps in increasing the level of efficiency of tourism businesses (Smith, 2015).
Carnival Corporation &Plc is one of the largest cruise brands and leisure travel and tourism
companies around the globe (Carnivalcorp.com, 2018). Due to this, it is important for the
company to analyze its costs and profits. The costs of a firm can be measured through the
classification and division of costs incurred by the company as per their behavior and
traceability. The costs incurred by Carnival Corporation &Plc are –
 Direct costs – The direct costs refer to those costs incurred by a company that can be
directly traced to the units of costs (Banker and Byzalov, 2014). For example, Carnival
Corporation &Plc employs a large number of employees to execute its activities. The cost
of these employees paid is the direct costs of the business.
 Indirect costs – Indirect costs refer to those costs that are difficult or not possible to be
traced directly to the units of costs (Banker and Byzalov, 2014). For example, Carnival
Corporation &Plc has to pay different costs such as payment of insurance, cleaning
expenses, etc. These costs are not directly appreciable to cost units and hence they are the
indirect cost of Carnival Corporation &Plc.
 Fixed costs – Fixed costs of a company are those costs that have to be incurred by a
company irrespective of any circumstances (Gu et al., 2017). These costs remain
unchanged even if the production of a company is zero and change only after long
intervals. For example, few offices of Carnival Corporation &Plc are taken on rent. The
rent paid change only after long intervals and these are the fixed costs incurred by the
firm.
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 Variable costs – Variable costs are just the opposite of fixed costs (Ding et al., 2013).
These costs keep altering with alteration in activity or production levels. For example, the
direct labor or employees of Carnival Corporation &Plc keep changing depending on the
demand of the tour packages of Carnival Corporation &Plc. This happens especially in
peak season. Similarly, the cost of employees decreases during off-season due to low
demand. Since this cost keeps changing from time to time, this can be classified as the
variable cost of Carnival Corporation &Plc. Semi variable costs – There are costs other than fixed and variable as well. Certain costs
have to be paid by a company one part of which is fixed in nature and the other keeps
varying (MacMillan, 2014). For example, Carnival Corporation &Plc has to pay
telecommunication charges. In spite of any changes in telecommunication, a basic tariff
has to be paid for telecommunication. This part of telecommunication costs is fixed.
However, telecommunication charges keeping elevating with greater use of
telecommunication. This part of the cost keeps varying based on utilization level. Such a
cost is semi-variable cost for Carnival Corporation &Plc.
However, apart from identification of costs, a company requires measuring the volume of goods
and services sold by it. The volume of goods and services sold by Carnival Corporation &Plc can
be measured with adopting the techniques mentioned below –
 Breakeven analysis – The breakeven analysis is an analysis that helps a company in
deriving the point at which the costs spent for production and the revenues collected from
sales are equal to one another (Morano and Tajani, 2017). The derivation of such a point
also helps a company in deriving the margin of safety of the company. For example,
Carnival Corporation &Plc can find out the margin of safety through breakeven analysis
and can derive the point below which the sales of the company can act as a threat.
 Economies of scale – Economies of scale can be explained as the advantages or benefits
got by a business from its large-scale operations and activities (Tegtmeier, 2013). For
example, Carnival Corporation &Plc is a large tourism business and purchases bulks of
materials for its activities. Buying materials in bulk gives the company an advantage of
buying products at low costs. This is the company’s economy of scale.
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1.2 Analysis of pricing methods used in the travel and tourism sector
Pricing is one of the major factors in a business since the prices of goods and services offered to
the public is responsible for maintaining the customer base of a company along with helping the
company in attracting new customers. Pricing strategy is also important for travel and tourism
businesses. In the present scenario, there exists large number of businesses in the tourism sector
and each business comes up with certain new tourism products and services in the market, each
of which attract large volume of customers. The most common pricing methods used in the sertor
of tourism are –
 Market led pricing – Market led pricing, or competitive pricing, refers to a method of
pricing products and services of a business in which the prices offered for similar
products and services by competitive tourism companies are evaluated and compared
(Hsieh et al., 2014). For example, the cruises of Holland America Line of Carnival
Corporation &Plc uses market led pricing method for comparing the price of products
and services offered by other cruise brands before setting its own prices. Cost led pricing – Cost led pricing is another pricing method in which the total costs of
production of a company are estimated followed by the addition of a fixed percent or
sum, which is offered to public for selling purposes (Kaur, 2014). For example, Carnival
Cruise Line, one of the cruise brands of Carnival Corporation &Plc use this pricing
method for pricing its cruise packages. ROI pricing – The method of ROI pricing is a pricing strategy under which the prices of
goods and services are set after the evaluation of the returns the company is going to get
from the investment on goods and services (Baker et al., 2017). For example, the P&O
Cruise brand of Carnival Corporation &Plc uses ROI pricing for setting prices for its
various cruise packages over the Caribbean and Mediterranean Sea.
 Cost plus pricing – Cost plus pricing is another method of pricing goods and services by
a company in which the total costs incurred for production is derived, which is multiplied
with a desired marked up percent (Li et al., 2015). The amount derived from this
multiplication is used for offering to customers for sales. For instance, Carnival
Corporation &Plc’s cruise brand AIDA Cruises prices its tour packages with the
application of the method of cost plus pricing.
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1.3 Analysis of the factors influencing profit for travel and tourism businesses
Profitability is the main reason for conducting a business (Obrinsky, 2015). An entrepreneur
always focuses on earning benefits from the operations made by his or her company. However,
different factors can have a negative effect on the profitability of a business. Tourism companies
often get affected due to different factors. The factors affecting profits of travel and tourism
companies are – Economic environment – Similar to all other businesses, tourism businesses also get
affected with economic environment factors (Briassoulis and Van der Straaten, 2013).
For example, business cycles, tax rates, GDP growth rate, inflation, etc. lower the profits
of a tourism business. Carnival Corporation &Plc’s profits are lowered when there is
inflation. The company and its different cruise brands have to pay higher prices for its
inputs but also have to keep the same price of its products and services, thereby causing
a decrease in the company’s profits. Seasonal variations – Seasonal variations have a direct impact on tourism business. For
example, Carnival Corporation &Plc is famous for its cruise brands (Guzman-Parra and
Quintana-García, 2015). However, tourists avoid sailing during rainy seasons due to the
fear of storms, cyclones, etc. This lowers the profit of the company during the rainy
season as the brands of the company such as AIDA Cruises has to offer great discounts
and low priced packages for attracting tourists during the season.
 Current trends – Current trends refer to the trends going on in the society. One-day
tours, adventure tourism, low cost tours, eco friendly tours, etc. are the current trends in
tourism. For example, in Scotland, most tourists are going for adventure tourism instead
of leisure tourism. Such a trend attracts tourists towards adventures and lowers the
profits of Carnival Corporation &Plc’s cruise brands, as these brands offer only leisure
tourism.
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LO2 Understanding the use of management accounting information as a decision-making
tool in travel and tourism businesses
2.1 Explanation of diverse types of management accounting information that could be used
in travel and tourism businesses
In order to operate the business successfully in the market, the management of Dalata Hotel
Group PLC needs to access different types of management accounting information. The
management accounting information is helpful for managing the financial resources of
organization efficiently and at the same time, it also helps in organizing the business activities
properly. The management accounting information that is important to Dalata Hotel Group PLC
is as follows:
Variance analysis results – Variance analysis is the analytical way in which the gaps between
the actual performance and standard performance of the organization are determined. In the other
words, it can be stated that with the help of variance analysis, the management can understand
whether or not they should improve their performance (MacMillan 2014). Therefore, if the
management of Dalata Hotel Group PLC uses this information they can actually improve their
performance level and can make the business more competitive.
Budgets – Budgets are the plans for the future financial activities of the business. With the help
of budgets the management can effectively and efficiently allocate the required funds to different
activities of the business (Tegtmeier 2013). It means by preparing or developing the budgets the
management of Dalata Hotel Group PLC can identify how much funds they need to operate the
business efficiently and at the same time, they can identify the sources from where they can
arrange the funds. Hence, budgets are also helpful for operating the business efficiently.
Financial statements – Financial statements are the documents that show the financial state of
the business during a particular financial year. With the help of financial statements the
management can understand the financial performance trend of the business, which includes
profitability trend, revenue earning trend and cash flow trend in the business (Obrinsky 2015). It
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means in order to making any important decision regarding the business, financial statements are
important.
Therefore, from the above discussion, it can be easily understood that management accounting
information is essential for operating the business effectively and so the management of Dalata
Hotel Group PLC must focus on this information.
2.2 Assessing the use of management accounting information as a decision-making tool
In the above discussion, the important management accounting information has been identified.
However, in order to understand the actual importance of the information, it is important to
identify the areas in which management accounting information can be used efficiently for
decision-making purposes. These areas are as follows:
Forecasting – Forecasting is one of the major areas in which management accounting
information is very effective (Kaur 2014). In the tourism business like Dalata Hotel Group PLC
forecasting is very important because this business depends on the seasons. Hence, in order to
maintain the financial position and market position of the company, proper forecasting is very
important. Through proper forecasting, the management of Dalata Hotel Group PLC can make
the decision how they needs to operate the business in the coming season or coming year.
Investment decision – The management accounting information also helps in making investment
related decisions. The management accounting information shows the financial capacity of the
business, which is very helpful understanding whether or not the business is capable of investing
in a new project (Morano and Tajani 2017). At the same time, it can also be stated that
management accounting information shows the budgets for the coming year, which is also
helpful in making decision how much funds the company can invest in a new project.
Raising capital – Management accounting information also helps the managers making decision
regarding how and from where they can raise the funds. With the help of the information that is
available in the budgets and financial statements of the organization is very helpful for
understanding from which source the management can raise the funds (Obrinsky 2015). At the
same time, this information also helps making decision whether the company should raise the
funds or not.
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LO3 Being able to interpret financial accounts to assist decision making in travel and
tourism businesses
3.1 Interpretation of travel and tourism financial accounts
Effective and efficiency in decision-making is essential for all businesses. The financial accounts
prepared by a business helps the business and its stakeholders to interpret and analyze the
financial position of the company during various years (Vogel, 2014). These accounts also make
it easy for the stakeholders of a company to compare a firm’s financial performance over a
number of years. The financial accounts prepared by a firm such as cash flow statement, income
statement, financial position statement, etc. help in analyzing the financial position of the firm.
For example, the income statement prepared by a firm helps in the analysis of the net revenue,
cost of sales, gross profits, operating profits and net profitability of the firm. Similarly, the cash
flow statement of a firm helps in the analysis of the liquid position of the firm. On the other
hand, the balance sheet or the statement financial position helps a firm in analyzing its financial
position through the analysis of the assets and liabilities of the firm. These statements can be
used for the computation of a range of financial ratios, which give a better interpretation of a
firm’s financial position.
The interpretation of the financial accounts of the businesses in the sector of travel and tourism is
helpful for measuring the financial performance of the businesses. For example, the financial
accounts of a famous tourism business Dalata Hotel Group plc can be helpful for understanding
and comparing the financial performance of the company (dalatahotelgroup.com, 2018). The
evaluation of the financial accounts of Dalata Hotel Group plc will help in assessing how
financial accounts interpretation assists in decision making in travel and tourism businesses. In
order to interpret and analyze the financial accounts of a firm, the annual reports of the company
Dalata Hotel Group plc prepared during 2016 and 2015 has been derived and compared with one
another.
The income statement of Dalata Hotel Group plc shows that the revenue from operations of the
business was 2813 million euro during 2015 (dalatahotelgroup.com, 2018). This figure changed
to 4176 million euro during the year 2016. This helps in interpreting that the net sales of Dalata
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Hotel Group plc have increased from the year 2015 to 2016. Thus, as per the sales made by
Dalata Hotel Group plc, the company has had an improvement in the company’s financial
performance. The comparison of the gross profit margin ratio of the Dalata Hotel Group plc also
shows an improvement. The gross profit margin of the business was 16068 million euro during
2015, which improved to 55482 million euro during the next year (dalatahotelgroup.com, 2018).
This yet again indicates that Dalata Hotel Group plc’s financial performance has been enhanced
from 2015 and 2016. The income statement of the company also indicates that the company net
income earned by Dalata Hotel Group plc was 14101 million euro in the period of 2015 and
18609 million euro during 2016 (dalatahotelgroup.com, 2018). The comparison of the net profit
margin ratio of Dalata Hotel Group plc also shows an increase in the firm’s financial
performance. Therefore, the interpretation of Dalata Hotel Group plc’s financial accounts shows
that the financial performance of the firm has been better in 2016 than in 2015.
If the balance sheet of the firm is assessed, it can be seen that the firm Dalata Hotel Group plc
has had an enhancement in the total assets of the firm. The balance on the asset side of the firm’s
balance sheet has improved from 2015 to 2016. A growth can be seen in the company’s
goodwill, fixed assets and the intangible assets other than goodwill. However, even if the
company had an increase in the total assets of the company, it can also be analyzed that the
equities and liabilities side of the company have also increased. This increase has taken place
mainly due to the increase in the firm’s long-term financial obligations or debts. The accounts
payable of the firm and the bank loans of the firm have also increased during 2016. This increase
can be acting as one major threat for the company Dalata Hotel Group plc in the upcoming years.
The analysis of Dalata Hotel Group plc’s cash flow statement shows that the firm has faced a
major fall or decrease in the cash or liquid position of the firm. During 2015, the net cash held by
Dalata Hotel Group plc was 149.1 million euro (dalatahotelgroup.com, 2018). However, during
2016, this amount decreased to 81.1 million euro within the span of one year
(dalatahotelgroup.com, 2018). This shows a massive decrease in the firm’s financial position.
This poor state of Dalata Hotel Group plc’s can also prove out to be one of its biggest threats
since poor liquidity can make it difficult for the firm to pay off all its short-term financial
obligations. Hence, the interpretation of the Dalata Hotel Group plc’s financial accounts shows
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