Financial Management For Travel And Tourism Business

Background

In today’s world, finance and funding are one of the essential concepts that need appropriate time and attention by business for the growth in the economy and in business. EUROCARIB tours planned for the trip considering which the analysis related to the CVP analysis is done which include the appropriate strategy related to the pricing. The paper also includes the analyses related to the factors that contribute in managing the profit. Further, there is analysis related to the management accounting and the investment appraisal report that has been prepared that there is no problem that can affect the future working. Moreover, there is an interpretation of the travel and tourism company that has been done with the use of ratios. In addition, the company is also looking to build a hotel in the Caribbean for which they need sources and distribution of funds which has been discussed in the paper.

The paper is based on EUROCARIB tours which are considered as the major London-founded European tour operator who majorly focuses on holidays in Caribbean. The company is planning a summer holiday trip to a Caribbean Holiday resort which lasts for one month. In addition, the company offers service related to an aeroplane that carries their tourists. Further, they book a floor of a hotel at the resort with the motive to accommodate its tourist. The costing of the aeroplane and hotel is equal to the £120,000, the variable cost per customer is £400, and EUROCARIB will charge £1600 per tourist for the 4-Week holiday trip.

CVP is a type of study which includes the result of the cost and volume related to the breakeven point. The determination of the cost and finding has been done with the use of the different equations (Lulaj and Iseni, 2018). In addition to this, the different assumptions are also taken into considering that can be used by EUROCARIB tours in finding the cost and volume. The finding includes assumptions related to the unit sold, there are two types of costs which include fixed and variable and sales, assumption related to the variable cost per unit and fixed cost that remain constant.

This has been found in the research that CVP analysis is essential for the travel and tourism as it allows forming the plan and controlling the financial matter. Some of the importance is discussed below: –

• CVP helps in evaluating the planning of future needs in an effective manner in the hotel industry like EUROCARIB tours. This supports the company to make the proper and correct decisions so that they don’t have to deal with the loss.
• This tool of CVP contributes effectively in identifying the breakeven point that helps the company to access to the essential details that can lead to success in terms of profit (Said, 2016).
• The financial manager of the company takes the suitable combination of the all types of variable, fixed cost in the account for the effective performance of the company (Noreen, Brewer and Garrison, 2014). This means that it allows the opportunity of reconsideration which leads to the growth of the business.  
• CVP is one of the simple and easy methods as data can be analysed with the simple use of the formula that reduces the efforts by the company and makes the practice easy (Klychova, Safiullin and Zakirova, 2014).

The profit is one of the essential factors that decide the survival of the company in the market. The profit is based on the prices of the products and services kept by the travel and tourism company in the marketplace. There are different methods that can be used by EUROCARIB tours for determining the prices of products and services. These methods include: –

Cost oriented pricing method: – In this pricing method, a particular margin is added to price that leads to the revenue for the corporate. This method is found as one of the easy ways that contribute in determining the pricing easily and understandable (Smith, 2014).

Task 1

Market oriented pricing method: – In this method, the prices of the products and services are determined according to the competition that exists in the market as the prices are based on the competitors that are present in the market (Liozu, Boland, Hinterbuber and Perelli, 2015).  

EUROCARIB tours are scheduling for the journey to a Caribbean Holiday resort in which £120,000 will be charged from the individual person for the hotel accommodation and aeroplane fares. In addition, the amount of £400 is charges as a variable cost which includes the cost of the meal and other expenses. This has been found that the company can make use of the cost-oriented pricing method that can be used in the environment of corporate as this technique allow to get adjust through the best margin for the corporate that would help in attaining the revenue for the business. In addition, this method of pricing is considered one of the easiest and simplest methods which make the operations easy for the company. Along with this, the tour company can make use of the market-oriented pricing strategy which can be used by them for evaluating the prices kept by the competitors for their products.

There are various factors that affect profit of the EUROCARIB tours which are: –

• Planning of good and effective management strategy is the only way through which the company can earn the profit. Thus, it becomes essential for the EUROCARIB tours to plan their strategies in an accurate manner to attain maximum profit.
• Advertisement and promotion campaign plays a vital role in making the customers aware about the products and services in the competitive market as this increase sale which ultimately leads to rise in profit of business (Burja, 2011).
• The profit of the tours company also gets affected due to the changes in the fare of the aeroplane or mode of transport fare remains high then the profit decreases. This reflects the direct impact on the profit by the changes in the transportation cost.

Hotel accommodation and aeroplane cost are equal to the £120,000 with the variable cost are £400 is charged from every customer. There are 90 tourists who avail to trip and their total variable cost remains £400 *90= £36,000. The total of variable and fixed cost accounts to £156,000. The business is charging amount of £1,600 per tourist and for 90 tourists it is £144,000. This reflects that the business has loss of £12,000. Though, the business is willing to earn the profit of £30,000 for which they need to charge 466.67 from every customer to gain the profit.

EUROCARIB tours trip evaluation
Fixed cost	Hotel accommodation and aeroplane cost	€               120,000.00
Variable cost	For additional items per customer	€                400.00
Total tourist		90
Total of variable cost		€           36,000.00
Total amount		€               156,000.00
Amount charged		€                    1,600.00
Total amount received		€               144,000.00
Loss		€                  12,000.00
Profit expected to earn		€                  30,000.00
Additional amount	Extra amount need to charge to earn the profit from every customer	€                     466.67

The tour and travel business make use of the different management accounting which helps them to collect and manage the internal working of data that can solve the problem that arises. Some of them are given below: –

Budget report: – The budget report is prepared by the tour and tourism business in which they document the expenses that can occur in the near future (Page, 2014). All the expected expenses can help the company to make the plan accordingly.

Job cost report: – This management account technique cover the main area of the business which helps the company to generate the maximum profit. This will save the time and efforts of the tour operator which is invested by them (Evans, Stonehouse and Campbell, 2012). This report includes all the features through income that can be generated are examined and further stated to make the accurate evaluation of the profit-generating projects.  

Cost allocation report: – In the report of the cost allocation, allocation of each and every resource has been made in the corporate at the early state so that no ambiguous situation related to rise in near future. This report supports in managing to keep a path record on the operative of business (Mason, 2015).

1.1 The concept of CVP analysis and its importance

EUROCARIB tours plan to earn an amount of £30,000 for a holiday trip to the Caribbean but they planned the budget and this has been found that the actual budget varies a lot as if business charges the amount of £1,600 per tourist and this lead to the loss of £12,000. Thus, this reflects that the tour company has the bad management of the profit. However, it is very important for EUROCARIB tours to plan an effective technique for the purpose of accounting.

Items	Amount
Profit expected to earn	€                             30,000.00
Amount charged from every customer	€                               1,600.00
Loss	€                             12,000.00
Additional amount	€                               2,066.67

From the above table, it is clear that the company is not able to manage the profit due to its bad management.

In the current era, the business makes the investment in the capital projects with the purpose of obtaining the profit or return from it. Some of the techniques that help the company to earn the profit are discussed below: –

Payback period: – This technique of management accounting is used by the small corporate for the effective control of the cash flow rather than the profit. This reflects the time which helps the business to gain the amount from the investment (Collier, 2015). EUROCARIB tours are essential to spend in the capital project that supports more cash flow.

Discounted cash flow: – This is the discounted rate at which the profit can be achieved to gain future value in the present scenario. Considering the loss faced by the tour company it time when the company should use their best source that contributes in minimizing the loss to a full extent.

Accounting rate of return: – ARR is essential to evaluate the difference between the amounts that is essential to be invested with the amount it is liable to earn from it. This approach is effective to perform the task (Brooks and Mukherjee, 2013). This technique can be formulated to reduce the loss which is faced by the company.

Investment risk and sensitivity analysis: – The risk that is linked with the investment that the company is about to make needs to be analysed properly so that no risk can lead to the effect on the growth of business and returns that are linked with it.

This section includes the explanation of the financial statement with the help of the ratios which include profitability, liquidity and investment ratios. The tours company on which the interpretation has been done is the TUI group. TUI group is Tour and Travel Company that owns different hotels, resort and cruise. The company is based in which wit a large number of tour and travels. The company is also listed in the London Stock exchange and Frankfurt stock exchange. The financial interpretation of the company is shown below with the help of the ratios: –

Ratios
Profitability Ratios			Year	Year
			2017	2016
Return on Equity	Earning after Interest and Tax		0.2194	0.3877
	Shareholder’s funds
Return on Assets	Earnings Before Interest and Taxes		0.045	0.072
	Assets
Liquidity (Short-Term Solvency) Ratios
Current Ratio	Current Assets		0.661	0.738
	Current Liabilities
Quick Ratio	Quick Assets		0.549	0.639
	Current Liabilities
Investment Ratio
Earnings per share	Net income-Preferred dividends		584	584
	Weighted Average shares outstanding
Equity ratio	Total Equity		0.207	1.000
	Total Assets

Profitability ratios: – This ratio reflects the capacity in relation to the skills to generate the revenue from the cost that is experienced by the business (Laitinen, 2018). The profitability ratios include many other ratios such as rate of return, gross profit ratio, return on assets, net profit ratio, return on equity and many others. Out of which two ratios are determined below: –

• Return on equity: – This ratio reflects the profit that is earned by the organisation from the shareholder’s equity. This ratio contributes effectively in identifying the worth of business in the long term. There is a decline in the ratio which reflects that the company is not able to earn the profit effectively (Penman, 2015).
• Return on assets: – This ratio contributes effectively in earning the profit from the assets of the company. From the comparison of the two years, it has been reviewed that the company has reduced the use of the assets in the company that can affect the profit of the company. This is happening because the company is not able to make the use of resources.

1.2 Pricing methods in the travel and tourism sector

Liquidity ratio: – The liquidity ratios are majorly used to identify the liquidity maintained by the company. This majorly helps the tour company to understand the liquidity which reflects that the company is able to meet its obligations or not (Laitinen, 2018). The liquidity ratio majorly includes current and quick ratio which are discussed below: –

• Current ratio: – The current ratio checks the volume of the organisation to pay off the short as well as the long-term debts. The calculation of the ratio can be done by dividing the current assets to current liability (Pilbeam, 2018). The current ratio is decreasing which shows that it is essential for the TUI group to work on the liquidity of the company on time without any difficulties, default and penalties.
• Quick ratio: – Quick ratio excluded the prepaid expenses and stock of the company and after that, they evaluate whether the organisation is able to pay off the current liabilities or not. The quick ratio of the year 2017 is less than the year 2016 which shows that the company need to work on their liquidity without any defaults and faults.

Investment ratio: – The investment ratio of the company reflects the ability to make the investment out of the investment done. This can include any project that contributes ineffective earning of the company (Pilbeam, 2018). Different types of the ratio can help the company in analyzing the profit earned from the investment. Two of them are discussed below: –

• Earning per ratio- This shows the corporation earned in accordance with its unpaid shares. This ratio is essential for different types of financial decision that are made by the company for the long run business. The earning per share for both the years is constant which shows that the company should bring the rise in the earning for the shareholders.
• Equity ratio: – The equity ratio includes the proportion of funds that are invested by the company by comparing it with the competitors. The company who perform the operations in the travel and tourism need to continue an optimum equity ratio for the motive of liability and investing of a long run of business (Gitman, Juchau & Flanagan, 2015). The equity ratio has decreased which reflects that there is a need to amend the policies for the betterment of the company.

EUROCARIB tours faced loss from the trip to the Caribbean because of its poor management of accounting. Currently, the company is planning to form a hotel in the Caribbean for which they need the funds that will help them in constructing the hotel. There are different sources of funds which include both internal and external method of sourcing (Drury, 2013). Some of these factors are discussed below: –

Loans: – Loan is considered as the external sources of reserves are collected from the borrowings that are mainly achieved by the organisation by putting the collateral security. Loans from the banks are considered as one of the easiest and fastest modes to accumulate the funds. The tour company need to pay the fixed amount of the interest as this contributes in carrying out the loan (Agrawal, Catalini and Goldfarb, 2014). This loan further can be categorized as long-term loans as well as short-term loans. The company can choose any type of loan as it totally depends on the need and project of the company. The short-term loans are taken for the small period time which is mainly used for the effective allocation of the resources and these are usually considered as the bank overdraft. The loans that are taken for the years are long-term loans. Considering the project of EUROCARIB tours, there is a need for the long-term loan that will help the company.

Retained earnings: – Retained earnings are considered as an internal source of funds which is used by the company mainly in the capital projects. The retained earnings are the certain proportion of the profit that is kept separately by the company for the purpose of making it use at the time of uncertainty or for the further investment (Rostamkalaei and Freel, 2016). The tour company can also make use of their retained earnings by investing them again in the business.

Equity: – Equity is considered as an effective way through which the firm can raise the funds. The tour company can issue the share capital which helps them to raise the funds that can be invested by them in their project. Along with this, there are numerous ways through which the EUROCARIB tours can easily raise the funds (Weygandt, Kimmel and Kieso, 2015). One of the ways is capital stretch; Company does the planning for future projects from years which give them time to store the funds. This stored or retained firm can be used in the projects of the business. This method is majorly known as the capital stretch method and this method is considered as one of the easy and simple methods of bills of exchange and numerous other related creditors of the business (Gitman, Juchau and Flanagan, 2015).

1.3 Analysis of factors affecting profit

Distribution: – Once the sources of funds have been done by the company when it comes to the distribution of the funds. Business has a budget of £ 25 million. This shows that the company need to take the loan of 10 million from the banks by disbursing the interest on a monthly basis after pitting the collateral security to the bank. Further, the company can source the amount of £ 4 million from the retained earnings. In addition, the EUROCARIB tours can source the amount of £ 2 million from the capital stretch. The company can also plan for the short-term loan of £ 4 million which can be payback by the company in short term. In addition, the remaining £ 5 million would be allocated from the issue of the equity share.

Conclusion: 

In the end, it can be concluded that travel and tourism are considered an essential sector of the economy from which the effective income can be generated which needs accurate and suitable finance and funding. EUROCARIB tours have planned a trip for which analyses of pricing strategy has been done. In addition, this has been found that the company face the loss because their strategies are not accurate. This reflects that there is a need to bring the change management accounting techniques of the company with the correct investment appraisal method that leads to effective growth in relation to the accurate decision making. Further, the interpretation of the ratios of any company has been done to understand the financial element. In the end, sources with the distribution of funds have been done with their appropriate selection.

References: 

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