Financial Analysis of EUROCARIB Tours' Funding in Travel and Tourism

This report provides a comprehensive analysis of finance and funding within the travel and tourism sector, using EUROCARIB Tours as a case study. It begins with an introduction to financial concepts relevant to the industry, including Cost-Volume-Profit (CVP) analysis and its importance in financial management. The report then delves into various pricing methods EUROCARIB can employ, such as cost-based, market-based, and market penetration pricing, evaluating their advantages and disadvantages. Furthermore, it examines factors influencing profitability, including current trends, political considerations, and seasonal variations. The report also explores the application of different types of management accounting information, like variance analysis, financial statements, budgets, and forecasting, to aid decision-making. Finally, it discusses investment appraisal techniques, providing a valuable framework for strategic financial planning and investment decisions within the context of the travel and tourism sector.

FINANCE IN FUNDING IN
TRAVEL AND TOURISM
SECTOR

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1 ...........................................................................................................................................1
A. The concept of CVP analysis and its importance in financial management in EUROCARIB
tours..............................................................................................................................................1
B. Analysis of different pricing methods for EUROCARIB tours..............................................2
C. Factors that will influence the profitability of EUROCARIB.................................................4
TASK 2............................................................................................................................................5
A. Different types of management accounting information can be used in Eurocarib................5
B. Investments appraisal techniques as decision- making tool....................................................6
TASK 3............................................................................................................................................9
A. Main financial statements and interpretation of financial statements using rations such as
profitability, liquidity and investment..........................................................................................9
TASK 4..........................................................................................................................................13
A. Sources of finance available for Eurocarib for the development of new hotel.....................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16

INTRODUCTION
The topic of this study is finance and funding in travel and tourism sector. Finance and
funding is related to different sources of funding available for travel and tourism sector to
perform its various functions. Finance is related to the financial requirement of the company
which assist in performing its various operations. The company selected for this project is
EUROCARIB TOURS. This company is providing various services relating to torus and travel
to customers. It is a London- based company that focuses on Caribbean holidays. This study will
include task in which it will provide with Cost – volume profit analysis and importance of
financial management. Furthermore, it will provide analysis of pricing methods which the
organization can use to determine the price of products and services. Moreover, it will include
management accounting information as a decision- making tool. It will also provide
interpretation of financial accounts to assist in decision – making.
TASK 1
A. The concept of CVP analysis and its importance in financial management in EUROCARIB
tours.
Cost volume profit analysis is a tool to determine the relationship between cost, volume ,
profit and price. Cost in CVP analysis means the expenses which are made for producing the
product or service. Volume in CVP analysis is related amount of service sold. Profit in CVP
analysis is provided by subtracting the selling price of the product from its cost.
CVP analysis helps the management in forecasting about future volume and cost to
identify the profitability of EUROCARIB. This analysis Is based on certain assumptions which
include sales price per unit is constant, variable cost per unit remains constant and Total fixed
cost also remain constant (What Is CVP, and How Is It Important to Managerial Accounting,
2018). Cost – volume profit analysis is also used by EUROCARIB tours to determine its break
even point. Break even point refers to the point of sales at which the firm does not occur any loss
and also does not generate any profit. Break even point is calculated by dividing the organization
fixed cost by contribution margin.
Fixed cost refers to the cost of production which remains constant over the period.
Contribution margin refers to the organization income before deducting the fixed cost. Variable
cost in CVP analysis changes as per changes in the volume of sales unit. CVP analysis is assist
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organization in identifying various changes in cost and volume which affect the firm's
profitability.
Importance of CVP analysis in financial management
CVP analysis is important in financial management of EUROCARIB tours as it provide
understanding of changes in cost which have its impact on various functions of firm. Cost
volume profit analysis helps EUROCARIB tours in controlling cost by identifying the variable
cost and fixed cost due to which its profitability is reducing. CVP analysis is also helpful in
making decisions regarding future improvement of operations to increase the productivity and
profitability of firm.
Effective decision- making assist the organization in formulating various strategies which
will provide support to EUROCARIB in reducing its cost and increasing prfits. CVP analysis is
also provided assistance to financial management as it support in prepare budget through which
they can take necessary action for reducing the deviation in budget. CVP analysis also help
EUROPCARIB in determining its maximum sale volume to avoid losses and the sale volume at
which the goals of the organization are achieved.
B. Analysis of different pricing methods for EUROCARIB tours
Price of the product or service places an important part in attracting customers towards
the organization. EUROCARIB tours uses different pricing methods to determine the price of
product to attract more customers. This pricing methods consist of the following:
Cost – based pricing : Cost based pricing method is used to determine the price of
product by adding profit margin to the cost of product. Cost of product include manufacturing
cost of product to determine the selling price of a product and service.
Advantages of cost based pricing
 This method of calculating price of product is beneficial for organization as it cover all
the cost of production to determine the selling price before profits are calculated.
 This method of determining price is a straight – forward and simple strategy.
Disadvantages of cost based pricing
 This method may lead to under prices products. This method may ignore the opportunity cost of the investment.
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Market based pricing : Market based pricing helps in determining the price of product on
the basis of market prices of similar products sold in the industry (Vellas, 2016). This pricing
method helps in determining the price of product on the basis of competitors price of the
product.
Advantages of market based pricing
 This pricing method is easy for calculating price of the product.
 Market pricing method helps in identifying the price of competitors price of the similar
product.
Disadvantages of market based pricing
 This method assumes that the competitors price is correctly calculated. This method of pricing reduce creation as it copy the competitors pricing method.
Market penetration method : This method of determining the price of product provide
that initially the price of the product is low to attract more customers towards the brand and
increase the market share of the firm in the industry (Vogel, 2016). This method is used by firms
to increase their sales by reducing the price of product and the price of product is increased by
organization when the firm have strong customer base.
Advantages of penetration pricing
 This method or pricing helps the organization in increasing their market share.
 Penetration pricing method assist in increasing the profitability by increasing its customer
base.
Disadvantages of penetration pricing
 Competitors in order to retain their customers may provide their products and services at
the low prices to give the organization price competition.
 Competitors may have strong brand image due to which customers may not be willing to
switch the brand.
EUROCARIB can use the above pricing methods to determine the price of its holiday
package for the summer Caribbean holiday trip to charge from its customers. These methods will
assist in determining the pricing strategies to attract more customers for the trips so its can use
market penetration method to attract more customers towards the brand.
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C. Factors that will influence the profitability of EUROCARIB
There are various factors which affect the business of travel and tourism that consist of the
following factors :
Current trend : The travel industry is affected by this factor as different generation
people are attracted towards different types of tourism (Varasteh, Marzuki and Rasoolimanesh,
2015). The current trend of tourism industry include nature tourism, adventure tourism, cultural
tourism etc. Nowadays, the young people are attracted towards the adventure tourism due to
which the travel industry have to make changes in the type of tourism to attract more customers
towards the brand(Shahbaz and et.al., 2017). The old people are attracted towards the religious
and cultural tourism sop the travel industry have to provide various types of tourism to satisfy the
wants of customers to attract tourist for various types of tourism. EUROCARIB tours is planning
a summer holiday which will attract only the young generation and it may lose the customers that
are attracted towards different type of tourism so EUROCARIB must provide all type of tourism
to attract tourist of from all over the region.
Political factor : Political factor affect the business of travel and tourism sector. There
are various rules and regulations which must be complied to perform various operations to
travels and tourism sector. Government impose taxes in order to perform various activities.
EUROCARIB tours must comply with the rules and regulations imposed by the government to
perform the various operations relating to travel (DeFranco, Morosan and Hua, 2017). Theses
factor affect the business as due to high imposition of tax rate the price of travel packages also
get increased due to which EUROCARIB can reduce its customers base.
Seasonal variations : Seasonal variations also affect the business of travel and tourism
because of changes in season the tourism is also affected (Becker, 2016) . In winter season the
tourist are mostly attracted and in this season the organization have opportunity to increase its
profitability by attracting more customers (Airey and et.al., 2015). There are less tourist in
summer which attract less income for the travel and tourism sector. EUROCARIB in order to
increase tourists for the summer Caribbean holiday must conduct the travel in the season which
attract more tourists to increase profitability of the EUROCARIB.
The above factors have their influence on the operations of EUROCARIB tours and to
reduce the negative impact of these factors EUROCARIB must provide different types of
tourism according to the trend existing in market to increase its customers and also
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EUROCARIB must comply with various political factors to perform its various function
effectively and efficiently.
TASK 2
A. Different types of management accounting information can be used in Eurocarib
There are various types of management accounting information which can be used by
Eurocarib for various decision – making purposes. This management accounting information
consist of Budget, forecast, variance analysis and financial statements.
 Variance analysis : It is an analysis which is used by management for various decision-
making which assist in improving performance of the organization (Deen and Leonard,
2015). Variance analysis helps in comparing the actual with the standards for identifying
various performance variances to take necessary action for improving organization
performance by making various strategy and planning. Variance analysis include
purchase price variance, labor rate variance, selling price variance etc. Eurocarib can use
this management accounting information for decision- making in order to improve the
performance of various operations by reducing this variance by making comparison
between actual and standards.
 Financial statements : This statement can be taken into consideration for decision-
making purposes on the basis of financial information provided in the financial
statements(Derco and Pavlisinova, 2017). These statements help in identifying
performance of the organization and also assist in decision making for improving position
and performance on the basis of these reports. Financial statements consists of balance
sheet, income statements and cash flow statements. Eurocarib can use financial
statements for various decision – making purposes such as company's financial
requirements, expenses etc. to improve profitability of the enterprise.
 Budget : Budget helps the organization in making decisions which will helps the firm in
improving their various activities to attract more customers towards the company (Smith,
2014). Budgets are prepared to identify performance variances by comparing the actual
with the budgeted to identify the factors due top which the performance goals are not
achieved. Eurocarib can use this information for various decision- making to achieve the
performance goals by reducing the deviations.
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 Forecasting : Forecasting include estimated for the figures of sales , cost profit etc to
identify the future profits to make the plan and strategies on the basis of estimates and
make decisions to achieve those galas in the future(Park and Tussyadiah, 2017).
Eurocarib can use this information for decision making for improving various operations
in order to increase profitability of the firm.
B. Investments appraisal techniques as decision- making tool.
Investment appraisal techniques are used to determine the profitability of the firm by
investing in the various projects . Investments appraisal techniques helps in choosing that project
which will provide high returns in less time and that will be beneficial for the organization.
Payback period : It refers to the time which is required to earn the initial cash invested
in the project(Payback Period, 2017). Payback period is used to calculate the time required to
earn the highest return on investments. Pay back period is calculated by = initial investment /
Cash flow per period
Advantages
 This method is easy to calculate the time required to earn the initial cash of investment. This method helps in measuring the liquidity of projects.
Disadvantages
 This method ignores the time value of money.
 It does not consider the cash flow occurring after the pay back period.
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On the basis of above analysis it can be computed that project A must be chosen by
Eurocarib to earn the initial cash outlay in minimum time(Kalbaska and et.al., 2016). The
payback period of the project A is lower than the project b and C which interpret that project A
will return the initial cash outlay in minimum time of 3 years.
Average rate of return : This method helps in measuring the profitability of the
investments on basis of information provided by financial statements rather than cash flow.
Formula for calculating accounting rate of return is = Average income / Average
investment over the life of the projects.
Advantages
 Its helps in measuring the profitability of entire project as it consider cash flows
throughout the life of project. This method is based on accounting information which is easily available and understood
by the businessmen.
Disadvantages
 It is based on accounting information and not on actual cash flows.
 It does not take into consideration the time value of money.
On the basis of above computation of average rate of return it can be interpreted that the
rate of return for the project A,B and C is 33.3%, 36 % and 33.0%. Eurocarib in order to earn
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higher profits must choose the project which have the average rate of return 36 % which would
be beneficial for the company and increase its profitability.
Net present value : It refers to the present value of the future cash inflows which are
expected from the investment.
Formula = cash inflows from the investment – cost of investment
Advantages
 Net present value method provide importance to time value of money. This method help in maximizing the value of firm.
Disadvantages
 This method is difficult as it required more calculation.
 It is difficult to calculate the discount factor appropriately.
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From the above calculation it can be interpreted that net present value of the project A, B
and C are 4318, 2146 and 2248 that shows that project A would provide the highest present value
of the future cash flows and so Eurocarib must choose the project A for acquiring higher inflows.
TASK 3
A. Main financial statements and interpretation of financial statements using rations such as
profitability, liquidity and investment
These are mainly three financial statements prepared by the organization which consist of
balance sheet, income statements and cash flow statements. Following are the main financial
statements prepared by Thomas cook.
Balance sheet : Balance sheet is prepared by the organization in order to determine the
financial position of organization on the basis making a statement which consist of assets,
liabilities and equity. Balance sheet is prepared to identify the financial position of firm at a
particular point.
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Income statement : Income statements are prepared in order to determine the
profitability of the organization on the basis of information provided in the income statement.
Income statements include incomes and expenses for the period on the basis of which net or loss
for the period is determined.
Cash flow statement: cash flow statements are prepared in order to have understanding liquidity
of the firm by identifying the minimum cash requirement of the organization to perform various
activities. Cash flow statement include cash inflow and outflow of various activities including s
operating, investing and financial.
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