Introduction to Finance and Funding
Finance and funding is the imperative aspect for any organization. It helps to arrange cost effective sources of finance and contribute towards the organizational growth for longer time span. The present report is based on the case study of Merlin Entertainment plc. It is based on United Kingdom and operates across 23 countries in four continents. It has several brands like Alton Towers, Legoland and Hotham. Along with that, Chessington as well as Heide Park are also included. Further, report covers explanation on the importance of cost and volume in financial management of travel and tourism business. Furthermore, different factors that are influencing the profit of businesses are also analyzed. In addition to this, use of management accounting information has also been assessed in order to take right decision for cited business.
1.1 Importance of costs and volume in financial management of travel and tourism businesses
Cost is the most important aspect for any business because it helps to set price for the products and services. There are different kinds of costs that are associated with the business practices of Merlin Entertainment such as indirect, direct, fixed and variable (Davis, 2008). All these costs are considered at the time of setting price of services or setting margin of profit. The first one is direct cost which is directly related to the product. This cost varies in accordance with the flow of production so that corporation can effectively contribute towards the growth and success. Here, direct cost includes labor cost , transportation cost and material cost that are required to provide services to the end users. On the other hand, indirect cost consists of administrative charges and salaries of managers as well as other expenses like rent, rates and taxes. This in turn, company will be able to assess the overall cost associated with service delivery. Not only this, but other cost like fixed cost also increases the overall prices of products and services of Merlin Entertainment (Mayer, 2005). This fixed cost does not vary in accordance with the volume of production. It remains constant whether there is demand of travel and tourism or not. Similarly, cost of electricity charges are quite different wherein some parts of cost remain constant and some variable.
Apart from this, allocation and apportionment are different aspects which serve as the indirect cost. The allocation is done to allot cost of the whole item where cost is allocated to cost units. Similarly, apportionment is applied when only a portion of the benefits of whole expenses is used by cost centres or units. Thus, it only deals in some proportion of items of cost. On the other hand, break even analysis is the situation of no profit and no loss. At this stage, expenses incurred to provide services become equal to the profit gained. In addition to this, organization takes decision related to increase the flow of profit by reducing expenses (Corpataux, 2009). This is done by increasing sales turnover and meeting demand of Merlin Entertainment in an effectual manner. Furthermore, all cost such as fixed, variable and semi variable are added and margin of profitability is added in the same so as to get price of that particular product or service.
1.2Analyzing pricing methods used in Merlin entertainment
There are different types of pricing strategies that are used in Merlin entertainment in order to attract buyers and enhance their level of satisfaction. However, selection of below mentioned pricing strategies is based upon circumstances or market behavior. The corporation uses following pricing methods to quote prices for its products and services-
Cost plus pricing-This is another kind of pricing strategy under which management of Merlin entertainment adds margin on the overall cost of products and services. It assists organization to cover the cost associated with services and increase the overall rate of return. This price is adopted very frequently in sector of travel and tourism. This is because management need to ensure that what percentage of ratio should be there to maintain desired level of performance (Müller, 2009). Accordingly margin of profit is added in the cost of products and services.
Value adding-Under this concept, value is added in the existing services so as to make it different from competitors. Main motive of customers behind to adopt this prices is to make customers loyal by offering unique services. It aids to retain buyers and also helps to increase sales turnover. Furthermore, value adding concept facilitates to make visitors realize that company is offering something different which is not available to competitors.
Discounted pricing-This pricing method is unique and implemented just to gain attraction of buyers. Here, company puts discount in prices on the basis of special occasions so that holiday packages can be promoted among the large number of visitors accordingly (Zarutskie, 2010). Furthermore, Merlin entertainment gets multiple benefits by using such kind of pricing strategy so as to increase customer base, enhance sales turnover and create competitive edge in the marketplace.
Market-led pricing-A market based pricing strategy is one under which Merlin entertainment assess the features of services in comparison to other competitors. In case when corporation finds that its services have additional feature then price can be put higher (Kacperczyk, 2005). On the other hand, services or products which have slightly less features than those offered in the market, in this case, price of services can be reduced. In addition to this, market led pricing assists Merlin entertainment to attract more buyers and create distinctive image in the marketplace.
1.3 Analyzing factors influencing profit for Merlin entertainment
There are several factors which affect profitability of business to a great extent. These factors are explained as follows-
Economic environment- This is the most imperative factor under which it is very important for organization to assess factors such as purchasing power of consumers because of inflation rate and other charges like corporate tax. Merlin entertainment's profit can be affected due to unfavorable inflation rate which decreases the purchasing power of visitors (Deboeck, 2013). Owing to this, sales turnover goes down and hence, profitability cannot be increased.
Staff- Manpower is the most crucial aspects for any organization. For Merlin entertainment, it is very important to have competent workforce so that they can contribute towards attracting more visitors by rendering good quality of services. Furthermore, in case, employees are not trained then they will not be able to retain visitors for the longer time span (Dahlby, 2008). Here, Merlin entertainment provides time to time training to its employees in order to increase their knowledge and skills.
Current trends-Merlin entertainment takes into account the current trends such as changing preferences of workforce. This facilitates corporation to meet the expectation of visitors in the best possible manner. In addition to this, changing life style of visitors tends to create demand for other kind of products and services (Brealey, 2012). At this juncture, currently provided services may not generate appropriate revenue.
Political environment-It includes issues related to trade barriers, import and export. In this regard, changes in political parties create issues by which profitability of company affects to a great extent. Here, sudden changes in political party create uncertainty for the company (Kreander, 2005). Here, Merlin Entertainment also consider regulations and rules imposed by EU. However, EU tend to support travel and tourism sector which requirement of employment generation.
Bad debts-Bad debts is also a serious issue which has direct impact on profitability of the company. Here, debtors take service in bulk on the basis of credit facility but do not pay the same on right time (Dahlby, 2008). Owing to this, organization faces issues in increasing the ratio of profitability related to financial activities.
2.1 Different types of management accounting information
There are different management accounting information available to business. These management accounting information is extracted from following listed statements. It facilitates corporation to get detail information related to cost and actual business performance.
Variance analysis-Variance analysis is the most important part of management accounting because it provide detail regarding favorable and unfavorable variance. This in turn corporation can effectively forecast for future business activities. Furthermore, variance analysis is done in order to analyze the performance of corporation for particular time span (Mayer, 2005). In addition to this, variance analysis makes it possible for corporation to assess that which material need to be arranged at first in order to achieve organizational objectives on right time.
Management information system-Management information system is a tool to store all important information related to business. Under this Merlin entertainment find the relevant information related to growth and success of business. Here, company also access data of employees who are competent enough and contribute towards organization success.
Budget-It is also the imperative tool of management accounting under which company forecast expenses to be incurred and income to be derived at certain time span (Davis, 2008). It facilitates to give certainty for future business activities. It helps to analyze financial performance of firm in an effective manner and give right direction to business.
2.2 Using management accounting information as decision-making tool for Merlin entertainment
The above mentioned tools of financial accounting or financial accounting information play vital role in achieving long as well as short term objectives of company. It has already explained that financial statements are most important aspects to assess financial performance of Merlin entertainment. This is because balance sheet makes it possible to compare the performance of two year on the basis of ratio analysis (Zarutskie, 2010). It assists management to analyze that whether organization is performing good in current year or not. Also, it also analyzed that company can expand at global space or not. It facilitates to deliver good quality of services to large number of buyers as corporation becomes successful in handling uncertainty. Further, it is the only financial statement by which company come to know that how much amount should be borrowed in order meet organizational objectives. Accordingly, new services can be added in the existing one of Merlin entertainment (Drake and Fabozzi, 2012). This aid to create distinctive image of firm in the marketplace.
Furthermore, budget is effective tool of forecasting wherein it is assessed that what are potential variances company derive. It leads to propose new solution related to variance by taking corrective action. It proves to be effective in long run expansion and growth of business. Furthermore, management take right decision on the basis of budget for providing training to workforce or expanding business (Shapiro, 2008). It reflects that variation in budgetary process is the most imperative aspect for growth potential of business. In addition to this, in case of high profitability company can sign investment project so that revenue can be increased and consumer expectation can be met in best possible manner. Apart from this, solvency is also another factors which facilitate to take right action. In case company's solvency position in not good then management can adopt effective strategies like merger and acquisition.
3.1 Interpreting financial accounting of the Restaurant Group (TRG)
Ratio analysis is the most imperative part way to assess performance of company. It includes different ratio which contain information related to accounting system. By assessing this information shareholders of organization come to know the exact position of firm and also they get information related to their earning (Davis, 2008). However, it exclude external information such as effect of political and economic factors. Thus, it can be said that ratio analysis provide detail quantitative analysis but qualitative.
Profitability ratio-This is the most important ratio under which consist of gross profit, operating and net profit ratio. It assists corporation analyze its financial performance so that accordingly management can each at appropriate action. The gross profit ratio of TRG in 2012 was 18.82% whereas it was increased in 2013 by 18.28%. It shows that current year performance is better than previous year. Further, operating profit in 2013 is 5.34% which was 5.44% in 2012 (Mayer, 2005). It reflects that current year profitability has been decreased a bit. In addition to this, net profit of TRG has been increased in 2013. It depicts that overall performance of corporation in 2013 is better than previous year. It enables corporation to seek growth potential in future time span and raise sources of capital effectively for its expansion. However, operating profit of company went down in 2013 from previous year (Corpataux, 2009). The reason for the same related to high cost of production and impact of external factors.
Liquidity ratio-Liquidity position of corporation is also very important as it determines ability of firm to pay its long as well as short term obligations. It includes two important ratios such as current and quick ratio. Here, current ratio is showing .30 in 2013 but in 2012 it was .38 (Müller, 2009). It shows that liquidity position of company was better than 2013. Furthermore, quick ratio in 2012 was higher but in 2013 it has been decreased. It is showing that company is not utilizing its limited assets properly. Also, decreases in current ratio that corporation might face problem in meeting its short term obligation (Zarutskie, 2010).
Efficiency ratio- This ratio play vital role for taking right decision for shareholders and other related stakeholders. Here, total assets turnover ratio for 2013 was 1.45 which was high in 2012. Furthermore, inventory turnover ratio in 2013 was 94.80 which was low in 2012. It shows that currently corporation is performing better but not good enough. In addition to this, debt equity ratio in 2013 was .23 and 2012 it was .27 (Kacperczyk, 2005). Apart from this, time interest ratio of company has increased from previous. It depicts that, company has capability to pay interest but still current liabilities are kept on increased. Therefore, it can be said that overall performance of corporation is better in current year (Deboeck, 2013). Thus, TRG profitability ratio is quite fine and increasing from previous year.
4.1 Analyzing sources and distribution of funding for the development of capital projects
There are several sources of funds trough which Cross Railway project can be developed effectively. In this regards, following sources can be approached-
Equity financing-this is the most effective source of fiance for the development of Cross Railway project. Under this, equity shares are issued to shareholders and they are invited to invest in the project. It assists corporation or project owner to get enough fund for the proper development of site (Dahlby, 2008). Furthermore, equity financing take long time but facilitates to meet project requirement in best manner which in turn project can be developed in specified time span.
Bank loan and retained profit-It is another source under which management take access bank loan as source of long term finance. It facilitates to ensure development of project effectively without any kind of issue (Brealey, 2012). Not only this but retained profit as internal source of finance proves to be effective. On the other hand, bank loan require generally extensive time in raising finance due to legal formalities. Also, retained profit create opportunity cost for the business so management take care while selecting the appropriate option (Wolf, 2007).
Regional development-Regional development is also the effective source for generating finance for development of capital projects associated with travel and tourism. Under this government of nation provide finance which in turn smooth flow of project development can take place (Kreander, 2005). Here, finance is provided on the basis of actual money require in the development of project. However, regional authorities interpret in the decision making process of firm.
National lottery committee-This is also one of the effective option under which lottery committee give some financial facilities for the development of travel and tourism project (Christoffersen, 2011). This aspects serves as to great source of finance because it takes relatively short time span.
The aforementioned concludes that financial position of company is assessed with the help of ratio analysis and other important accounting information which extracts from budgets, variance analysis and fund flow statements. It assists management take corrective action accordingly and determine long run growth of corporation in the marketplace. It can also be said that, accounting information play vital role in taking decision related to expansion, investment and launching of new product in the marketplace. It enables corporation to cater need of large number of stakeholders and meet their expectations in effective manner. Furthermore, external factors like political, legal and environment affects profitability of company to a great extent. The reason behind that same is less control of management of these stated factors.
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