Discuss about the Finance for Ultimate Travel Company.
The industry of Travel and tourism is flourishing in the developing business environment. The world is big place where different destination sites are coming up rapidly as the government of many countries have recognized that the travel and tourism industry brings about foreign currency in the market and also ensure that the industry provides significantly to the GDP of the country (Smith 2014). Moreover, it is being seen that more and more people are getting interested in foreign destination weddings which makes it very favorable for the company selected. The assignment will be considering various financing options which is available to the Ultimate Travel Company it pursues its expansion plan.
Overview of the Business
Ultimate Travel company is engaged in the business of providing travel and tourism services to the clients of the business. The company has operated for more than 26 years and has acquired a lot of markets in the business. The company has attractive destination packages for the customers and therefore it is the reason due to which the company is able to retain about 85% of the customers of the business. The business is considering introduction of new packages of destination which can be taken as combo offers. This is a strategy for market expansion and the company is planning to provide for new destination spots to the customers and better facilities in the business.
The current market condition for travel and tourism is quite favorable as the industry is growing and developing. It is considered that if the management of Ultimate Travel Company is able to effectively develop and implement the strategies appropriately then the business will greatly benefit from such an expansion strategy (Shaheen et al. 2014). The plan of the company is to further expand its business and add new tour and destination spots for its clients which are popular among client. The expansion in any new market will be requiring large amount of capital. In addition to this, the new expansion plan must be prepared in such a way that they cover all the area and looks into the taste and preference of the younger.
The market for travel and tourism is growing at a rapid rate and therefore this serves as an opportunity to the business to establish the business and gain market dominance. In most of the countries, travel and tourism Industry contributes significant percentage in the GDP of the Company (Buhalis and Foerste 2015). A recent study in UK showed that the travel and tourism Industry of the country provides as much as 6.4% of contribution towards GDP. The thing which is to be noted here is that the economic cycles and inflationary pressure impact the growth and development of travel and tourism industry. Another favorable impact of the development of travel and tourism business is that it brings in foreign capital in the country which is beneficial for the economy as a whole. The travel and tourism company provide a variety of services such as lodging and food, travelling for its customers. The contribution of travel and tourism industry in the market of UK
It is clear that the contribution which is provided by travel and tourism industry is quite significant in UK. Similarly, in most of the countries the contribution of tourism industry is more or less the same which proves that the travel and tourism industry as a whole is at a growth phase and thus Ultimate Travel Company needs to take advantage of the situation. It is to be noted that the travelling and vacation plans of most of the people takes place in the year end or beginning of the years and this is considered as the season for travel and tourism industry. In addition to this, the revenue which is earned by the business also increases when there is an occasion or event which is nearby which requires family and friend’s reunion such as Thanksgiving, Christmas. There has also been an increase in the number of destination wedding which are taking place which also increases the revenue of the business.
Any new plan of the business needs to have financing in order to make the implementation of the plan effective. In case of Ultimate Travel Company, the management of the company needs to decide which source of capital is to be used for the purpose financing the expansion plan of the business. The various options for financing which the company has available with it are given below in details:
The analysis of CVP is essential in determining the breakeven point on the basis of cost and volume of the product. The breakeven point of the business will be considered on the basis of Breakeven sales and Breakeven for customers. The analysis is very useful when it comes to the decision-making process for any development or expansion plan. The analysis takes into consideration fixed costs, variable costs and selling price which enhances the relevance of the analysis in decision making process (Lin, Wang and Qiao 2013). The components of fixed costs, variable costs and selling price of a product is crucial in the decision-making process about the performance of the business.
In the case of Ultimate Travel Company, the analysis of CVP and its results can be relied upon if the results do not vary within a certain level of production. This method which forms a core part of the analysis with the help of which the company can estimate the breakeven sales which the business needs to achieve in order to achieve the growth level which is expected from the expansion plan. With the help of CVP analysis, the business would be able to anticipate the contribution margin and the profitability of the services or packages which is provided by the business (Ryzhova et al. 2015). In addition to this, it is a general requirement that the contribution margin needs to be more than the fixed cost which is incurred by the business so that the expansion plan as formulated by the business can be successful. Moreover, the contribution margin is useful in computation of break-even point and break-even sales (Hill and Alexander 2017). This could be obtained by dividing the overall fixed costs by the ratio of contribution margin. The various assumptions which are taken for the CVP analysis which is to be conducted are given below in a table format:
|
Basic Assumptions: |
|
|
Particulars |
Units |
|
Average revenue per customer |
£ 80 |
|
Average variable cost per customer |
£ 35 |
|
Contribution margin per customer |
£ 45 |
|
Incremental fixed cost |
£ 20,000 |
|
Number of customers |
1,000 |
As per the basic assumptions which are taken in the above table are based on judgements. The average revenue per customers is estimated to be £ 80 and the average total cost which is the summation of the average variable cost and incremental fixed costs are also depicted in the table above. The calculation for the same is also demonstrated in a table which is given below:
|
Break-even calculation: |
|
|
Particulars |
Units |
|
Revenue |
£ 80,000 |
|
Total variable cost |
£ 35,000 |
|
Contribution margin |
£ 45,000 |
|
Incremental fixed cost |
£ 20,000 |
|
Total profit |
£ 25,000 |
|
Break-even (in customers) |
444 |
|
Contribution margin ratio |
56.25% |
|
Break-even (in sales) |
£ 35,556 |
The number of customers is estimated to be 1000 and therefore the revenue comes by multiplying average revenue per customer with the total number of customers. Similarly, the costs associated with the business are also calculated in the same way. The contribution margin is calculated to be 56.25% and the breakeven in customers is 444 customers and that of sales is £ 35,556. In case of a breakeven sales there is no profit no loss situation prevalent as shown in the table above.
An example of different period fixed cost, revenue, variable costs and profits are depicted in a chart format which is given below:
|
Revenue |
Contribution |
Fixed cost |
Profit |
|
£ 20,000 |
£ 11,250.00 |
£ 20,000 |
-£ 8,750.00 |
|
£ 40,000 |
£ 22,500.00 |
£ 20,000 |
£ 2,500.00 |
|
£ 50,000 |
£ 28,125.00 |
£ 20,000 |
£ 8,125.00 |
|
£ 60,000 |
£ 33,750.00 |
£ 20,000 |
£ 13,750.00 |
Pricing Techniques are those techniques which are used to determine the prices which are to be charged on a product (Adetiloye and Eke 2014). The various pricing techniques available to the business are given below:
The recommendation which can be given to the management of the Ultimate Travel Company regarding the expansion plan are given below:
Conclusion
From the above discussions it is clear that, the market is quite favorable for the growth travel and Tourism Industry. The management of Ultimate Travel Company must consider the expansion strategy which is formulated by the business which deals with getting more destination spots for the customers and introducing better offers for the customers. The company should move ahead with its plan to expand and for the purpose of such expansion plan the management need to acquire funds which are necessary for expansion plan. The company should choose venture capital funding as it is a secure source of funding. In addition to this, out of the different pricing options which are available to the company, the company has selected advance payment system.
References
Adetiloye, K.A. and Eke, P.O., 2014. A Review of Real Estate Valuation and Optimal Pricing Techniques. Asian Economic and Financial Review, 4(12), pp.1878-1893.
Bammens, Y. and Collewaert, V., 2014. Trust between entrepreneurs and angel investors: Exploring positive and negative implications for venture performance assessments. Journal of Management, 40(7), pp.1980-2008.
Bloom, N., Sadun, R. and Van Reenen, J., 2015. Do private equity owned firms have better management practices?. American Economic Review, 105(5), pp.442-46.
Buhalis, D. and Foerste, M., 2015. SoCoMo marketing for travel and tourism: Empowering co-creation of value. Journal of Destination Marketing & Management, 4(3), pp.151-161.
Cumming, D.J. and Johan, S.A., 2013. Venture capital and private equity contracting: An international perspective. Academic Press.
Hill, N. and Alexander, J., 2017. The handbook of customer satisfaction and loyalty measurement. Routledge.
Lin, C., Wang, S. and Qiao, Z., 2013. Product Profitability Analysis Based on EVA and ABC. International Journal of Business and Management, 8(12), p.73.
Ryzhova, L.I., Nikolaeva, L.V., Kurochkina, N.V. and Lebedeva, M.E., 2015. Optimization of Methods and Systems for Strategic and Operational Management Accounting in Agricultural Enterprises. Review of European Studies, 7(8), p.119.
Shaheen, S.A., Martin, E.W., Cohen, A.P., Chan, N.D. and Pogodzinski, M., 2014. Public Bikesharing in North America During a Period of Rapid Expansion: Understanding Business Models, Industry Trends & User Impacts, MTI Report 12-29.
Smith, S.L., 2014. Tourism analysis: A handbook. Routledge.
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