Detailed Analysis of Finance and Funding in Travel and Tourism Sector

This report provides a detailed analysis of finance and funding within the travel and tourism sector. It begins with an introduction to the importance of finance in the industry, followed by an in-depth exploration of Cost-Volume-Profit (CVP) analysis and its application. The report then examines various pricing methods, including competitive, geographical, cost-plus margin, and penetration pricing policies. It also discusses factors influencing profits, such as costs, volume, and price. Furthermore, the report delves into management accounting information, including budgeting, cost accounting, and ratio analysis, and how these tools are utilized in decision-making. Investment appraisal techniques, such as payback period, accounting rate of return (ARR), net present value (NPV), and internal rate of return (IRR), are also analyzed. The report includes an interpretation of financial statements from Thomas Cook Group PLC, focusing on profitability, liquidity, and investment ratios. Finally, it explores various sources of finance available to the tourism industry, including both internal and external options, providing a comprehensive overview of financial strategies and their practical application within the sector.

Finance and Funding in the Travel and Tourism Sector
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Table of Contents
INTRODUCTION ...............................................................................................................................4
TASK 1.................................................................................................................................................4
1.1 Importance of CVP Analysis.....................................................................................................4
CVP Anlysis : .........................................................................................................................4
Importance of CVP anlaysis in Tourism Industry...................................................................5
1.2 Analysis of Pricing methods for Travel and Tourism Sector.....................................................5
Competitive pricing policy .....................................................................................................5
Geographical Pricing ..............................................................................................................5
Cost plus Margin ....................................................................................................................6
Penetration Pricing Policy ......................................................................................................6
1.3 Factors influencing Profits for Travel and Tourism...................................................................6
TASK 2 ................................................................................................................................................7
2.1 Types Of Management Accounting Information applied in Decision Making..........................7
Budgeting ...............................................................................................................................7
Cost accounting and Variance analysis .................................................................................8
Ratio Analysis ........................................................................................................................8
2.2 Use of investment Appraisal Techniques in decision making...................................................8
Payback Period........................................................................................................................8
Accounting rate of return (ARR)............................................................................................9
Net Present Value (NPV).........................................................................................................9
Internal Rate of Return (IRR)................................................................................................10
TASK 3 ..............................................................................................................................................10
3.1 Interpretation of Financial Statements of Thomas Cook Group PLC......................................10
Profitability Ratios................................................................................................................10
Liquidity Ratios.....................................................................................................................11
Investment Ratios.................................................................................................................12
TASK 4...............................................................................................................................................13
4.1 Sources of Finance for Tourism Industry.................................................................................13
Internal Source......................................................................................................................14
External Sources ...................................................................................................................14
CONCLUSION .................................................................................................................................15
REFERENCES...................................................................................................................................17
Index of Tables
Table 1: Cost Volume Profit analysis for CHTC..................................................................................5
Table 2: Factors influencing the profits................................................................................................6
Table 3: Calculation for profits when 90 tourist registers....................................................................7
Table 4: Calculation of Payback Period...............................................................................................8
Table 5: Calculation of ARR................................................................................................................9
Table 6: Calculation of NPV................................................................................................................9
Table 7: Calculation of IRR................................................................................................................10
Table 8: Ratio analysis on the basis of Profitability ratios of Thomas Cook Group PLC..................10
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Table 9: Ratio analysis on the basis of Liquidity ratios of Thomas Cook Group PLC......................11
Table 10: Ratio analysis on the basis of Investment ratios of Thomas Cook Group PLC.................12
Table 11: Analysis of Internal Sources of Finance.............................................................................14
Table 12: Analysis of External Sources of Finance............................................................................14
Illustration Index
Illustration 1: Cost Volume Profit (CVP) analysis ..............................................................................4
Illustration 2: Management Accounting information functions...........................................................7
Illustration 3: Profitability ratios of Thomas Cook Group PLC.........................................................11
Illustration 4: Liquidity ratios of Thomas Cook Group PLC.............................................................12
Illustration 5: Investment ratios of Thomas Cook Group PLC..........................................................13
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INTRODUCTION
Finance is a pillar of success and growth for business in every sector and Travel and tourism
is no exception. Carib Happy Tours Company(CHTC) is a company engaged in arranging tours
across the globe. This report reflects the application of CVP analysis and its importance in addition
to evaluation of factors influencing profits of the CHTC. Although management decisions are based
on the intuitions and market conditions but information regarding management accounting plays
vital role in the same. Further this report displays investment appraisal techniques and its use in
decision making. Moreover Thomas Cook Group PLC is selected for performance measurement
under the financial microscope. Finance being major function, this report described the sources of
finance available for the expansion projects of travel and tourism companies.
TASK 1
1.1 Importance of CVP Analysis
CVP Anlysis :
CVP analysis depicts the relationship between cost , volume and profits of the organisation.
It describes various levels of operation which will generate profits or loss for the enterprise. CHTC
with the help of CVP analysis can determine the break even number of customers to be taken on trip
to land into situation of no profit and no loss. Break even point is the level of sales where company
is at indifferent situation and anything above break even will result in profits and below the same
will be loss(Kumar, 2016).
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Illustration 1: Cost Volume Profit (CVP) analysis
(Source: Cost Volume Profit (CVP) analysis, 2017.)

Table 1: Cost Volume Profit analysis for CHTC
Carib Happy Tours Company (CHTC) Per tourist (2 week)
Particulars Amount in £
Price per customer 800
Less : Variable cost per customer 200
Contribution per customer 600
Fixed cost (Air plane and hotel) 60000
Break even point (Fixed cost/Contribution per unit) 100
Importance of CVP anlaysis in Tourism Industry
CHTC is a company engaged in core service sector of hospitality. CVP strongly supports
mangers in decision making in following manner :
Informed and detailed information : CVP analysis provides informed and detailed information
regarding the activities or services performed by CHTC. CVP analysis helps the entity to closely
monitor per unit cost and price and decide the margins and comparing the same with competitors
pricing policy(Datar, Rajan and Horngren, 2013).
Level of operations : CHTC can decide the level of operations in term of number of customers to
be served in order to cover the fixed cost incurred. In the above table it is clear that only if CHTC
takes 100 customers on trip it will be able to cover the fixed cost incurred on hotel and air fare.
1.2 Analysis of Pricing methods for Travel and Tourism Sector
Travel and tourism sector is highly competitive sector and therefore pricing is a crucial
decision to be undertaken. Pricing policy refers to amount charged from customers against
rendering the services(Kaplan and Atkinson, 2015). There are few pricing policies relevant for the
companies engaged in tourism business:
Competitive pricing policy
This policy emphasise on the pricing of services on the basis of competitors policy followed
by competitors at the same level. CHTC can price the trip to Caribbean holiday resort as per the
prices charged by Thomas cook for the same level of services provided. Further adjustments can be
made in pricing after considering the difference in quality of service and the market position.
Geographical Pricing
This pricing is used to charge different customers different amounts on the basis of their
geographical location. People travelling from far away countries will be charged more by CHTC as
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compared to North America as the flight charges for later would be less due to minimal
geographical distance.
Cost plus Margin
This is the best pricing policy to be adopted to ascertain minimum profits in the form of margin
over cost. As per thsi pricing policy CHTC should prefer this policy for lareadyt established tour
packages as the cosyt is already known and only desired margin is to be sadded. However this
cannot be applied on new tour packages as exact costs are not clearly defined .
Penetration Pricing Policy
Penetration pricing policy is adopted when demand is elastic with prices and company wants
to act as entry barrier for the new entrants. Penetration policy emphasise on keeping the prices
lower at the initial stage of launching the service to gain the market share(Zadek, Evans and Pruzan,
2013). CHTC can launch the summer holiday trip to Caribbean at lower prices in comparison to
competitors and gain on volumes.
1.3 Factors influencing Profits for Travel and Tourism
Profits are the function of several factors affecting directly or indirectly. However cost, price
and volume affects the profits directly. Further changes in consumer taste and preferences or market
conditions will affect the volume and cost respectively.
Table 2: Factors influencing the profits
Factors Meaning Influence on profits
Cost Cost refers to the expense incurred for
making the services deliverable for the
client. It includes all the direct and
indirect cost. For example: air fare, hotel
rent, food, commission to agents etc.
Cost is in inverse relation with profits. If
the cost of CHTC increase the profits
will decline as the spread between price
and cost will reduce.
Volume Volume refers to number of customers
served. Volume is elastic to the price
charged.
This is in direct relation with profits. If
the number of customers increase the
profitability of CHTC will increase
automatically.
Price Price is the amount charged from
customer for the services. Price drives
Price is directly in relation with profits. If
the price of the services increases the
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the customer preference and ratings to
the company.
profits will increase for CHTC as the
difference between cost and price
increases.
Table 3: Calculation for profits when 90 tourist registers
Carib Happy Tours Company Per tourist (2 weeks) 90 Tourist (2 weeks) 117 customers(2 weeks)
Particulars Amount in £ Amount in £ Amount in £
Price per customer 800 72000 93600
Less : Variable cost per
customer 200 18000 23400
Contribution per customer 600 54000 70200
Fixed cost (Air plane and hotel) 60000 60000
Net Profit -6000 10200
TASK 2
2.1 Types Of Management Accounting Information applied in Decision Making
Management Accounting information is crucial part of decision making. It provides
technical evidence to the decision and forms basis for the same. Further quality of decision depends
on the data or information from management accounting(Leary and Roberts, 2014). Some of the
major management accounting informations are demonstrated below:
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Budgeting
Budgeting is a systematic process of analysing and preparing future forecasts about
revenues, expenses, incomes, cash flows, production units, material usage etc.(Kelly, 2015). This
information is of great importance for decision making as provide clear picture about projects in
pipeline for CHTC.
CHTC can allocate and deallocate resource as per the utilisation expected on the basis of prepared
budgets.
Cost accounting and Variance analysis
Variance analysis focuses on comparing actual production or expenses with the budgeted
and finding the reasons for the gap(Pratt, 2013). CHTC can frame the decisions for controlling the
difference between actual and budgeted therefore leading the company towards attaining the
organisational goal of profitability.
Ratio Analysis
Ratio analysis depicts the relation and proportions between various variables. Further ratios
such as inventory turnover and efficiency ratios reflects the usage and requirements of the raw
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Illustration 2: Management Accounting information functions
(Source :Functions of Management Accounting, 2017.)

material(Vogel, 2014). CHTC can utilise the data of ratios to take effective decisions for betterment
of company.
2.2 Use of investment Appraisal Techniques in decision making
Investment appraisal techniques are applied in business to evaluate projects which involves
huge initial cost since they are irreversible in nature and employed for long period of time(Baum
and Crosby, 2014). Generally projects are mutually exclusive due to some or the other constraint
such as funds therefore selection of best is desired outcome. Some of the investment appraisal
techniques are listed below with their respective application in tourism industry:
Payback Period
Payback period determine the time period within which the initial cost of the project can be
recovered from the expected cash inflows in future years.
Table 4: Calculation of Payback Period
Project A Project B
Amount in £ Amount in £ Amount in £ Amount in £
Initial investment0 -80000 -100000
1 8000 -72000 12000 -88000
2 20000 -52000 25000 -63000
3 28000 -24000 32000 -31000
4 36000 12000 60000 29000
5 45000 57000 80000 109000
Pay back period 3.67 3.52
CHTC van use payback period to determine how long the project will take to cover the
initial cost. Since project B is covering the initial cost in 3.52 years in relation to 3.67 years by
Project A therefore project B should be collected as recovery is faster. This assist in knowing the
recover period of project.
Accounting rate of return (ARR)
This technique is utlised to know the profitability of the project. It determines the avrage
profitability of the project in each year during the life of project. Higher returns reflects better
profitability of peoject(Eliasson and Börjesson, 2014).
Table 5: Calculation of ARR
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Project A Project B
Years Amount in £ Amount in £
Initial investment0 80000 100000
1 8000 12000
2 20000 25000
3 28000 32000
4 36000 60000
5 45000 80000
Total 137000 209000
Average 27400 34833
ARR 34.25% 34.83%
Since tourism, projects involve huge initial investment there fore profitability of the project
is to be analysed on priority basis. Since Project B is slightly more profitable than Project A
therefore B should be preferred despite the high initial cost.
Net Present Value (NPV)
Net Present Value refers to difference between discounted cash inflows and the initial outlay
of the projects. If NPV dericed is positive project becomes acceptable(Liesen, Figge and Hahn,
2013).
Table 6: Calculation of NPV
Project A PV @ 10% Present value Project B PV @ 10% Present value
Years Amount in £ Amount in £
Initial
investment0 80000 100000
1 8000 0.909 7273 12000 0.909 10909
2 20000 0.826 16529 25000 0.826 20661
3 28000 0.751 21037 32000 0.751 24042
4 36000 0.683 24588 60000 0.683 40981
5 45000 0.621 27941 80000 0.621 49674
Total 97368 146267
NPV 17368 46267
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This is most suitable tool of capital budgeting as it considers time value of money. Further
since the projects are mutually exclusive project B should be adopted with higher NPV generated.
NPV calculates the value added to CHTC with the acceptance of project.
Internal Rate of Return (IRR)
IRR is the discounting rate at which the NPV of the project comes to 0. therefore if the
discounting is graeter tahn IRR project becomes accepatble(Dyson and Berry, 2014).
Table 7: Calculation of IRR
Project A Project B
Initial investment -80000 -100000
1 8000 12000
2 20000 25000
3 28000 32000
4 36000 60000
5 45000 80000
IRR 16.42% 22.33%
Since IRR of both the projects of CHTC is more than discounting rate used of 10% therefore
both the projects are acceptable but Project B has higher IRR which is more beneficial and should
be accepted. IRR is useful to evaluate the return generated with considering time value of money.
TASK 3
3.1 Interpretation of Financial Statements of Thomas Cook Group PLC
Financial Statements of the company reflects the income earned during the year and
financial health of the company(Gean and Gean, 2015). Financial performance of the competitor
Thomas Cook can be analysed on the basis of various ratios which are demonstrated below:
Profitability Ratios
Table 8: Ratio analysis on the basis of Profitability ratios of Thomas Cook Group PLC
Profitability Ratios
Particulars
Amount in £
Millions
Amount in £
Millions
2015 2016
Gross Profit 1772 1822
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Revenue 7834 7812
Gross profit margin Gross profit/Revenue 22.62% 23.32%
Net Profit 23 12
Revenue 7834 7812
Net Profit Margin Net profit/Revenue 0.29% 0.15%
Profitability ratio depicts the proportion of profits in comparison to revenue for the
period(Kraft, 2014). Income Statement of Thomas Cook Group PLC depicts that despite the fact
that operating profits have grown in year 2016 net profit ratio has declined from .29% to .15 % in
year 2016. Gross profit margin has increased due to decline in cost of sales in year 2016 as
compared to 2015 although revenue has also declined but proportion of falling varies therefore
leading to rise in gross profits. The major reason behind the declining net profits is increase in
other operating expense and interest cost.
Liquidity Ratios
Table 9: Ratio analysis on the basis of Liquidity ratios of Thomas Cook Group PLC
Liquidity Ratios
Particulars
Amount in £
Millions
Amount in £
Millions
2015 2016
12
Gross profit margin Net Profit Margin
0
0.05
0.1
0.15
0.2
0.25 22.62%
0.29%
23.32%
0.15%
Profitability Ratios
2015
2016
Illustration 3: Profitability ratios of Thomas Cook Group PLC

Current Assets 2035 2656
Current Liabilities 3702 4630
Current Ratio Current assets/Current liabilities 0.55 0.57
Quick assets Current assets- inventory 2003 2613
Current Liabilities 3702 4630
Acid test Ratio Quick assets/Current liabilities 0.54 0.56
Liquidity ratio depicts the adequacy of current assets or quick assets to repay the current
liabilities. Current ratio of Thomas cook presents a serious threat to its liquidity as current assets are
not sufficient to repay the current liabilities in either year. However it has slightly increased which
is good indicator in 2016.
Quick asset ratio or acid test ratio depicts the efficiency of quick assets to repay the current
liabilities immediately. Therefore inventory is excluded from current assets as it takes substantial
time to convert itself into cash and repayment of liabilities.
Investment Ratios
Table 10: Ratio analysis on the basis of Investment ratios of Thomas Cook Group PLC
Investment Ratios
Particulars Description Amount in £ Amount in £
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Current Ratio Acid test Ratio
0.52
0.53
0.54
0.55
0.56
0.57
0.58
0.55
0.54
0.57
0.56
Liquidity Ratios
2015
2016
Illustration 4: Liquidity ratios of Thomas Cook Group PLC

Millions Millions
2015 2016
Long term debt 1038 847
Equity 340 366
Debt Equity Ratio Long term debt/Equity 3.05 2.31
Earnings available for equity shareholders 23 12
No of equity shares 1487 1530
Earnings Per Share
Earnings for equity
shareholders/No. Of equity
shares 0.02 0.01
Investment ratio indicates the perception of investors and potential investors towards the
company which guides their decision to buy , hold or sell the shares(Accounting ratios, 2016).
Earnings per share reflects the earning generated for every share in the company it has declined in
year 2016 which is leaving a negative impact on investors as returns have deteriorated.
Debt Equity ratio indicates that what proportion of debt and owners capital are applied to
finance the assets of the company. The ratio has improved in 2016 therefore reducing the risk of
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Debt Equity Ratio Earnings Per Share
0
0.5
1
1.5
2
2.5
3
3.5
3.05
0.02
2.31
0.01
Investment Ratios
2015
2016
Illustration 5: Investment ratios of Thomas Cook Group PLC

financial leverage in the company. The major reason behind decline is due to decrease in loan term
loan amount in addition to slight increase in equity.
TASK 4
4.1 Sources of Finance for Tourism Industry
Tourism Industry expenses, are dominated by rentals paid to hotel accommodations and air
fare. Therefore CHTC desired to reduce the cost of hotel accommodation by constructing its own
hotel. This construction will increase the fixed assets investments of the company and reap good
future profits as this is part of long term business objective. Further hotel will generate its
independent income as well which will contribute towards overall profitability of the company.
Since the amount required is £25 Million which is huge and cannot be obtained from one source
therefore combination of following sources can be utilised.
Internal Source
Table 11: Analysis of Internal Sources of Finance
Sources of Finance Meaning Implications Suitability
Retained Earnings Retained earnings are
part of profits which
are retained into
business after
distributing dividends
to equity
shareholders(Shin and
Regulation, 2014). This
forms part of reserves
and enhance the equity
shareholder's fund.
There is no explicit
cost involved with
retained earnings and
also no legal
implications. However
opportunity cost of
retained earnings is
high as equity
shareholders expect
higher returns.
Retained earnings are
treated best source of
finance but it can be
utilised to fulfil limited
funding requirement.
Since CHTC requires
£25 Million therefore it
can be used in
commination with
other sources.
Sale/ Lease Of Fixed
Assets
Sale of fixed is a good
source of internal
funding. Company with
huge investments in
fixed assets can sell off
the assets which are not
in use and can generate
Sale of fixed costs
carries minimal
expense of disposal of
assets and generally
legal contracts are
entered for immovable
For CHTC this the best
source to sell one fixed
asset to construct
another. Building or
land which is not used
by CHTC can be sold
or leased for long
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funds(Xhaferri and
Demi, 2015).
properties to be sold. period of time and
amount derived can be
utilised for construction
of hotel.
External Sources
External sources of finance are
Table 12: Analysis of External Sources of Finance
Sources of Finance Meaning Implications Suitability
Long term Debt Long term debts can be
availed from credit or
financial institutions
for long term with
fixed scheduled
repayments along with
interest. Banks issue
secured and unsecured
loans with the strict
norms and regulations
regarding utilisation of
the amount(Carpinelli
and Crosignani, 2015).
This affects the
financial status of
company.
Debt is a cheap source
of finance and can be
utilised for huge
amounts. However
interest payments affect
the liquidity of the
business. Further
interest is tax
deductible. Debt has
preference over all the
other liabilities of
business at the time of
liquidation.
This can be used in
combination with some
source by CHTC for
construction of hotel to
maintain overall cost of
capital and have tax
benefit as well.
However it affects the
financial leverage and
ultimately risk
increases with rise in
debt.
Equity Equity is utilised by
companies for raising
huge funds by issuing
equity shares to general
public in primary
financial market(Aaker
and Biel, 2013).
Equity has high cost as
the investors expect
higher returns.
Although the returns re
distributed in the form
of dividends which are
appropriation of profits
Since the amount
involved is large equity
can be utilised for
raising the funds for
CHTC without
affecting the liquidity
of business and
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but tax benefits are not
available on the same.
guaranteed returns.
CONCLUSION
The above report demonstrate that CVP analysis is an important tool to decide the level of
operations to be performed. Further, Competitive pricing policy is best suitable for tourism industry
as cut throat competition exists in the sector. Management accounting information is strongly
support in decision making through budgeting and applying controls on expenditures and income.
NPV is the best tool of investment appraisal technique to decide whether to accept or reject the
project. Reviewing the financial health of Thomas Cook it can be concluded that it is not
performing well however situation can be reversed by undertaking measures to improve the same.
Moreover the most important root cause of company's growth is, efficiency in financial
management. Since amount required for construction of hotel is large, combination of debt, equity,
sale of fixed assets and retained earnings should be applied.
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