Travel and tourism sector of UK is growing significantly as compared to the before times. From data evaluation, it has been assessed worth of tourism industry worth of tourism industry will over £257 billion at the end of 2025. Along with this, travel sector of UK makes remarkable contribution in GDP such as 9% by offering employment opportunities to the large number of people. Hence, effective management of fund in tourism sector is highly required to achieve the aims and objectives(Ambrosie, 2015). The present report is based on Carib Happy Tours Company (CHTC) which is planning summer holiday trips for the customers. In this, the present report will describe the financial tools and techniques that aid in the profitable decision making. Further, report will also shed light on the financial health and performance of Thomas Cook which is the leading travel firm of UK.
A. Defining the concept of CVP analysis and its importance in financial management
Cost volume profit analysis can be used by an entity to determine the changes in volume of operating income and net income due to change in cost and volume of product. This analysis is supported through various assumptions. First of all this analysis theory assumes a constant sale price per unit as well as it also assumes constant fixed cost(Becker, 2016). CVP analysis is very useful for the management in order to control the factors which make changes in level of revenue. The most important part of CVP analysis is that the point where the total revenue of cited entity is equal to total cost of products which includes both fixed and variable cost. This point is termed as Break Even Point, which means this is level of sales at which there is no loss and no profit(Buhalis and Darcy,2011). There are three elements of cost volume profits analysis i.e. cost, volume and profit. Cost means the expenses which occurred during the production and selling process of product and services on the other hand volume means total number of units which an entity manufacture in a certain period and profit is the excess of revenue over total expenses. The importance of cost volume profit analysis is mentioned below :
- CVP analysis assist an entity to ascertain the contribution margin for the current period. Contribution is the excess of sales over variable expenses.
- Through it a company can ascertain the its break even points which assist management of cited entity to get acknowledged of the level at which total expenses get equal to total revenue of cited entity(Cole and Morgan,2010). That means after that level the organisation will start earning profit.
B. Analyzing the methods that can be used by CHTC for setting prices
There are different methods through which a firm decides it s price. The marketing manager decides different techniques for setting up the price. Following are some methods on which the prices are decided.
- Mark up price method: This is the most commonly used method for setting up the prices. In this method the profit margin is added up in the price so the cost can easily be settled up. Construction business, professions and consumer goods are most commonly fields in which this method is used. It can only be used when company have a proper analysis about the cost and the expected future sale(Dwyer, Forsyth and Dwyer,2011). Company can be fixed upon their cost and also the cost of selling.
- Perceived value pricing method: The price is totally depend upon the consumer perceived value for the product. The priority is given on the basis of consumers view. Firms takes the consumers perception for setting the price not its own objectives. The price is set on the basis of the market research not on their own will.
- Going rate pricing method: the pricing is set on the basis of the competitors and that's why it is sometimes called competition oriented pricing. So the pricing decision is largely based on competition.
- Target return pricing: it is one of the cost oriented method for setting up the prices. The firm set that price on which they can earn maximum return. So the ROI is taken as the base for setting up the prices. So attempts are made for recovering the investment.
C. Analyzing the factors that have high level of impact on the profit margin
There are a number of factors which makes a vital impact over the profit margin of CHTC hence these factors needs to manage in a way so that these factors will not adversely affect the profitability of cited entity(Eagles, 2014). Some of the factors which can impact over the profitability are mentioned below :
- Level of Sales : level of sales decides the level of revenue as well as the level profitability(Evans, Stonehouse and Campbell, 2012). Hence management of cited entity requires to frame such strategies as well as they should employ such techniques in their operations so that productivity could be increased as well as the level of revenue gets also high.
- Variable Expenses : variable expenses are those expenses which changes as per the change in level of production(Factors that affect business profitability. 2015.). Hence this will affect the profitability as if the production gets high and variable cost are not controlled then it will reduce the profit margin of CHTC.
- Fixed Expenses : Fixed expenses are those expenses which doesn't changes as per the change in level or volume of production(Forno and Garibaldi, 2015). They remain fixed hence high volume of production will not affect fixed cost but if the fixed expenses will gets high then this will reduce the profit margin of CHTC.
- Market price : Profitability is ultimately affected by market price of product. If the total market price for a product is high then there may be chance of high margin of profit if the total cost of that product is controlled. But if the market price of any product offered by CHTC is low as well as there is less control over the total cost.
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A. Assessing the different types of management accounting information that can be used by CHTC for decision making
Management accounting and its techniques assist a person in managing its funds and available resources in an efficient way so that they can generate better return on investment. There are different types of management accounting information which can be used by CHTC for taking decisions :
- Relevant cost analysis : Managerial accounting information is used by any organisation for the determination of what to sell and how they should sell it(Gabor, ConÅ£iu and Oltean, 2012). An accountant needs to analyse that which cost is needed to be controlled so to control the cost involved in production and selling of products.
- Activity based costing techniques : After getting information about what to sell and how to sale then the management needs to analyse to whom they should sell out their products. They can identify various methods through which they produce their goods and services(Leung, Leung, Bai and Law, 2011). This technique helps an entity to take decisions regarding the production of goods and services.
B. Evaluating the use of investment appraisal techniques in decision making
Investment appraisal includes wide range of tools and techniques which in turn helps in evaluating the attractiveness and viability of project. Such techniques include NPV, IRR and payback period etc which in turn assists in making selection of suitable project. Usually, investors face difficulty in making selection of profitable project when several other options are available to them(Mancini, 2012). Thus, CHTC can employ money in the suitable proposal by making assessment of returns which will be offered by it.
For instance: CHTC has two proposals such as option A and B with the initial investment of £220000. In this, by evaluating cash flows business entity of CHTC can find most profitable project.
Project A: 2 + 45000 / 89000
= 2.5 years
Project B: 2 + 59000 / 84000
= 2.7 years
From the above calculation, it has been assessed that CHTC will recover the amount of initial investment within the period of 2 years and 5 months if it selects project A. On the other side, CHTC has to wait for 2 years and 7 months. On the basis of selection of selection criteria business unit should select project with less payback period(Morrison, 2013). In addition to this, NPV and IRR of project A is higher which entails that such proposal will give higher return to CHTC. In this way, investment appraisal techniques help in making suitable decision regarding investment.
A. Interpreting the financial statements of Thomas Cook
For this task, Thomas Cook has been selected which is one of the leading travel firm of UK. It frames highly attractive tour packages and holiday plan by considering the expectation level of customers(Robinson and et. al., 2016). Such business unit places high level of emphasis on offering tour packages to the customers at affordable prices.
- Return on assets – in this profitability is assessed according to the costs and expenses and then, further analyzed in comparison to assets so that effectiveness of company in deploying assets
- Return on equity- it is the ratio that concerns a company's equity holders the most, as it measures the ability of earning return on their investments.
- Liquidity ratios- these ratios measures the company's ability to pay debt obligations and also its margin of safety through the usage of ratios of current ratios , quick ratios and operating cash flows(Standing, Tang-Taye and Boyer, 2014). These ratios are responsible to identify the time in which company can pay off the current liabilities.
- Investment ratios- this is an another type of ratio which can be used by the investors to estimate the attractiveness of a potential or existing investment. it is used by the company to assess the performance of the shares of company. The ratios which are included in this are ; price earning ratios, earning per ratios and earning yield.
A. Analyzing the sources of funds that can be used by CHTC to obtain fund or finance
On the basis of the cited case situation, CHTC is planning to construct its own hotel in Caribbean rather than hiring others. The main motive of firm behind such project is to develop standardization and maintain or reduce the cost level. For this purpose, business unit can meet its financial need of requirements in relation to £25 million by taking into account both internal and external sources are:
- Retained profit: Business unit can also meet monetary requirements by making use of retained profit. Moreover, with the aim to contingent situation CHTC places high level of emphasis on retaining some amount of profit with itself. This source of finance will assist CHTC in generating funds at low cost(Vance, Sibeck, McNulty and Hogenauer, 2011). However, when business unit makes use of retained profit then it is not in position to offer dividend to the shareholders which in turn directly influence the image or goodwill of firm.
- Sales of land, plant & machinery: CHTC can also enhance fund by selling unused assets at their disposable value such as land & building, plant & machinery etc. Moreover, each business unit has some assets which are not used by it in the productive activities.
- Issue of shares: CHTC can generate enough amounts of fund by issuing shares to the general public. It is the most effectual sources of finance which in turn enables firm to get funds at low cost. Now, with the aim to make significant value addition in the money investors prefer to employ money in highly growing venture. Hence, by offering shares to both existing and potential shareholders CHTC can meet its financial requirements. In such source business unit pays dividend to the shareholders only when it earns enough amount of profit(Wong, Mistilis and Dwyer, 2011). However, such source increases the interference level of customers to a great extent.
- Bank loan: By taking fund from monetary or financial institution CHTC can enhance fund. Moreover, such source offers high level of benefits to the firm in terms of tax deductions, easy installment payment system etc. Along with this, now companies are ready to provide fund to others whose business plan and existing performance level is sound. Thus, by approaching to the banking institution on the basis of collateral security CHTC can invest money in the construction project.
In this report, from the above mentioned facts and figures it can be concluded that management should utilize various techniques of management accounting which can be used by CHTC for managing its available limited sources of finance. Through this they can be ensured about better return on investment. Entity can use various sources of funds i.e. internal and external financial sources for the funding of their proposed projects. This report also contains financial reports of Thomas cook through which a person can analyse the financial position of cited entity.
- Ambrosie, L. M., 2015. Sun & sea tourism: Fantasy and finance of the all-inclusive industry. Cambridge Scholars Publishing.
- Becker, E., 2016. Overbooked: the exploding business of travel and tourism. Simon and Schuster.
- Buhalis, D. and Darcy, S. eds., 2011. Accessible tourism: Concepts and issues (Vol. 45). Channel View Publications.
- Cole, S. and Morgan, N. eds., 2010. Tourism and inequality: Problems and prospects. CABI.
- Dwyer, L., Forsyth, P. and Dwyer, W., 2011. The travel and tourism competitiveness index as a tool for economic development and poverty reduction. Strategic Management in Tourism. pp. 33-52.