Financial Analysis of the Travel and Tourism Sector: Funding

This report provides a comprehensive analysis of finance and funding within the travel and tourism sector, using Thomas Cook Airlines as a case study. It begins with an interpretation of financial accounts, including ratio analysis (current ratio, acid ratio, return on capital employed, net profit ratio) t...Read More

Finance and Funding in the Travel and
Tourism Sector

Table of Contents
INTRODUCTION ..........................................................................................................................1
TASK 1............................................................................................................................................1
3.1 Interpretation of financial accounts to assist decision-making.........................................1
.........................................................................................................................................................3
2.1 Different kind of management accounting information which used in tourism sector....7
2.2 Use of management accounting information as a decision making tool..........................8
TASK 2............................................................................................................................................9
1.1 Significance of cost and volume in travel and tourism sector..........................................9
1.2 Analyse of pricing methods used in travel and tourism sector.......................................10
1.3 Factors influencing profit in travel and tourism businesses...........................................11
CONCLSION ................................................................................................................................12
REFERENCES..............................................................................................................................13
.......................................................................................................................................................13

INTRODUCTION
Financial Management is process of planning,executing and controlling financial
operations. With passage of time tourism has emerged as popular leisure activity and a major a
source of income for many nations supporting their economy by contributing in GDP,
generating employment opportunities, earning foreign exchange reserves etc. The report is based
on case study of Thomas Cook Airlines (Evans, Stonehouse and Campbell, 2012). The project
will discuss about various types of costs that is incurred by hotel along with various factors that
are essential to analyse to understand tourism sectors. Further a detailed ratio analysis of firm
will be provided along with results and interpretation. The report will also provide sources and
distribution of funds for public and private tourism development.
TASK 1
3.1 Interpretation of financial accounts to assist decision-making
Thomas Cook is a British airline established in 2003 with its base in Manchester,
England. The firm belongs to travel and tourism sector and is a airline division of Thomas Cook
Group which is having three sister airlines. Firm is known to provide leisure destinations
worldwide. Company is having fleet around 90 aircraft and operates approx 20 sources markets
in Europe. Year by year firms revenues increased from 15.33% from 7.81bn to 9.01bn while net
income improved 225.00% from 4.00m to 13.00m. This shows good financial position of the
firm. Mentioned below is the financial statement of Thomas Cook that provides company's
income statement, cash flow statement and balance sheet for the year 2016-2017:
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Interpretation of financial data
All the values are calculated in Millions.
Current ratio: Current assets / Current liabilities
2016 2017
2645/4633= 0.57 2241/4325= 0.51
As per firms current ratio analysis it could be determined that company is emphasizing
more on its fixed assets. This ratio will shows the ability of organisation to pay off their
liabilities. From the calculation of current ratio analysed that Thomas has sufficient of funds to
pay off their debts.
Acid ratio: Current assets- (stock +prepaid expense) / Current liabilities
2016 2017
2645-43/4633=0.56 2241-42/4325= 0.50
In comparison with 2016 acid ratio of Thomas Cook has reduced down from 0.56 to 0.50
that is the indicator of reduction in company's cash and liquid assets. It means that organisation is
required to provide more emphasis on arrangement of liquid funds.
Return on capital employed: EBIT / Total Assets –current liabilities
2016 2017
34/6943-4633=1.47% 46/6615-4325=0.20%
Profit for Thomas Cook before tax was recorded 46 £m for 2017 and 34£m for year 2016.
In addition to this capital employed for 2017 is 280£m and for 2016 was 326£m. This will
improves the decision-making of management as they understand that they sufficient amount of
resources which aid to earn better returns in future.
Net profit ratio: PAT / Sales *100
2016 2017
1/7810*100= 0.012% 12/9007*100=0.133%
Net profit for Thomas Cook is estimated to be 0.133 in 2017 and for 2016 it was 0.012.
This is the indication of firm earning higher revenues year by year. This will shows that
company is doing good in their operational transactions and having the option to expand their
business by employing large amount of funds in different activities.
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2.1 Different kind of management accounting information which used in tourism sector
Management accounting information is concerned with internal managers and decision
makers that assists in providing relevant information and data to managers for taking sound
business decisions. This information could be in form of ratios, budget forecasts, variance
analysis, cost accounting and variance analysis. Thomas Cook make use of below mentioned
management accounting information to take authentic and accurate financial decisions:
Budget Reports: It is a financial document that comprises summary of all expenses and
incomes that are been generated by for a particular financial year. It is divided into various
sections such as general income and sales information, fixed and flexible expenditures and entire
business net worth comprising assets and liabilities. In context to Thomas Cook budget reports
ascertain expectation of top level of management from its middle and lower levels. Thomas
Cook been dealing in travel and tourism industry is subject to various market fluctuations. Thus,
it regularly prepares budgets so as to keep firms expenses within limits. Also they serve as
indicators for business targets that company strives to achieve. (Gibson, Kaplanidou and Kang,
2012).
Variance analysis: The managers of Thomas Cook make use of variance analysis to
ascertain the deviation or gaps between hotels planned and actual business behaviour. For which
company calculates variance associated with its material and labour. This enables Thomas Cook
to determine its performance as good or bad. For instance, in case variance comes out to be
negative then it becomes critical for management of Thomas Cook to take corrective actions so
that in near future that specific variance is not repeated again. It is an effective techniques to
maintain control over business by regularly examining changes in variance level on monthly
basis.
Management Information System: it is computerized database system in which
financial information of Thomas Cook are programmed and organized to produce regular
reports for its various business operation at different levels. Firm make use of this technique to
analyse its market performance by monitoring deviations revealed by MIS reports between its
actual results and planned goals (Morrison, 2013). Thus it assist top management to take
corrective measures to overcome those gaps.
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2.2 Use of management accounting information as a decision making tool
Management accounting information is a technique of gathering , storing and processing
accounting and financial data and to track down various accounting activities in conjunction with
its resources (Murphy, 2013). The information revealed by management accounting system
could be utilized by both internal and external management including creditors, investors , tax
authorities etc. The data and information provided by management accounting system enables
firm to take right and accurate decisions by reviewing various analysis related to cost, activity
based costing techniques etc. Mentioned below ere certain prominent use of Management
accounting information for Thomas Cook : Controlling firms expenditures: Thomas Cook by making use of budgets keep a regular
check and control over various expenses that are been incurred by firm. Thus for
managers to estimate these expenditure it becomes essential to make predictions about
probable amount. On basis of these estimated amount various business decisions are to
made by managers. In case these estimated amount is wrongly estimated all decisions
associated with them will be wrong as well. Therefore it is essential for managers of
Thomas Cook to be cautious while formulating budgets. Enables firm to take price reducing decisions: Break even analysis technique helps in
determining the minimal sales level that is requisite for firm to attain so as to cover its
production cost. Thus, this tool helps Thomas Cook to ascertain level up till which firm
can reduce price of its products. ( Nielsen and Spenceley, 2011).
 New product and service launch: The information related to various current market
trends are made available to top management with Trend analysis. This enables managers
to ascertain and determine information related to different time periods and helps
managers to spot actionable patters in current information available with firm. Thus, it
greatly influences firms capabilities to remain competitive by introducing goods and
services as per customers requirements. Thus Thomas Cook could come up with new
packages, adding ion new complementary services, premium facilities etc. to enhance its
guests experience.
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TASK 2
1.1 Significance of cost and volume in travel and tourism sector
Capital is a significant requirement for any organisation irrespective of their industry.
Cost and Volume both forms an interrelated aspects having direct relationship with each other
i.e. an increase in volume will enhance cost and vice versa. Thomas Cook being one of leading
British airline is subject to various economic situations such as recession for instance for which it
is essential for firm to required volume of funds.
Significance of Cost
Cost is money that is invested by a entrepreneur in its various business activities and one
of the major determinant that impacts firms growth and profits. For instance, in case of Thomas
Cook if company keeps its flight tickets rates too high in comparison to its business competitors
there is probability for firm to experience decrease in its sales volumes as clients will look for
affordable options (Vanhove, 2011). Thus it is essential for Thomas Cook to set right
competitive price for its airline tickets so as to provide value to its customers and to earn high
profits. Cost minimization: It is of critical significance to optimum utilize all its limitedly
available resources so as to lower down its operational costs. This will ultimately assist
Thomas Cook to keep price of its products reasonable so as to attract large number of
tourists to make bookings. Improving performance of management : There are various different types of costs that
are involved related to business operations such as direct, indirect, variable and other
costs (von, Weppen and Cochrane, 2012). Thus, carefully analysing these costs and
undertaking market research about factors effecting them will enables Thomas Cook to
take right and authentic decisions. This will lead to timely attainment of objectives within
specific time frame leading to enhancement in performance and productivity level of
hotel.
Significance of Volume
Volume : Volume could be described as the quantity of products and services that are been
offered by a company within one financial year. Achieving high volume is critical for Thomas
Cook for achieving the following:
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 Break even point : Break even is that point or situation that indicates no profit no loss
i.e. a level of production where all expenses are equal to all revenues that are incurred.
For Thomas Cook it is significant to analysis its BEP so that company could ascertain
sales volumes that is necessary to covers hotels expenditures and to earn profits. Further
it also assist firm to know its position in market.
 Economies of Scale : It refers to decrease in cost of production with an increase in
company's level of outputs. For Thomas Cook it is essential to generate economics of
scale so that it could reduce its cost of packages that it offers to customers It is critical as
with reduction in this cost the fund requirement of hotel also reduces.
1.2 Analyse of pricing methods used in travel and tourism sector
In order to ascertain right price Thomas Cook are requisite to take into consideration a
number of pricing methods to evaluate the most suitable one (Wong, Mistilis and Dwyer 2011).
It is because setting up an appropriate price for its packages forms a difficult task as in some
cases company is thought to be charging more or less in comparison to its competitors that
either lead to loss of customers or loss incurred by firm. Thus, mentioned below are certain
pricing method that could be adopted by Thomas Cook to set most appropriate price level that
can generate high revenue and sales volumes:
Cost based pricing : It forms the most simplest pricing method in which certain fixed
percentage of desired profit margin is added to product's cost to ascertain final price of product
and services. More simply it is a pricing strategy where in some percentage of total production
cost is added in cost of manufacturing for finalizing its selling price.
Value Based pricing: This pricing strategy could be beneficial for Thomas Cook to build
up a loyal customer base by providing quality services at affordable prices to them. in this
pricing strategy the focus of company is to evaluate ways to lower down its cost of production
without sacrificing on its quality aspects. For this firm is required to enhance its R&D process.
1.3 Factors influencing profit in travel and tourism businesses
Travel and tourism industry is subject to various components that greatly impacts its
profitability. Mentioned below are some most prominent factors that affects the business growth
and profit index of businesses belonging to this industry: Seasonal variations: As tourist attractions are subject to various factors such as
holidays, climatic and weather conditions etc. that are been considered by tourists while
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planning their visit or tour. For instance in countries like UK , Italy etc. there is high
demand of cruise in summers while in nations like Finland, Germany etc. that are
famous for their winter Christmas markets and carnivals. Thus, in case of off season in
UK will lead to lower booking of flights by travellers. While in peak season all costs
related to travel increases leading to high revenue generation for hotel.
 Growth rate of UK tourism industry: In spite of Brexit, travel and tourism industry is
showing resilience since 2016 by contributing 3.1% in GDP and supporting around 6
million people by generating employment opportunities for them. Also according to
statics 39.2 million tourists visited Britain in 2017 that is 8.7% more in comparison to
2016. Thus, for tour and travel industry it has resulted in earning an impressive profits
with enhancement in its sales volumes.
4.1 Sources of funds
There are various capital projects related to tourism sector such as extension of
telecommunication facilities, funds for project management units, tourism investment program,
construction of public facilities etc. Thus, in near future in case Thomas Cook tends to invest in
any such capital project it can make use of below mentioned sources of funds: Public finance: It involves funds that are pre- paid and are provided by government for
ensuring development of various places so as to encourage tourism and attract visitors to
generate maximum profits (What are public sources of funding? 2015). Debentures- Debenture is a medium and long term source of funds issued by company in
public. Debenture certificate is the acknowledgement of raising funds from public.
Debenture is a kind of loan which are repaid at some specific date. Debenture holders are
liable for fixed rate interest annually or half yearly. Sometimes debentures are based on
collateral security which works as mortgage. Interest on debentures are calculated against
profit of specific year.
 Private Equity: Thomas Cook can apply private equity which is refer as a variant of
equity to finance its operations and activities. Due to minimum profitability there is more
chance of under payment of issue. In order to keep this conditions an organisation can
hangout to private equity to finance its operations and activities in a systematic manner.
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CONCLUSION
The project undertaken concludes financial management forms integral part for any
business. A in-depth analysis off financial statements of one of UK's leading airline company
reveals how company is successfully managing its operations in this competitive environment.
For this firm make use of various pricing methods such as value base and cost base pricing that
enables company to set appropriate price levels for its products to attract consumers. Further
various factors that are probable to impact every travel and tourism company are
determinelatika.rd along with certain sources of funds that tourism industry could consider in
case of investing in capital projects.
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REFERENCES
Book and Journals:
Evans, N., Stonehouse, G. and Campbell, D., 2012. Strategic management for travel and
tourism. Taylor & Francis.
Gibson, H. J., Kaplanidou, K. and Kang, S. J., 2012. Small-scale event sport tourism: A case
study in sustainable tourism. Sport management review.15(2). pp.160-170
Morrison, A. M., 2013. Marketing and managing tourism destinations. Routledge.
Murphy, P. E., 2013. Tourism: A community approach (RLE Tourism). Routledge.
Nielsen, H. and Spenceley, A., 2011. The success of tourism in Rwanda: Gorillas and more. Yes
Africa Can: Success Stories from a Dynamic Continent, pp.231-249.
Tribe, J., 2015. The economics of recreation, leisure and tourism. Routledge.
Vanhove, N., 2011. The economics of tourism destinations. Routledge.
von der Weppen, J. and Cochrane, J., 2012. Social enterprises in tourism: An exploratory study
of operational models and success factors. Journal of Sustainable Tourism.20(3).
pp.497-511.
Wong, E. P., Mistilis, N. and Dwyer, L., 2011. A framework for analyzing intergovernmental
collaboration–the case of ASEAN tourism. Tourism Management.32(2). pp.367-376.
Online
What are public sources of funding? 2015. [Online]. Available through;
<http://www.who.int/health_financing/topics/revenue-raising/public-funding/en/ >.
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APPENDIX
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