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Finance and Funding

Sample Report on Finance and Funding

Introduction to Finance and Funding

In the contemporary business environment, financial management is one of the most crucial aspect of business management. In this context, it can be sated that every business entity has to develop appropriate strategies in order to assess wide range of funds for attainment of distinct business requirement such as expansion of business and new product development. In he process of financial management, the assessment of current profitability and market position of company is playing vital role in selection of best source of finance as per the ability of business to repay the loan value.

In the context of present assessment, this report tries to assess the importance of cost value and profit analysis in various business decisions of Angamah Happy Tours Company. In addition to that this report also evaluates different investment appraisal tactics through which the management expands its hospitality and hotel business. It also determines different sources of funds to meet business requirement. This report also carries out a ratio analysis to determine its importance in business decision making process.

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Task 1

A. Examining the concept of CVP analysis and explain its importance in the financial management of a travel and tourism business such as AHTC

Cost-Volume-Profit [CVP] analysis is being termed as analytical tool for studying the relationship between volume, cost, prices, and profits. In the context of travel and tourism business, this approach has been found very effective in evaluation of cost and pricing of different services with in hospitality business. It is very much an extension, or even a part of marginal costing. It assists management in profit planning process as per the distinct need of firm. With the help of CVP analysis, the management of Cost-Volume-Profit is able to carry out formal profit planning and control in which management uses different budgets and other forecasts. Therefore, it can be stated that the CVP analysis provides only an overview of the profit planning process along with this approach examines the purpose and reasonableness of such budgets and forecasts.

Importance of Cost-Volume-Profit [CVP] analysis in financial management of a travel and tourism business such as AHTC

In the the context of travel and tourism business, CVP analysis assists management by providing an insight into the effects and inter-relationship of factors associated with financial management such as costing of hospitality services, profit margin and etc. which influence the profits of the firm. The relationship between cost, volume and profit provides a basis to travel and tourism firm to determine the profit structure that helps organization for handling of various aspects of financial management as per the distinct needs of Angamah Happy Tours Company. Therefore, it can be stated that the CVP relationship becomes essential for budgeting and profit planning.

In the context of financial management, profit planning plays important role through which management is able to good profit within good price. As a starting point in profit planning, CVP analysis has been found very effective to assess the maximum sales volume to avoid losses which is equal to cost of travel and tourism related services. Furthermore, this system assists tour operator to determine the sales volume in the financial planning through which the profit goal of the firm will be achieved. As an ultimate objective it helps in evaluation of various most profitable combination of costs and volume that provides assistance in determination of sales target as per the corporate goals.

The travel and tourism industry is greatly influenced by different seasonal element. In this context, AHTC has to consider the dynamic management so as application of CVP analysis helps manager in order to predict and evaluate the implications of its short run decisions associated with he fixed costs, marginal costs, sales volume and selling price for its profit plans on a continuous basis.

B. Providing an analysis of pricing methods that AHTC can use to determine the price to charge each tourist on the trip

In the context of travel and tourism sector, AHTC can use different kinds of pricing tactics in order to determine reliable price to charge each tourist on the trip. In this regard, some most important pricing tactics are explained below:

Cost plus pricing

It is one the most common tool which is used by each organization to determine final price of products and services. It involves the addition of a certain percentage to cost in order to fix the price. This approach has been found most simpler approach in which AHTC determines the costs and add a certain percentage to arrive at the selling price.

Mark-up pricing

It is a variation of cost pricing. In this case, mark-ups are evaluated as a percentage of the selling price and not as a percentage of the cost price. It plays important role in the pricing of high end goods and services.

Demand-based Pricing

According to this approach, the price of a product or service is finalized as per its market demand. If the demand of a product is going up than business entity sets high prices for products to gain profit. On the other hand, if the demand of a product is less, the low prices are charged to attract the customers. This tool plays important role in pricing of tour packages of AHTC due to great impact of seasonality factor. The success of demand-based pricing depends on the ability of marketers to analyze the demand. This type of pricing can be seen in the hospitality and travel industries.

Competition-based Pricing

This approach refers to a method in which an organization sets the prices of different products and service as per the pricing of competitors. In this context, The organization may charge higher, lower, or equal prices by considering the prices of its competitors to handle market competition (Lasher, 2010). The aviation industry is termed as the best example of competition-based pricing in which airline companies charge the same or fewer prices for same routes as charged by their competitors.

C. Analysing the factors that will influence the profit AHTC will earn on the holiday trip

As per the given case, The Angamah Happy Tours Company (AHTC) is planning a summer holiday trip to a Caribbean Holiday Resort lasting one month. In this context, there have been several factors are evaluated that influence the profit earning capacity of business entity from particular holiday cost trip. In this context, some most important factors are explained below:

Change in cost of meal

The cost of food products plays vital role in determination of costing of different food products which are offered by Angamah Happy Tours Company during breakfast, lunch and dinner (Tauringana and Afrifa, 2013). In this context, it has been analysed that it prices of food ingredients are raised than the tour operator faces increase in cost that would reduce the profit business. Therefore, prices of food product are creating great impact on the overall costing of holiday package. As per the given case, company charges £125 per tourist for meals. Henceforth, increase in cost of food ingredients would increase price of food meals.

Change in tax rate

Several taxes are imposed by public authority on various elements of travel and tourism business such as service tax on accommodation, air transportation etc., property tax, green tax etc. All these taxes have direct impact on the cost and pricing of different services which are offered by Angamah Happy Tours Company. If the public authority influences tax rates than business entity would face increment in costing and reduction in profit margin (Shim and et.al., 2008). This is because there is very tough competition identified in travel and tourism business so as increase in price of hospitality services could reduce the demand of travel or holiday packages of Angamah Happy Tours Company.

Variation in fuel prices

The cost of air-ticket posses maximum share in the overall costing of holiday package of (AHTC) related to holiday trip to a Caribbean Holiday Resort lasting one month. A small increment in fuel price leads negative impact on profit of business entity (Cai, Small and Have, 2011). This is because the management of (AHTC) cannot increase the price of tour package in comparison of fuel price. Therefore, business entity develops appropriate strategies for managing the performance and profitability as per the current market trends. This thing influences the current cost of air-ticket and accommodation which is £50,000.

Total number of passenger 90
Price per member of holiday trip 750
Meals cost charge by company from tourist 125
Total price 875
Total revenue of company from 90 tourist 78750
Total cost of company 50000
Profit of company 28750

As per the above analysis, Angamah Happy Tours Company should organize a tip of 90 people. This is because company will generate good profit that could be £128750 which is more than £10,000 as per the projected profit of company. By organizing a one month holiday trip to a Caribbean Holiday Resort, organization would generate good return. Therefore, it can be concluded a holiday plan from 90 people is beneficial of organization.

Task 2

A. Explaining the different types of management accounting information that could be used in AHTC

The AHTC offers wide range of holiday packages as per the distinct needs of consumers. In this context, the management of AHTC collects wide range of management accounting information from distinct sources and accounting statements that play important role in strategic planning process such as expansion of business in markets, new product development, establishment of new ventures, mergers etc. All these element are playing important role for attainment of wide range of business objective. Different types of management accounting information which are used by AHTC are evaluated below:

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Forecasting

All businesses must conduct strategic planning in order to assess the competitive edge over other firms. In the planning for future operations, AHTC can carry out of forecasting. The goal of the forecasting process is to try to predict the outcome of future operations through trend analysis by evaluating the past revenue, sales and growth statistics. On the basis this information, AHTC is able to develop future plans associated with business expansion and development of new products and services.

Budgeting

In the context of travel and tourism business, the budget process help management of Angamah Happy Tours Company in allocation capital future operations as per the forecast. On the basis of this information, business entity allocates the funds for new product development and merger along with acquisition of new firms.

Variance Analysis and Cost Accounting

The term variance analysis is termed as process of comparing the actual realized expenses with reference to budgeted expenses. By assessing variation between actual and budgeted expense of various services provided in holiday packages. Tour operator firm is able to implement appropriate strategies for reducing cost and improving service quality.

Ratio Analysis

Ratio analysis is considered as most important source of accounting information. It provides wide range of information associated with liquidity, profitability and efficiency of firm. With reference to different ratio, AHTC is able to predict profitability trends and current liquidity position of firm that lead significant impact on various strategic decision such as assessment of new source of funds and handling of market competition etc.

Accounting for Decision Making

Managerial accounting is the process of in which business entity uses wide range of accounting data available to make better business decisions--solid decisions based on trends, facts and projects (Petzke, Fuller and Metges, 2010). All strategic decision such as improvement in service quality, costing, business expansion, etc. are mainly based on different kinds accounting data that have been gained through different accounting process.

B. Assessing the use of investment appraisal techniques as decision-making tools

In the process business expansion, an organization uses wide range of investment appraisal tactics to assess efficiency and profitability of investment project. Angamah Happy Tours Company can consider below mentioned approaches to examine different investment proposal to increase variety of services:

Net present vale

This approach provides assistance to organization in order to measure the present value of future cash inflow as per the particular discounted rate (Robb and Robinson, 2012). This process is very help full in travel tourism business in assessment of present value future cash inflow.

Payback period

The payback period is termed as most important part of business decision. Especially, in the case of Angamah Happy Tours Company, this approach has been found very effective for assessment of appropriate information about the time period in which an organization could be recovered its whole initial investment in particular project (Kesicki and Ekins, 2012).

Formula:
Payback Period = A +(B/C)
A= Period with a negative cumulative cash flow
B= Absolute value of cumulative cash flow at the end of the period A
C= Cash flow during the period after A

Project A= 5+0/20000=5 years
Project B= 5+(10000/22000)=5.45 years

On the basis of above assessment, it has been addressed that the net present value of both proposal A and B is negative. But, the assessment of payback period is determined that Proposal A is beneficial for business entity. This is because the net present value of Proposal A is better that Proposal B due to better net present value and lower payback period. So, travel and tourism firm should select Proposal A.p>

Task 3

A. Interpreting the financial statements using appropriate ratios for profitability, liquidity, efficiency, and investment

Financial statements of the business concerns reflect financial position and operational performance of an organization that assists business entity in order to assess present business position. The evaluation of financial ratios of TUI Travel is carried out below:

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Interpretation

As per the above ratios, it can be concluded that the liquidity position of business entity is not good there fore business entity needs to arrange the requirement of working capital efficiently. This is because liquidity ratio of TUI travel is indicating that travel organization is facing different several issues associated with fulfillment of all current liabilities as per the current assets (Financial Ratio Analysis, 2012). In addition to that it has been evaluated that current ratio of company was fall in 2014 to 0.53 times from 0.55 times of 2013. Therefore, liquidity position of company is not good. As far as operational performance is concerned depicted through profitability ratios, it can be said that TUI has recorded only 1.28% net profit ratio so as business entity requires to consider various strategies to increase profit percentage. In 2014, there is some improvement identified in net profit of company. This is because the net profit margin is increased from of 0.40% of 2013.

As far as efficiency ratios are concerned, company has been made optimum deployment of fixed assets in generating revenue from operations. Company’s average inventory has been sold 229 times during the year. Furthermore, it is evaluated that company has recorded improvement in inventory turnover ratio which is increased from 227.03 times of 2013. Therefore, it can be stated that company has made some improvement on operational efficiency. The PE ratio of TUI is being 243 in number which indicates that company is notable to appropriate income to pay back appropriate dividend (TUI Travel Annual Report & Accounts for the year ended 30 September 2014, 2014). In 2013, company has recorded PE ratio 87 times. Furthermore, it has been addressed that the company’s half debt is secured by equity holder’s fund, but company has sufficient funds on account of serving cost of debt. This is because interest coverage ratio is approx 16.63 times in 2014 as compared to 6.17 time of 2013.

Task 4

A. Analyzing the sources of funding, both internal and external) the company can obtain in developing the new hotel

There are different sources of finance available which are considered by the management of Angamah Happy Tours Company for development of new hotel. These resources are explained below:p>

Internal sources of finance

Retained earning

It is termed as most important source of finance which can be used by AHTC for different business requirement. Retained earning is defined as some portion of profit which is sustained by business entity for future business operations (Clark, 2013). By utilising of retained for development of new hotel, travel and tourism company can save cost of interest and other charges.

Selling of old assets

There are several non-profitable and unused property or assets available with an organization (Hoque, 2012). By selling old assets, the management of AHTC is able to generate fund for the project of new hotel.

External sources of finance

Equity shares

It is one the most common tool which is used by business entity to generate funds for business expansion. By issuing equity shares, the management of AHTC is able to arrange funds for new hotel (Needles, Powers and Crosson, 2013). In this process, risk on investment is mainly handled by investors and shareholders. However, it is very lengthy process.

Bank loan

It is termed as one the most quick tool of fund which is considered by tour operator company for raising funds for investment. In this process, management considers different long term and short-term source of finance as per the distinct of business. In this process, the management of AHTC can consider long term loans. etc (Srinivasan, 2012). for development of new hotel. All these factors have significant impact on different business operations associated with business expansion.

Short term source

Short term sources of finance are generally used by an organization for managing short-term requirement of funds which are mainly related to day to day expenditures, etc. These sources have been found very effective in order to resolve cash and liquidity related issues within business.

Long term source

For expansion of business and other capital extensive projects, an organization uses long term source of finance. These sources include equity shares, long term bank loans etc. In this process, business entity acquires funds for more than one year as per the long term business planning.

The management of AHTC selects different sources for distinct business requirement (Hoque, 2012). In this regard, cash and liquidity related issues are resolved by short term source of finance such bank overdrafts, working capital, retained earning etc. On the other hand, company uses long term source finance for major business expansion objectives and targets.

Conclusion

On the basis of above assessment, it can be concluded that an organization associated with travel and tourism business has to consider several factors such as pricing, profit margin etc. in order to generate good profit. This report has found that different investment appraisal tactics develops basis for business expansion. It has addressed that selection of best source of finance has played vital role for attainment of different corporate goals. This assessment has also found that financial ratio provides assistance to management in evaluation of business performance and carrying out a systematic business planning.

References

  • Berk, J., DeMarzo, P. and Harford, J., 2012. Fundamentals of Corporate Finance.
  • Brand, W. A. and et.al., 2014. Assessment of international reference materials for isotope-ratio analysis (IUPAC Technical Report). Pure and Applied Chemistry.
  • Cai, B., Small, D. S. and Have, T. R. T., 2011. Two‐stage instrumental variable methods for estimating the causal odds ratio: Analysis of bias. Statistics in medicine.
  • Choo, F. and Tan, K. B. 2011. An Income Statement Teaching Approach for Cost-Volume-Profit (CVP) Analysis by Using a Company’s CVP Model. Journal of Accounting and Finance.
  • Clark, G. L., 2013. European pensions & global finance. OUP Catalogue.
 
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