Unit 2 Finance and Funding in Travel Tourism Assignment

Program	Diploma in Travel and Tourism Management
Unit Number and Title	Unit 2 Finance and Funding in Travel Tourism
QFC Level	Level 5

Introduction

Cost, profit, and volume are the considerable factors for that organisation operating in Tour and travel industry. This finance and funding in travel tourism assignment report explains importance of cost, profit and business volume of the business and significance of pricing policy for tour and travel organisation. This report also provides information regarding MIS and sources of funds for investment are available in the travel and tour industry.

Task 1

Merlin Entertainments Plc is operating in travel and tourism sector in United Kingdom. It operates its business in three segments: Midway Attractions, LEGOLAND Parks and Resort theme park around 115 attractions in 23 countries of four continents. Cost, volume and profit from travel and tourism business are most important. These three factors are useful for making policy decisions for management.

P 1.1 the importance of costs, volume and profit for management decision making in travel and tourism:

Tour and Travel is one of the growing sectors of United Kingdom. For any business Cost, volume and profit these three factors are important. Companies operating in travel and tourism sector have to consider cost, business volume and profit margin in order to make strong strategies to stand in market in long run and expand its business at international level.
Cost: Cost includes all direct costs, indirect cost, fixed cost and variable cost incurred during business operations. Indirect cost includes arrangement of local bus service, making arrangement of tour guide etc. Direct cost includes expenses occurred regarding providing facilities and services to their customers related with accommodation or resort and theme park. Consideration of all the expenses management can frame plan to control the cost so that profit margin may increase (Harris, P. 2010).
Business Volume: Management should always consider the business volumes or peak seasons before strategic decision making. Travel and Tourism business is a kind of seasonal business. People plan their holidays during summer and winter vacations. Management should consider the business volume so that it can frame strategies for operational activities and make effective cost control.
Profit: Profits are the final results of operational activities held in the organisation. Considering the profit margins of past performance management can make more efforts in controlling cost and frame market strategies for expansion of market in order to increase profits. Whole business of tour and travel is dependent on profit. Higher profit helps in developments of business and also makes it economically strong.

P1.2 Analyse pricing method used in the travel and tourism sector:

There is huge competition in travel and tourism sector of UK. To remain in the race of competition and serve industry in long run Merlin Entertainment Plc should adopt some pricing methods in framing different tour packages for increasing customer’s attraction. Some pricing methods are as follows:

• Market-led pricing method: Under this pricing method company evaluate the prices of similar tour packages that are available in the market by the competitors. Management should analyse prices of the facilities and services provided by the competitors and set prices as per the comparative study between their tour packages and competitor’s tour packages. Company set prices of their tour packages higher or lower from the prices of similar products in order to increase sales and earn high profit.
• Cost- plus Pricing: Company may adopt this method for pricing their tour packages. As per this method company can calculate cost of tour packages including direct and indirect expenses and then add a certain percentage of profit margins to them. Company calculate a breakeven point so that it can earn sufficient amount of profits on their investments in business.
• Return on investment: Company uses this method in making an idea of their profit. Prices are determined on the basis of interest rate and rate of return from the investment made in organising tour packages for customers.
• Marginal Costing pricing method: Company may decide its prices on the basis of marginal pricing method. Under this method prices are charge of a product to equal to the extra expenses involved in organising another tour package. But this method is generally less adopted by the company.

Competitors of Merlin entertainment Plc “GREVIN ET COMPAGNIE” adopt market led pricing method in deciding tour packages. Company may adopt one of the above explained pricing methods but before deciding pricing of the tour Packages Company should consider the factors influencing pricing such as change in seasonal variation, political environment, economic environment, social environment etc (Medlik, S. 2012).

P 1.3 Analyse factors influencing profit for travel and tourism businesses using Merlin Entertainments Plc.

Profit: Profit means financial gains earn in business from operational activities. Profit is the focal point for every business organisation. Like other industry there are many factors which affect the profit margin of “Merlin Entertainments Plc”. If profit is affected then it also affects the business of whole organisation. Influencing factors includes external and internal factors of organisation. These are as follows:

Internal Factors:

• Bed Debts: Generally bed debts are arises when customer do pay amount in respect of the services taken by the company. When payment from customers are not received by company then those payments become bed debts and charged by company in profit and loss account it will reduce the profit margin of the company.
• expenses like salaries and wages are related with staffs which creates a major part of cost of business. If these costs are increase it will affect the profit level of the company.
• Planning includes estimates of future investments on the basis of current profit. Planning consider prevailing market situations it does not make estimates on the basis of future. If market conditions will change then it will planning of company and ultimately affect the profit level.

External Factors:

• Seasonal Variation: Attraction of tourist is based on seasons sometimes tourist is like to plan their holidays in summer vacations. Business volumes are changing on the basis of seasons. These seasonal variations affect the profit margin of the company.
• Political environment: Political environment includes changing government, taxation policy, foreign trade regulations and other legal changes affect on the business activities of company. Tourist plan their holiday considering these legal rules and regulations so changes in political environment influence the profit margin of company.
• Economic environment: Economical changes include change in interest rate, change in exchange rate etc. this will affect the monetary transactions of the business which are directly affecting the profits.
• Social Environment: it includes changes in population demographics, income distribution, social mobility, lifestyle, attitudes towards work or leisure, consumerism and level of education are also influence the profit margin of the company (Pizam & Mansfeld, 1999).

Task 3

“Restaurant Group Plc” is operating in restaurant industry. Its business is spread in to 470 restaurants and pub restaurants all over. Frankie & Benny’s , Chiquito , Coast to Coast are the principle brand of company. Company has strong image and good financial conditions. Management Consultant firm focuses on travel and tourism business wants to make financial performance analysis of “Restaurant Group Plc” for the year ended 2015.

3.1 Interpret financial accounts of The Restaurant Group (TRG) Plc for the year ended 27 December 2015:-

Table shows the terms from financial statement used in ratio analysis:

	Amount  in (£'000)
Particular	2014	2015
Revenue/Turnover	6,35,225	6,85,381
Shareholders Fund	244524	283560
Long term fund	39458	30527
Capital Employed	283982	314087
Gross Profit	113900	126890
Operating Profit	80450	88891
PBT/LBT	78065	86845
PAT/LAT	60107	67398
Operating cash flow	124992	135535
Current Assets	29410	38005
Current Liabilities	121634	136403
long term +short term funds	39458	40296

Ratio analysis of “The Restaurant Group Plc” of the year 2014 and 2015:

S. No.	Ratio	Formula	2014	2015
1	Capital turnover	Revenue/Capital employed	2.23685	2.18
2	Profit margin	Profit/revenue
	Gross profit margin	Gross profit/revenue	0.17931	0.19
	Operating profit margin	Operating profit/revenue	0.12665	0.13
	PBT/LBT margin	PBT or LBT/revenue	0.12289	0.13
	PAT/LAT margin	PAT or LAT/revenue	0.09462	0.10
3	Return on capital	Profit/capital employed
	Gross profit	Gross profit/capital employed	0.40108	0.40
	Operating profit	Operating profit/capital employed	0.28329	0.28
	PBT/LBT	PBT or LBT/capital employed	0.27489	0.28
	PAT/LAT	PAT or LAT/capital employed	0.21166	0.21
4	Operating cash flow	Cash flow/operating profit	1.55366	1.52
5	Current ratio	Current assets/current liabilities	0.24179	0.28
6	Gearing ratio	Debt/equity
	Long term debt ratio	Long term debt/Equity	0.16137	0.11
	Total debt ratio	Long term + Short term debt/ Equity	0.16137	0.14

Interpretation of Financial Analysis: For analysis of financial performance of companies ratio analysis is used. Ratio analysis includes capital turnover, Profit margin ratio, Return on capital ratio, Operating capital ratio, current ratio and gearing ratio (Cartney, D. 2011).

• Capital Turnover ratio: this ratio interprets capability of generation of revenue against capital employed. In the year 2014 capital turnover ratio was 2.2368 and in year 2015 ratio was 2.18. Performance of current year 2015 is low than year 2014. The reason behind it is company take overdraft facility along with long term borrowing. This will increase the burden over revenue so the revenue is less generated in 2015.
• Profit Margin ratio: it shows the availability of profit against revenue. Profit margin ratio are of four types:

1. Gross Profit margin: company’s gross profit margin increases in year 2015 than 2014. Gross profit ratio against revenue in year 2015 is 0.19 which is quite higher than in year 2014 which was 0.17.
2. Operating Profit Margin: Company generate good profit from its operating activities regularly in comparison of previous year.
3. PBT margin: Company performing good in its operational area and enjoy good profit so its Profit before tax includes profit from other activities which is also good and increased than last year.
4. PAT Margin: Company‘s profit after tax margin from revenue is 0.10 in year 2015 and 0.09 in year 2014 which shows sign of increment.

• Return on Capital Employed: This ratio depicts the amount of return which a company receives from its total amount invested. Capital employed includes equity capital and long term debt funds. It is calculated in four ways:

1. On the basis of gross profit: Return calculated on the basis of gross profit shows that its returns are stable during two years.
2. On the basis of operating profit: Company earn return on its investments as per operating profit is stable it does not lower or less in year 2015.
3. On the basis of Profit Before tax: Company’s performance is stable during two financial years.
4. On the basis of Profit After tax: Company enjoy stable return as per profit after tax.

• Operating Cash flow: Operating cash flow ratio is used to analyse liquidity soundness of the company. If ratio is less than 1 then it shows that company is unable to pay off its short term liabilities. “The Restaurant Group Plc” is financially sound and able to pay all short term liabilities during the both years. There is no effect on its liquidity position in year 2014 and 2015.
• Current ratio: This ratio interprets the company’s capacity to pay its debt during its business cycle, for example 12 months. Current ratio of company is below 1 which means company’s current liabilities are more than its current asset. Current ratio of year 2015 is more than in year 2014 because company adopt overdraft facility for its operations.
• Gearing ratio: Gearing ratio interprets financial risk which company have due to huge debt amount over its equity. This ratio shows proportion of borrowing capital to its equity. But financial risk for the company is very low because it have little amount of debt capital in proportion of equity capital. During the year 2015 and 2014 there is no such change in company’s gearing ratio.

Performance overview:

Overall the financial performance of the company is good and company is financially sound. “The Restaurant Group Plc” is suitable option for making capital investment in project associated with travel and tourism because company is generating cash continuously (Velten, M. 2014).

Task 4

  Poster Presentation:

Conclusion

The report explain in detail about the significance of cost, profit and business volume in tour and travel industry and different types of pricing method which travel and tour operator may adopt for designing tour package. The report also describes the tools of management accounting information used in decision making in tour and travel industry. This report also describes the financial analysis which helps in taking investment decisions in capital project and also describes various capital project associated with travel and tourism industry and help in growth and development of tourism sector’s organisations.

Reference

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Langfield-Smith, K., Thorne, H., Smith, D.A. & Hilton, R.W. 2015, Management accounting: information for creating and managing value, 7e [] edn, McGraw-Hill Education, North Ryde, N.S.W.
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Pizam, A. & Mansfeld, Y. 1999, Consumer behavior in travel and tourism, Haworth Press, New York.