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Importance of Finance management in Eurocarib Tours

University: ICON College of Technology and Management

  • Unit No: 2
  • Level: Post Graduate/University
  • Pages: 18 / Words 4622
  • Paper Type: Assignment
  • Course Code: HA3011
  • Downloads: 74
Question :

This assessment will cover the following questions:

  • Tourism funding provide all types of financial assistance for expansion and growth. Evaluate the importance of costs, volume and profit for management  in effective decision-making in EUROCARIB TOURS.
  • Explain the use of management accounting information as a decision making tool in travel and tourism businesses as in EUROCARIB TOURS.
  • Interpret financial accounts to assist decision-making in travel and tourism businesses.
  • There are various of funding for development of projects associated with tourism. Understand and interpret sources and distribution of funding for public and non-public tourism development.
Answer :
Organization Selected : Eurocarib Tours

INTRODUCTION

Finance is defined as the management of money and includes activities like investing, borrowing, lending, budgeting, saving, and forecasting. There are various sources available for the firm that assist in getting an adequate or sufficient level of finance for the long term as well as the short term (Byrne, Sipe, and Dodson, 2014). Finance is also important and necessary for the tourism industry in order to gain knowledge and information on the different concepts related to the financial performance or condition of the business. The main purpose of this report is to identify the significance of finance and funding in travel and tourism organizations. In this report, the given organization is “EUROCARIB TOURS” which is a major European tour operator in London focusing on Caribbean holidays. This study is divided into different parts which include the importance of costs, volume, and profit and the use of management accounting information in travel and tourism. This assignment also covers the financial statement of the tourism company and different sources of new hotel development (Kurowski, 2014).

TASK 1

1.1. Concept of CVP analysis and its importance in the financial management of EUROCARIB

Concept of CVP:

Cost-profit-Volume analysis get applied for the motive of determining variation in costs and volume that impact on operating income and profit of EUROCARIB. There are few assumptions made within this procedure such sales price per unit is constant. In addition, it is an effective planning tool which is used by the management in order to predict future volume of activity, sales made, costs incurred and profit received. Through cost volume analyse, break even point for different sales volumes and cost structures is analyse which can be useful for EUROCARIB for making taking short- term economic decisions.

Importance of CVP:

CVP plays an important role to make financial decision for an organisation. CVP helps to know the variables in cost and volume and its affects in operating expenses and net income. CVP analyses help to know the relation between cost, sales and price. Financial management is a process which involve planning, organising, controlling and monitoring financial resources for the achievement of organisational goal (Chen and et. al., 2014.). CVP analyse is important in the financial management of EUROCARIB because of the following reasons like- it helps to know the cost or expenses which occurred in the whole tour. It helps to know the volume, for a tour operating company it is important to know the expenses involve in services which are provided to tourist. By analyse the cost and volume EUROCARIB can take financial decision. CVP analysis determines the how much changes in company's cost both fixed and variable, sales volume and price affect a company's profit. Through CVP Analyses EUROCARIB can know its fixed and variable cost. It these costs will incur more then profit margin will be less so company tries to minimise these costs. There are following ways to minimise the cost like- be smart when it comes to fuel means airlines can save money by fuel hedging contracts that secure a fixed price for fuel over a specific period of time. If an airline has hedged a low fuel prices and when fuel prices will increase they can get benefited greatly from being locked into the lower price, sometimes for months or even quarters, consequently saving huge amount of fund. It shows the effective financial management decision of the company because EUROCARIB is able to minimise its fuel price and through it they can earn more profit or profit margin will increase.

BEV

 

Sales

800000

Fixed cost

120000

Contribution

600000

BEP

0.2

1.2. Analysis of pricing methods that EUROCARIB can use to determine the price:

Prices are the important factor for any organisation. Prices strategies are use to attract the customers because if prices will low then more customers will attract and if prices are high then customer will not attract. As customers wants the better products and services at low cost. If an organisation has monopoly in the market then it can charge high price otherwise customers will not attract and will not buy high price product (Hillier, 2016). Choosing the appropriate price strategy is a challenge for the management of an organisation. Prices should be economical so that it can match with the supply and demand of goods and services. Prices can vary upon a period of time because of uncertain market conditions. For a tour and travel company, prices matters a lot because customers are price conscious and they search for low prices with better quality of product (Floyd, 2015). Customer have many alternatives in the market so they have many choices and they will buy that product which is getting on low prices and excellent quality. If EUROCARIB will maintain economic price with better quality of services than tourist will attracts towards them. There are many pricing methods such as follows:

Marginal cost pricing:

Marginal cost pricing is practice of setting the price of a product to equal the extra cost of producing an extra unit of output. It helps in determining the extra cost which will occur due to adding additional tourist (Pricing methods, 2017).

Particular

Amount

Sales

800000

less: Variable cost

200000

Contribution

600000

Less: Fixed cost

120000

Profit

480000

Incremental pricing:

Incremental price is that pricing method which is used by the company to know the incremental cost of a product. In this pricing method selling price can be determine by the variable cost. EUROCARIB can use this method to know the incremental in prices due to the variable cost. For tour and travel company variable cost can occur due to the changes in oil price.

Break even pricing:

 Break even pricing is the practice of setting a price point at which a business face the situation of no profits or no loss and every company wants to cross its break even point as early as possible so that they can earn profit. For example, EUROCARIB can achieve its break even if minimum 20 tourist travel in the air plane and it is point where they will earn no profit or loss. Total cost incurred in this point that is 1000 pound. But there are 30 tourist want to travel in air plane and these extra 10 tourist will bring profit of 500 pound for EUROCARIB. It helps in determining the price that is 50 pound which is needed to be charged from each tourist.(Gunder and Hillier, 2016).

Mark- up pricing:

Mark-up is the ratio between the cost of a good or services and it selling price. It is expressed as a percentage over the cost. EUROCARIB can use this price strategy to know the selling percentage over the cost. This strategy is use when cost estimates can be made with reasonable accuracy.

M1. Interpretation and analysing of pricing method:

Prices are matters for organisation as well as for the customers. EUROCARIB can use different pricing strategies like- marginal cost pricing and it helps to know the extra cost incurred in travelling for an extra tourist. Break even pricing method helps to determining the price which is going to be charged from each tourist of EUROCARIB. These are the pricing strategies which EUROCARIB wants to apply so that they can analyse and determine the appropriate prices in its organisation.

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1.3. Different factors that will influences the profit EUROCARIB:

There are various factors which can influence the profits of EUROCARIB. Profit is the main aim of any organisation to work. Without profits no one wants to work. Profit is that situation when organisation covers its cost and after cost covering the remaining margin is describe as profit (Keough, 2015). It is the difference between amount earned and amount spent. Without sufficient profits margin organisation can not survive for a long time. There are various factors which can influence the profit of EUROCARIB. These factors are:

Services:

Services can influence the profits when organisation does not provide appropriate services according to the demand of customers. For EUROCARIB it is mandatory to provide quality services to its tourists who is planning a summer holiday trip to a Caribbean Holiday Resort. Services like: comfortable seat, proper cleanliness, food and water services etc.

Oil price:

High oil price can influence the profit of an organisation. For a tour and travel industry incremental in prices can affect the cost. High Oil prices can influence the profit of EUROCARIB. If prices will high then EUROCARIB have to increase the fare prices of tickets and high fare prices can affect the holiday trip because it can reduce the number of tourist who wants to travel. If number of tourist will decrease then it decrease the profit of EUROCARIB.

Local transportation:

Local transportation of the country can influence the profit of an organisation. Local transportation of that country where the tourists want to visit, if local transportation cost will high then it will reduce the profit of EUROCARIB. Tourist have to pay more price for transportation and it can affect the holiday trip. Number of tourist can be decrease because of more transportation expenses so it can influence the profit of company.

There are various factors which can influence the profit of EUROCARIB and EUROCARIB should try to control it for the high profit margin (Kumar, 2016).

D1. Desire profit

Particular

Amount

Number of tourist

90

Sale prices per tourist

120000

Less: variable charges

36000

Contribution

84000

Fixed cost

144000

Total number of profit

-60000

TASK 2

2.1 Different types of management accounting information that could be used in EUROCARIB

Management accounting information is basically focused at internal managers of the firm and also the decision makers. It provide the relevant financial data to the manager of EUROCARIB so that they make the effective business decision for the company. Also helps the them to build the policies for the firm. The different types of management information are as follows:

Variance analysis:

Variance analysis is used by the company to calculate the fluctuation of actual outcome from the targeted outcome. The manager analyse the reason of variances and take right decision to control it. The manager of the firm always consider the variances while preparing the budget. This analysis helps manager to compare the standard budget with actual budget and if they find variance in the cost then they can take action accordingly. For Example, EUROCARIB planning a trip for Europe for 15 people, the estimated budget is 20000 pound but the actual that they occurred 15000 pound, so there is favourable variance of 5000 pound for company.

Formula:

Variance analysis: Actual cost- budgeted cost

Particular

actual cost

 budgeted cost

Variance

Trip for 15 people

15000

20000

5000(f)

Budget report:

This is used by the EUROCARIB to control the production cost. It provides the roadmap and required activity to achieve the business objectives. The manager of the firm used this tool so that they may compare the performance activity of the company with the budget to take the correct action for the organisation.

Cost Report:

Cost report is used to show the expenditure and the income of all the projects of the company (Leigh and Blakely, 2016). With the help of cost report the manager of the EUROCARIB get to know that which project gains the high profit and which incurs loss.

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M2. Variance analysis helps in improving the performance of company:

Variance analysis is process of measuring and analyzing the difference between the actual and estimated budget. In management accounting, variance analysis may have favorable that is cost is lower than the expected or adverse which revenues are lower than expected. It helps the managers to identify the cause of variance between the actual and planned budget. This evaluation helps the managers to take corrective action where needed. This analysis can be helpful for the EUROCARIB also to improve its performance and generate more revenues. For an example, EUROCARIB is planning a tour to Asian continent countries for the group of 30 people. There managers have estimated cost of trip would be around 95000 pound but the actual cost they occurred 90000 pound. So the deviation of 5000 pound is favorable for the company. This means company have more revenue in compare to the cost of trip. So it helps in evaluating the cost by previous trips and planned the future trips accordingly. So excess cost can be cut and more revenue can be generated. As excess cost will reduce and it will help in improving the financial performance of company.

2.2 Investment appraisal techniques as decision making tools:

(Source: Investment appraisal techniques)

Investment appraisal is a techniques which is used by the company to determine the quality of an investment. It's purpose is to evaluate the practical projects, portfolio decisions and the value that firm generates. EUROCARIB used the investment appraisal techniques to place the financial value on profit so that the cost of the company were justified. Following techniques which were used by the company as a decision-making tools:

Cash flows amount is million

Year

Cash flows

PV of 10%

Present value

0

-25

1

-25

1

12

0.9090909091

10.9090909091

2

15

0.826446281

12.3966942149

3

10

0.7513148009

7.513148009

4

8

0.6830134554

5.4641076429

Total PV

36.2830407759

NPV

11.2830407759

IRR

31.17%

Payback period

2.4years approx.

Pay back period:

Payback period is the easiest techniques of the investment appraisal, which is always expressed in years. It is the length of time required to recover the cost of an investment. It is considered as a decision making tools as it helps the EUROCARIB to take decision in which year they may recover the cost of investment. For example, If EUROCARIB is planning to undertake a project requiring initial investment of £25 million for their new hotel. It will take around 2.4 years approx to cover its total investments. It is more reliable aspects for the Eurocarib to determine their capital and make investments in its new projects.

Internal rate of return(IRR):

It is commonly used to ascertain the expected return from an investor for the project. It is the interest rate at which the net present value of all the cash flows ( both positive and negative) from a project or investment equal zero. It helps in determination of attractiveness of a project. If IRR will more than the required Internal rate of return then project is desirable. If it is low then the requirement then project will be rejected. From the above calculation, it has been found that EUROCARIB is making a total investments of 25 million from which they are getting a total of 31 % of return after 4 years. It will be more suitable option for the company to make investments in their projects.

Net Present Value(NPV): 

The difference between present value of cash inflows and out flows over the period of time is known as Net Present value(NPV). It is used as a decision making tool as it more effective process to evaluate the company projects. It is considered as a effective tools as it uses the discounted cash flow analysis. For example, the NPV of a project which requires an initial investment of 25 million for four years. They are going to get a decent amount of value after four year as 11 million. It means that the company is not so sure that they are able to earn sufficient amount of profit in coming four years. Hence, it would be easy for them to go for some other options that can help them to choose right methods for the calculation of reliable profitability. In this case NVP is 11million pond which is not so reliable, when NPV is positive then the firm project is accepted and when it is negative then the project is rejected. According to it EUROCARIB can take financial decision for the investment in the projects. (Lu and Yu, 2014).

TASK 3

3.1. Financial statement of travel and tourism company

Trafalgar tourism is one of the finest travel and tourism company of United Kingdom. Trafalgar provides luxurious hotels and comfort vehicle for travelling at reasonable rate. Here is the proper analysation of its financial performance by analysing the profitability ratios, current ratios and investment ratios.

Ratio

Formula

2017

2016

Liquidity ratio

     

Current ratio

Current Assets/ Current Liability

181957 / 15307 = 11.89:1

166158/15969 = 10.40:1

Total Asset turnover ratio

Net sales/ Average total assets

92682/291431= 0.318

109181/291431 = .374

Return on Equity

 Profit after tax/ Net worth

9794/239752 = 0.0408

-511/192563 = −0.00265

Current ratio =

Current ratio give the sense of efficiency of a company's operating cycle or its ability to turn its product into cash.

Working note:

Current Assets For 2016 = 166158 and Current Liability : 15969

The company have very less expenses on its liabilities the ratio shows that 11.89 assets over 1 liability, the reason being company is not using its much of assets.

Total Asset turnover ratio:

It measure the value of a company's sales or revenues generated relative to value of its assets. It shows the efficiency with which company is deploying its assets in generating revenues. It can be calculated as:

Working note:

 Net sales for 2016 = 109181, Average total assets for both year = 315833+267029/2 = 291431

Total Assets Turnover: This data shows that company is not using its assets to generate better revenues. As company is generating only 37.4% of sales from its assets. In 2017 the company assets ratio is lower than 2016 which clearly shows company's assets are not used in effective way.

Return on Equity:

It is a measure of the profitability of a business in relation to book value of shareholders equity. It can be calculated as below:

Working note:

Profit for the year 2016 = (511) and net worth (2016) = 192563

As return on equity is negative for the year 2016 for company and negative equity means company bear some losses and expenditures.

Profit For the Year 2017 = 9794 and net worth = 239752

In compare to 2016 return on equity is positive which shows some financial stability for the particular year. It shows company raised some funds from public issues also.−0.00265

M3. Appropriate Management Approaches

Management is an art of getting things done through others. To support this art there are approaches which helps manager of company to achieve their goals. As this can help the EUROCARIB to achieve the goals efficiently. The social system approach helps in understanding the behaviour of groups and individuals. And this will help EUROCARIB because the company is in tour and travel industry where different kinds of people come together for a tour. This will help the management to take decisions in interest of all parties rather than any one group. Apart from this, decision approach is also there which will help the management to take quality decisions.

D2. Collect and analyse the company financial statements

According to the calculated ratios it has been analysed that quick ratio of the company has increased up to 0.38 from 0.62 which is good for the organisation's performance. Current ratios of the organisation has decreased as compare to previous it is declined up to 0.59 from 2. The financial statements of the company has provided all these information which is used to assess actual organisational position (Wey, 2015).

D3. Concluding whether the company is financially stable in the long term on the basis of ratios

From the calculation of ratios it has been concluded that Liquidity of the company is not increasing because current ratio for 2016 is 10.4 and for 2017 is 11.89 which means the company have good liquidit but company is also not using its current assets in effective way. Company needs to manage its liquidity effectively to achieve higher profits. Return on equity ratio has increased from −0.00265 to 0.0408 which is a good sign for the company. As there is not much variance in the ratios and return on the company's equity has been increased from previous year so it can be said that the company will stable financially in forthcoming years. The return on equiity is increasing which shows company earning good profits. Therehore company will enough funds for upcoming years. (Wynn, 2017).

TASK 4

4.1 Different sources and distribution of funding for development of new hotel

EUROCARIB is intending to gather the accurate amount fund from external and internal source of funding. It could be applied in order to decrease interest rate and increase long run sustainability at marketplace. Beside this, EUROCARIB run to make its own hotel in the Caribbean, having obtained a suitable site. That will cost £25 million. There is more requirement to apply this effectively which could assist them to maintain better reputation at marketplace. There are various internal and external source of funding which are described as follows: (Planning Commission, 2011):

Internal Source-

Internal Source of capital is the capital which is generated internally by business. These are as follows:

Retained earnings:

It is refer as one of the main source which can be applied in order to gather sufficient amount of capital for developing new hotel. In the balance sheet of company, retained earning recorded as a part of shareholders' equity. It is calculated by adding net income and subtracting any type of dividends. Therefore, remaining value is essential for the company to used this in their expansion.

Debenture:

It is identify as an effective process which is used by company in order to rising liability from public by issuing debenture. The business entity is needed to pay sufficient quantity of interest rate to the public in relate with those liability value.

Owners investment:

It is also introduce as an effective way of gathering accurate amount of fund from the internal source such as personal savings. It is taken by the business owner within an enterprise for the purpose of operating business operation in an effective and systematic manner. It is considered as a safe side investment for owner as one does not need to pay any interest to outsiders and no worry of repaying loans. The investment will help to owner to establish their own business as well the it will develop the tour and travel industry also. (Zheng, and et. al., 2014).

External Source:

An external source of business is the capital generated from outside the business, which are described below:

Bank loan:

It is identify as one of the essential and important source of funding which is used by company to gather accurate amount of fund from developing their new business in another country. There is less limitation in bank rates which is imposed by lenders. Capitals are easily accessible to the enterprise for the accomplishment of their future goals more effectively. Basically bank loans are the most considerable source of funding for setting a new venture. As main reason for this is, it can be availed easily against the collateral security. (Ozanne, Biggs and Kurowski, 2014).

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CONCLUSION

As from the above report, it can be concluded that the company EUROCARIB is planning a trip to Caribbean Island, for that company have analysed the different factors that could affect the profitability of company. The financial statements for two years have also been evaluated, the data shows the stable situation of the company. Somewhere it has been from the statements that company is not using its current assets effectively due to this current ratio has risen up. Apart from this various kinds of internal and external sources have also identified for raising the fund for company to start new projects.

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