Financial Analysis and Funding Strategies: EUROCARIB Tour Report

This report provides a comprehensive financial analysis of EUROCARIB Tours, a European tour operator. It begins with an explanation of Cost-Volume-Profit (CVP) analysis, its importance in financial management, and its application to EUROCARIB. The report then explores various pricing strategies that EUROCARIB can employ, along with factors influencing its profitability. Different management accounting information used by EUROCARIB, including variance analysis, financial statements, forecasting, and budgeting, are also discussed. Furthermore, the report assesses investment appraisal techniques, such as payback period, accounting rate of return, Net Present Value (NPV), and Internal Rate of Return (IRR), using a practical example to evaluate the viability of potential projects. The report also includes an interpretation of financial statements using ratio analysis and examines both internal and external sources of funding for starting a new project, such as a new hotel in the Caribbean. The analysis aims to provide insights into financial planning, decision-making, and funding strategies within the tourism sector.

FINANCE AND FUNDING
IN
TRAVEL AND TOURISM
SECTOR

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
A. Explaining the concept of CVP analysis with its importance in financial
management of tourism sector..........................................................................................1
B. Analysing the pricing method for EUROCARIB to determine the price to charge
from tourists..........................................................................................................................2
C. Analysing factors which influences the profit of EUROCARIB from the holiday trip.
................................................................................................................................................3
D1. Evaluating the viability of EUROCARIB' trip with justification...............................4
TASK 2............................................................................................................................................4
A. Explaining different management accounting information used in EUROCARIB.4
B. Assessing the use of investment appraisal techniques as decision making tools for
EUROCARIB........................................................................................................................5
TASK 3............................................................................................................................................8
A. Interpretation of financial statements using ratio analysis.......................................8
TASK 4..........................................................................................................................................11
A. Analysing different external and internal source of funding for starting a new
project..................................................................................................................................11
CONCLUSION.............................................................................................................................12
REFERENCES............................................................................................................................13

INTRODUCTION
Tourism is one of the biggest and fastest growing industry in UK. The report
includes a critical discussion of finance and funding in tourism sector. Tourism is an
important source for a countries economy. In the recent times, several inbound and
outbound visitors prefer to visit London. Thus, for grabbing opportunities and attaining
success business units need to lay emphasis on strategic financial management. The
report is about EUROCARIB TOURS, a major European tour operator. The report
discusses, cost-volume-profit analysis and its importance in financial management in
tourism sector. Further, it highlights different pricing strategy that EUROCARIB can use.
The factors which can affect the profit is also presented in this report. Further, different
types of management accounting information are explained in study. Different
investment appraisal techniques are used which helps in making decisions are
mentioned with a calculative example. The file discussed the various ratio analysis for
profitability on the financial statements of EUROCARIB. The report will also have
discussed different type of external and internal source of financing for new hotel in
Caribbean.
TASK 1
A. Explaining the concept of CVP analysis with its importance in financial management
of tourism sector.
Cost Volume Profit analysis is an important tool for financial managers to control
financial activities in business. It helps in studying the relationship between volume,
cost, price, profit which can be incurred from a particular activity (Ismail and
Louderback, 2018). CVP analysis plays an important role in profit planning process and
helps in evaluating the purpose of budgets and forecast. The three elements of CVP
analysis which helps in financial decision-making process of EUROCARIB are: Cost: The computation and allocation of cost helps in ascertaining the actual
profit of EUROCARIB. The cost of a company can be classified as direct cost
and indirect costs.
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Direct cost: It is the expenditure which incurred in producing goods or services.
Direct cost are variable expenses like raw material, labour cost and direct expenses.
These costs are primary and is important for company.
Indirect cost: it is the cost which incurred in daily business operations. They are
related to sales of a products. Indirect costs are of two type fixed and variable costs.
Fixed cost will stay stable with the change in any volume of activity. Whereas, variable
expenses will vary with alter in level of activities.
 Volume: The type of cost incurred will directly affect volume of activities in
business. Price of product will be based on cost of production. Regardless of the
volume of tourist fixed cost needs to be covered (Braun, 2017). The number of
packages prepared and sold by rivals will determine price of a package to meet
break-even point.
 Profit: Break even analysis will help in ascertaining the revenue, high volume of
sales with low cost results in getting desired profit margin.
CVP analysis will help financial manager of EUROCARIB to compute the effect of
changes in price, direct-indirect cost, and volume on profit of a trip. It provides a
minimum sales volume required to cover the fixed cost and to avoid any losses. It also
helps to evaluate whether the travel package is profitable or not. CVP analysis is
essential for budgeting and profit planning process.
B. Analysing the pricing method for EUROCARIB to determine the price to charge from
tourists.
Pricing strategy has a drastic impact on the profit margin of business and helps in
determining the steps at which EUROCARIB can grow (Nagle and Müller, 2017). It’s
very important to choose the best pricing strategy or method for package of
EUROCARIB. The pricing method which can be adopted are as follows: Competitive or Marketing pricing: Competition based marketing prices
focuses on setting up of price of product based on the competitor's package
price. It is important to have an idea about what the current trend in market is.
With the increasing trend in tourism, tourists start comparing packages prices
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of different travel companies according to their needs and preferences.
EUROCARIB should set package of tour on the basis of competitors
packages by offering tourists more facilities. Penetration Pricing: It is a useful strategy of pricing to attract new tourists to
the company and building tourist base for EUROCARIB. In penetration pricing
the EURICARIB can set initial price of package with lower rate (Li and et.al.,
2016). This method is mostly useful when the demand for new package is
high in market.
 Cost Plus Pricing: In this strategy EUROCARIB determine all variable and
fixed cost of package, then a mark-up percentage will be added to that cost
which is the cost of package per tourist. Mark-up cost profit earned by
company on single unit of sales.
C. Analysing factors which influences the profit of EUROCARIB from the holiday trip.
The factors which can affect profit of EUROCARIB, are: Changing trends and preferences: Preferences of tourists for packages is
changing with the change of trends in tourism. EUROCARIB should make a
proper marketing research about the current trend of tourism, like will tourist
prefer to go on holidays in summers? Will tourist prefer air-plane or they travel
via cruise? Lack of effecting planning and staffs: Success of a tour depends on proper
planning and contribution of staffs. Skills and ability of staffs to handle and satisfy
the problem or needs of tourist on time is very important (Vellas, 2016). Similarly,
proper planning relating to destination, airline booking accommodation with
proper financial resources is very important as it can affect the goodwill of
EUROCARIB in market. Economic environment: Fluctuations in the currency rate is directly affecting
tourism business. Travelling in UK will be cheaper as British Pound is lower as
compared to U.S dollar. It can affect the profit margin of EUROCARIB.
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 Seasonal Variations: The choice of destination and its seasonal condition can
highly affect the tour of EUROCARIB. The tourist prefers to go on holiday when
season of destination is pleasant. Seasonal variation can affect the profit, as
some tourists doesn't consider summer season to go on a holiday.
D1. Evaluating the viability of EUROCARIB' trip with justification.
Units need to sell for attaining desired profit margin
Particulars Formula Figures
Fixed cost or expenses 120000
Desired profit 30000
Contribution per unit 1200
Number of units required to sell
Fixed cost + desired profit
margin / contribution per unit 125
Table 1
TASK 2
A. Explaining different management accounting information used in EUROCARIB.
Management accounting information are tools for financial manager to analyse
financial data for business operations in an account to make sound decisions. The
techniques of management accounting are very important to improve decision-making
procedures of EURPCARIB. Some of the different management accounting information
tools are: Variance Analysis: It is the study of fluctuations of actual performance and
standard performances. The difference in both actual and budgeted performance
indicates the impact of change on business of EUROCARIB. This shows that
how much capital is spent for each type of economic resources and business
should allocate these resources in planning of packages (Vanhove, 2017). This
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information is very important for EUROCARIB to make proper financial planning
for the tour and packages. Financial statements: Financial reports provide important information that is
useful to understand the business operations. Profit and loss statements helps in
understanding the overall expenses and revenue earned by EUROCARIB in a
particular year. Financial information helps in calculating ratio analysis which
helps to ascertain the company's ability to pay its long term and short-term debts.
As a financial manager, proper analysis will help EUROCARIB to control weather
the business entity is operating in a profitable way or not. Forecasting: It is a strategic planning tool which helps business to stay
competitive. It is process of planning for any future uncertainty that can affect the
business operations. The goal of forecasting process is to predict outcomes of
future operations through trend analysis.
 Budgeting: It is a tool used by the management to build an anticipated future
revenue figures (Sharpley, 2018). After completing forecast process, the budget
making begins which helps in allocation of funds for future operations.
B. Assessing the use of investment appraisal techniques as decision making tools for
EUROCARIB.
The investment appraisal techniques also known as capital budgeting is
essential in a planning process which helps in resolution of the company's investment
(Laudon and Laudon, 2018). There are different investment appraisal techniques which
helps in deciding whether the concerned project is profitable or not. The main
techniques are: Payback period: It is appraising capital investment that shows expected time
that would be taken to get back the initial investment on project. It is an
easiest method for calculation of appraisal techniques. The project which
takes lower time period than another will be considered more appropriate to
invest.
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 Accounting Rate of Return: It measures the amount of profit, or amount of
return expected on an investment. Project with high ARR will be preferred for
capital investment. Net Present Value: It is a mathematical calculation involving net cash flows
at a particular time considering constant discount rate. There is an adverse
relationship between discount rate and NPV (Angel, Menéndez-Plans and
Orgaz-Guerrero, 2018). A high discount rate would reduce the net present
value of capital.
 Internal Rate of Return: This method is generally used to consider efficiency
of capital investment. It is discount rate that gives a value of zero to NPV. The
project with high IRR is more profitable to be invested.
Following is the example of financial information of two proposed projects A and
B of EUROCARIB. With the help of capital investment techniques, most profitable
project will be calculated.
NPV:
Year
Projec
t A
PV
factor
@10
%
Discount
ed cash
inflow
Projec
t B
Discount
ed cash
inflow
1
10000
0 0.909 90909
11000
0 100000
2
12000
0 0.826 99174
12500
0 103306
3 95000 0.751 71375
11500
0 86401.2
4
13200
0 0.683 90158
14000
0 95621.9
5
15000
0 0.621 93138
16500
0 102452
Total
discoun
ted
cash
inflow 444754 487781
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Less:
initial
investm
ent 250000 250000
NPV 194754 237781
Table 2
Interpretation: NPV of project A is 194754, and the present value factor is
decreasing with each year. Whereas, the NPV of Project B is 237781, hence project B
will be more preferable than A.
IRR:
Year
Project
A Project B
-250000 -250000
1 100000 110000
2 120000 125000
3 95000 115000
4 132000 140000
5 150000 165000
IRR 35% 40%
Table 3
Interpretation: With the above figure it can be anticipated that project B is more
profitable as internal rate of return of B is 40% which is greater than Project A which is
35%.
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From the above calculation it be said that project B is more profitable and
EUROCARIB should invest its capital in project B in order to get better return and
maximize the profit.
TASK 3
A. Interpretation of financial statements using ratio analysis.
Ratio analysis of TUI travel for the period of 2016 and 2017.
Profitability ratios:
Illustration 1
Interpretation:
The above table is indicating financial performance of TUI travels in context of
analysing its profitability ratio. By considering the above calculation, it can be seen from
above calculation that Gross Profit ratio has been decreased from 11.10% in 2016 to
10.79% in 2017. it can be observed that company's expenditure has increased over the
year or cost of products has increased in relation to sales of product (Harrison, 2017). It
can be interpreted from the above calculation that net profit ratio of TUI travels has also
decreased to 3.5% in 2017 from 6% in 2016, decrease in net profit ratio indicates that
the company's overall performance and profitability level is declining.
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Liquidity ratio analysis:
Illustration 2
Interpretation:
From above calculation it can be interpreted that current ratio of 2017 is .66 as
compared to 2016 which .74 which represent that company has low CR. Which means
that company's short-term assets are not enough to meet current debt obligations of
EUROCARIB (Ingale and Priya, 2018). By observing company's quick ratio from year
2016 to 2017 it can get decreased from .72 to .56 which shows that the company is
relying heavily on inventory or other assets to pay off its liabilities.
Solvency ratio analysis:
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Illustration 3
Interpretation:
While observing level of solvency of TUI travels, it can be seen that debt equity
ratio has increased from year 2016 to 2017 which was .14 to .21 it indicates that
company is issuing more equity in comparison to debt obligation. It will increase the
expenses of company and indicates that solvency ratio of TUI is not appropriate.
Efficiency ratio analysis:
Illustration 4
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TASK 4
A. Analysing different external and internal source of funding for starting a new project.
EUROCARIB intends to start a new hotel in Caribbean and decides to invest 25
million Pounds in this project. The following are the internal and external sources
through which EUROCARIB can generate funds for new hotel:
External source of funding: Bank loans: Banks are most common source of funding. For long term or short-
term debt. For long term funding company can generate the funds by taking
loans from bank (Newman, 2017). Bank will fix an interest rate on monthly or
yearly basis and company can return principle amount after agreed time period.
Banks wants assurances of repayment by requiring personal guarantees and
secured interest or assets. Issues of equity shares: EUROCARIB can raise its equity shares in financial
market, buyers of shares such as shareholders, stockholders or equity holders.
They receive regular dividend as a part of profit. It has an advantage of raising
funds through equity as it provides firm with a vast pool of liquidity. Government grants: Funds can also be issued through some governmental
organizations. Advantage of government grants is that company need not to
repay the money. (Grant, 2016). Certain conditions like the location of hotel will
be considered before granting funds.
Internal source of finance: Retained earnings: Retained earnings are the profit which has been retained or
reserved by business for future investments (Difference Between Internal and
External Sources of Finance, 2018). EUROCARIB can use its retained earnings
to finance its new project.
 Selling unused assets: Funds can also be generated by selling the company's
unused assets. It is a simple source of financing.
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CONCLUSION
By summing up the above report, it can be concluded that finance and funding is
important in travel and tourism sector. With the help of this report it can be inferred that
EUROCARIB can set suitable pricing method by analysing competitive and penetration
method. It can be concluded from the report that seasonality, customer preferences and
market trend can affect profit in travel and tourism sector. Along with this, it can be
arbitrated that forecasting, budgeting, variance analysis is an important control tool of
accounting information for travel and tourism companies. It can be summarized from the
evaluation that using IRR and NPV tools company can take suitable decisions
pertaining to investment. The ratio analysis of financial statements is concluded which
gives overview about profitability of EUROCARIB. The report summarized different
source of finance for funding new hotel of EUROCARIB.
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REFERENCES
Books and Journals:
Ismail, B. E. and Louderback, J. G., 2018. Optimizing and satisficing in stochastic cost ‐
volume‐profit analysis. Decision Sciences. 10(2). pp.205-217.
Braun, K. W., 2017. Excel-based active learning: use Excel projects to engage students
with management accounting topics. Strategic Finance. 99(2). pp.42-50.
Nagle, T. T. and Müller, G., 2017. The strategy and tactics of pricing: A guide to growing
more profitably. Routledge.
Li, B., Hou, P. W., Chen, P. and Li, Q. H., 2016. Pricing strategy and coordination in a
dual channel supply chain with a risk-averse retailer. International Journal of
Production Economics. 178. pp.154-168.
Vellas, F., 2016. The international marketing of travel and tourism: A strategic approach.
Macmillan International Higher Education.
Vanhove, N., 2017. The Economics of Tourism Destinations: Theory and Practice.
Routledge.
Sharpley, R., 2018. Tourism, tourists and society. Routledge.
Laudon, K. C. and Laudon, J. P., 2018. Management information systems: managing
the digital firm. Pearson.
Angel, K., Menéndez-Plans, C. and Orgaz-Guerrero, N., 2018. Risk management:
comparative analysis of systematic risk and effect of the financial crisis on US
tourism industry: Panel data research. International Journal of Contemporary
Hospitality Management.30(3). pp.1920-1938.
Harrison, A. J., 2017. The economics of transport appraisal. Routledge.
Epstein, M. J., 2018. Making sustainability work: Best practices in managing and
measuring corporate social, environmental and economic impacts. Routledge.
Ingale, D. and Priya, M., 2018. To Study the financial position of steel authority of India
Limited by using ratio analysis technique. South Asian Journal of Marketing &
Management Research.8(4). pp.4-13.
Grant, R. M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley
& Sons.
Newman, T. P., 2017. Tracking the release of IPCC AR5 on Twitter: Users, comments,
and sources following the release of the Working Group I Summary for
Policymakers. Public Understanding of Science. 26(7). pp.815-825.
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Online:
Difference Between Internal and External Sources of Finance. 2018. [Online]. Available
Through: <https://keydifferences.com/difference-between-internal-and-external-
sources-of-finance.html>
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