Analysis of Finance and Funding in the Travel Sector

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FINANCE AND FUNDING IN TRAVEL
AND TOURISM SECTOR
1

Table of Contents
Introduction....................................................................................................................................3
Task 1 (LO1)..................................................................................................................................4
A (P1.1)..........................................................................................................................................4
B (P1.2) (M1).................................................................................................................................5
C (P1.3) (D1).................................................................................................................................6
Task 2 (LO2)..................................................................................................................................7
A (P2.1) (M2).................................................................................................................................7
B (P2.2)..........................................................................................................................................8
Task 3 (LO3)..................................................................................................................................9
A (P3.1) (M3).................................................................................................................................9
Task 4 (LO4)................................................................................................................................12
A (P4.1)........................................................................................................................................12
Conclusion...................................................................................................................................14
References..................................................................................................................................15
2

Introduction
With the changing scenario, different sectors of the economy have shown growth in different
aspects. Travel and tourism are one of those sectors which are growing at greater speed along
with giving other sectors opportunity and a threat both. Various factors have to be taken for
decision-related to the funding. Funding and finance for travel and tourism are not easier.
Different types of sources both internal and external are taken into consideration along with their
merits and demerits and the best source is selected. In many researches, feedback is done to
select the best sources from a number of alternatives. There is also the importance of cost and
volume analysis, pricing method. It is also important to assess the various types of investment
appraisal, management accounting, and information as a decision-making tool. It is important to
know about the distribution of funding for the development of capital projects associated with
tourism which will be helpful for decision making. For this purposes, analysis of leading hotel
has been done which is involved in the travel and tourism industry. For the details, the financial
statements are interpreted and related results are documented.
3

Task 1 (LO1)
A (P1.1)
CVP analysis stands for cost volume profit analysis. Cost volume profit analysis is used to
determine the level of changes on net income and operating income by changes in variances of
cost and volume. While performing a cost volume profit analysis certain assumptions are always
made regarding its sale price, variable costs, fixed cost and economic mix of various products.
In a CVP analysis of EUROCARIB it requires to identify manufacturing, administrative and
selling costs as variable and fixed costs. CVP analysis is used in EURACAIB to identify the
situation in which what level of targeted income is determined by what level of sale for reaching
a particular target income and this level of target income is always derived after ignoring the
taxed for a particular period.
CVP analysis in financial management of EUROCARIB in travel and tourism sector plays a
crucial role in formulating decisions based on the financial plans of company depending on the
objectives of EUROCARIB. Cost volume profit analysis is used to determine the break-even
point of targeted sales in relation to cost and volume. CVP analysis is also used to control
financial related activities in EUROCARIB. CVP analysis in financial management helps this
enterprise to reduce chances of losses that may occur if future needs are not properly planned
and analyzed. By determining the breakeven point in Cost volume profit analyzes all the
necessary information to achieve profitability will be gathered (Saigeetha1, & Surulivel, 2017). In
CVP analysis the efficient combination of costs for EURACARIB is to take fixed and variable
costs into account. CVP analysis is an easy and practical approach to determine the level of
volume and profit for EURACARIB and therefore CVP analysis is a suitable technique for
EURACARIB to make correct and proper decisions in financial management in the tourism
industry.
4

B (P1.2) (M1)
Every tourism business needs a pricing strategy to determine the price of its various packages.
In a marketing strategy for determining prices in tourism business of EUROCARIB financial
analysis plays a major and crucial role. While determining a specified pricing strategy for
EUROCARIB there are many factors which needs to be considered such as discounting
criteria, commission percentages, package deals, common pricing deals for those packages,
rack rates for packages selected and prices for seasonal packages. As EUROCARIB is a
tourism business company which will only survive if it earns sufficient profits compared with the
actual cost spent on the packages with the help of appropriate pricing strategies. There can be
various categories of methods of strategy pricing in tourism industries like target pricing
methods, cost-oriented pricing, market-oriented pricing etc. but EUROCARB follows only two
types of pricing strategies which are as follows:
 Cost based pricing method: Cost based pricing method is a simplified method to calculate
price of the tour packages. Cost based pricing method involves various terms like markups,
variable costs and rate of return on certain investments.In this method, certain markup amount
is included in the cost price to determine the price charged by EUROCARIB and marketing
strategy derived from this method is understandable.
 Market-based pricing method: Market based pricing method is basically termed as
competition strategy in tourism industry. Market-based pricing method is used to determine the
price of the tour package for each tourist by considering the prices of competition prevailing in
the market. In EUROCARIB the market pricing strategy can be used to determine the price
charged by each tourist after considering demand, price sensitivity among tourists and life cycle
of the completive tour packages companies (Georgescu, 2015).
5

C (P1.3) (D1)
Factors that influence the profit of EURACARIB are as follows:
 Events: Many times profit factors in the tourism industry is affected by the events occurred in a
particular destination. As many special events are occurring nowadays in different- different
destinations. For eg: the Olympic Games held in a particular country will influence the profit
factors of businesses in other countries. Travel marketing most probably uses events for their
promotion to join long initiatives.
 Trends: Trends in traveler’s scenarios is a usual year to year seen practice. Trends in the
tourism sector are examined by travel and tourism professionals in marketing and are
established by tourism and travel media.
 Development: A marketing campaign is actually formed for announcing about the new projects
and destination developments and in many undergoing projects major development takes place
with respect to their regions. The transformed region can be an influential factor for affecting the
profits of tourism businesses.
 Currency Rates: Fluctuations in the currency rate on a regular and in non - sequenced manner
will directly affect the international suppliers of the tourism business. Marketing and other factors
are majorly affected by these fluctuations in currency rates.
EURACARIB HOLIDAY TRIP EVALUATION: EURACARIB is planning a trip in summer
holidays to a Carrabin holiday resort for a period of one month in which hotel accommodation
and airplane costs for about £120000. Other than that variable costs £400 is charged to each
tourist. There are in total 90 tourists so the total variable cost is £400*90tourists which is equal
to £36000. Therefore total cost amounts to £156000 which includes both fixed and variable cost.
But EURACARIB is charging only £1600 per month per tourist, so total money charged from
tourist is £144000. From this calculation, we are able to derive that EURACARIB is suffering
from a loss of £12000, but EURACARIB wants to earn a total; profit of £30000 so for gaining at
least this profit EURACRAIB has to charge £2066.67 from each tourist.
6

Task 2 (LO2)
A (P2.1) (M2)
Management accounting information helps managers in EURACARIB in planning, decision
making and controlling inefficient activities within the enterprise (Georgescu, 2015). Managerial
accounting information in the planning phase by managers set objectives, identifies ways by
which objectives can be achieved, and formulate decisions on the basis of which objectives can
be achieved Managerial accounting information in decision-making process provides different –
different ways by which decisions can be implemented. Managerial accounting information is
used in applying cost and management accounting in EURACAIB Managerial accounting
information while controlling inefficient gather data about the actual results achieved and
convert these data into useful information and this conversion will eventually help investors to
make a comparison between the actual and expected results.
Different types of managerial accounting information are as follows:
 Ratio analysis: Ratio analysis is a basic tool to analyse the various types of accounting
activities in an accounting period. In EURACARIB ratio analysis is used to determine the
enterprise ability to pay its obligations in both long and short term debts (Malíková and Brabec,
2012). Ratio analysis is used to determine the different- different ratios in the enterprise and in
EURACARIB this tool will determine the liquidity and solvency ratios. Ratio analysis can also be
used to determine whether the company is utilising its raw material in an efficient and effective
manner and whether proper and appropriate levels of inventory are maintained or not.
 Forecasting: EURACARIB in order to stay competitive needs to formulate a strategic plan
based on forecasting future activities. Forecasting process is done with the help of analysis of
past year trends. Forecasting model of the enterprise is based on the ratio analysis trends
prepared by managers of enterprises.
 Budgeting: Budgeting process in an enterprise can only be done after implementing the
forecasting process. The budgeting process is used in EURACARIB to allocate capital in
different sectors, to predict various types of costs like material costs, labor costs and allocating
cash when required and analyse the resulted benefits from that allocation.
7

B (P2.2)
Every business in its monetary terms only desires to invest in that project in which huge benefits
are expected. So various appraisal techniques used by EURACARIB are as follows:
 Net present value: Net present value technique of capital budgeting is used to determine the
actual value of an investment purchased in past. Net present value in EURACARIBI is used to
determine the compatibility of industry performance scenario which includes average daily price
strategy per tourists and value of hotel accommodation.
 Risk-investment analysis: All the risk related to a particular investment in which EURACARIB
desires to invest should be anticipated by the managers of EURACARIB so that no risk factors
involved in the investment project affects the growth percentage rate (Malíková and Brabec,
2012).
 Payback period: Payback period is a capital budgeting technique. Payback period is used to
determine the time in which business will gain the amount invested in a specified investment.
EURACARIB is investing in a capital project in which it will gain the invested amount and profit
only with help of payback period which will determine the time of investment.
 Discounted cash flow: Discounted cash flow provide the detail about the annual cash flows at
discounting rate factors. In EURACARIB various types of losses can be analysed or predicted
by using discounted cash flow technique.
8

Task 3 (LO3)
A (P3.1) (M3)
In the question given above it is required to present the financial statement of any company
related to travel and tourism and to interpret the ratios related to it. On the basis of the question
following data has been collected from Dalata hotel group of UK and financial statements of the
same have been used to interpret the different types of ratios.
s.no ratio Formulas 2017 2016
1 liquidity ratio current assets/current liability
0.45814
7
1.43518
7
2
Quick Assets
ratio
current assets-inv/current
liability
0.43698
6
1.40878
5
3 Debt ratio total debt/total assets
0.01653
5
0.01596
8
4
Gross profit
margin (sales-cogs)/sales
0.63194
4
0.62187
7
5 operating profit EBIT/Sales
0.22178
7
0.15181
8
9
Ratio Analysis
Particulars 2017 2016
current Assets 38214 98771
non-current assets
106287
4
88660
5
current liability 83410 68821
noncurrent liability 280285
29617
3
Inventory 1765 1817
total debt 18206 15734
total assets
110108
8
98537
6
total liabilities 363695
36499
4
sales or revenue 348474
29055
1
cost of goods sold 128258
10986
4
Ebit 77287 44111
Net income 47267 46949
Equity 737393
62038
2

6
Return on
equity
Net income/Average common
equity 0.0641
0.07567
8
Liquidity Ratios: These are ratios which assess the firm ability to meet the short term obligations
using short term assets. Current assets ratio to current liability is used to interpret the ability to
deal with short term obligations. The higher the ratio of the company it highlights the ability of
company to pay its obligations and that too in a timely manner. In the data given above liquidity
ratio of Dalata group has reduced in the year 2017.
1. Quick Assets Ratio: Firm key problem is that they assume that they will be able to convert to
convert their current assets in cash to overcome this problem quick asset ratio is used and
inventory is deducted from the same. This ratio only highlights assets that are easily convertible
in cash and therefore eliminates inventory that takes time to be converted in cash. In the data of
Dalata group, the ratio has shown sudden reduction form the past year means it takes time to
convert into cash. Formula:
2. Debt Ratio: Debt ratio generally highlights the proportion of assets financed through both short
and long term debt. This ratio generally highlights the financial risk that occurs if this ratio is
higher. The higher the ratio shows more leverage by the company (Georgescu, 2015). Dalata
group shows slightly lower debt ratio which is good for the company financial position.
3. Gross profit Margin: This ratio highlights the profit margin of the firm after deducting the cost of
goods sold but before deducting any other expenses such as operating expenses, interest and
taxes. This ratio generally highlights the costs that are directly related to the product. In the data
given above the ratio has increased as compared to last year.
10
=current assets-inventory
Current liability
=Total Debt
Total asset

4. Operating profit margin: This ratio highlights the firm profit after deducting the cost of good and
operating expenses but before deduction of any interest and taxes. This shows how much profit
company generally earns after payment of its variable and fixed costs. It generally highlights the
efficiency and effectiveness of company to deal with the expenses. The data above shows the
increase in the operating profit ratio.
5. Return on equity: Return on equity shows the return earned on capital employed by the entity.
Net income used in this formula is income available for distribution to the ordinary shareholders.
This generally shows the ability of firm generates greater profits to pay a higher return to pay
shareholders expected a return on their investment.
11
=sales-cost of goods sold
sales
=EBIT
Sales
=Net income
Shareholder equity

Task 4 (LO4)
A (P4.1)
EUROCARIB the leading tour operator company of UK is already going strong and is able to
keep their share in the market at high. Now when the business has already set up and running
successfully the Company is planning to expand its business over other countries also. It is
obvious that every established firm or company which has a successful business chain will in
future plan to develop new venture as in this case tour operating company is planning to
construct its own hotel. It is not easy for any company to enter in a different sector that is totally
opposite to existing business of the firm (Shakouri, et. al., 2017). It is important for the company
EUROCARIB before entering into the business of hotel line to have a full and careful analysis of
the environment (Saigeetha1, & Surulivel, 2017). It is one of the important factors to have
understanding of the environment in which business operates in order to have an idea about
threats and opportunities that may have an impact. There are various factors which play an
important role: finance, market, climate, raw material and many more. An external analysis of
the environment helps to know about threats and opportunities available in the market and
internal analysis help to know about the internal strength and weakness. One of the important
factors that affect the new development may include finance. Finance is something that may
individually affect the entire project. There are both the internal and external sources of finance
and funding available for the EUROCARIB.
Internal sources of finance are those sources which arise within the organization. The possibility
of sources of finance available with the entity itself is quite low. As the company also make
investment form their sources and also the cost of capital is also low for internally generated
funds. The limitation of internal sources of finance is that limited funds are available because of
internal sources which restrict the firm to make the expenditure. Also firm past earnings,
revenues are used so for later preference no finance is available to the company. Sources of
internal sources of finance include:
1. Past year earnings and revenues (retained earnings)
2. Sale of stock.
3. Sale of fixed assets.
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