Evaluating Significance Of Finance And Funding In Travel And Tourism Sector

FINANCE AND FUNDING IN TRAVEL AND TOURISM

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Table of Contents Introduction ................................................................................................................................................3 Task 1 .........................................................................................................................................................3 A) Calculation of unit costs and making pricing decision ............................................................... 3 B) Calculate price of New Romantic Movement tour ...................................................................... 5 C) Analysis of factor influencing profit for travel and tourism businesses ...................................... 6 Task 2 .........................................................................................................................................................7 Investment Appraisal Techniques ..................................................................................................... 7 Task 3 ....................................................................................................................................................... 11 Ratio Analysis ................................................................................................................................ 11 Task 4 .......................................................................................................................................................13 Analyse sources and distribution of funding for development of capital project .......................... 13 Conclusion ...............................................................................................................................................15 References ................................................................................................................................................16

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INTRODUCTION Finance and Funding can be defined as the crucial aspect for all the commercial companies who are putting tons of efforts to sustain in business for long term periods. However, both these elements have direct connections with growth and profitability. It is the duty of senior authorities of firm to ensure that financial resources are managed and utilized in optimum manner so to attain desired outputs (Cahill, 2010). Looking at the condition of corporate market it become more significant for the companies to deliver best to its target audience otherwise it may have negative impact on overall future contingency.

Financial resources are considered to be the most valuable assets that an organisation have which requires intense care and appropriate management to carry out business activities effectively and efficiently. Furthermore, finance manager has the responsibility of keeping proper balance between cots and volume in order to manage and use financial resource adequately. In the present research project, researcher is focusing on evaluating significance of finance and funding in travel and tourism sector. To elaborate this in detail, report consist of importance of cost, volume and profit in making smart decisions regarding future functioning. Researcher concentrates on evaluating three different methods of determining the price of per unit and on that basis making the best possible decision for setting pricing strategy. Other than this, report includes evaluation of different investment appraisal techniques to determine the feasibility and reliability of future investment. Lastly, By the means of financial information researcher will evaluate and analyse the financial position of Magical Mystery Tours Ltd using ratio analysis.

TASK 1 A) Calculation of unit costs and making pricing decision 1) Analyse the figures to determine how many tourist booking require for break even point at price of 30 per ticket Break even point refers to the point of zero loss or zero profit. In other words, at break even situation revenues of business enterprise are equal to the amount of its total costs and its contribution margin is equals its total fixed costs (Irwin and Scott, 2010). In order to compute break-even point Get the best Tourism Assignment Help from Vetted UK Writers @ pocket friendly prices.

manager have to use equation such as: px = vx + FC + Profit Where, P is the price per unit X is the number of Units V is variable cost per unit and FC is total fixed cost 

Breakeven point in Sales units = x = FC/ p – v Price per Unit = 30 Variable Cost per Unit = 2 Fixed Cost = 300 Breakeven point in Sales units = 300/ 30 – 2 Breakeven point in Sales units = 300/28 Breakeven point in Sales units = 10.71



Break-even point in Sales Pound = Price per Unit × Break-even Sales Units Breakeven point in Sales Pound = 30 * 10.71 Breakeven point in Sales Pound = £321.42

2) How many tickets of sale require by Magical Mystery Tours Ltd to earn a profit on 30 per ticket 

Profit = 500



Price per ticket = 30

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Unit to be sold to earn 500= Fixed cost + desired profit / Contribution 800/28

3) Significance of cost and volume when determining how to make profit In financial management cost and volume play a crucial role because both these elements have direct impact on the overall functioning as they are highly correlated. When the volume is increases or decreases it directly effects on the cost of production. However, it is the duty of finance manager to manage and control financial resources in effective manner so that cost can be maintained (Narayanan and Nanda, 2004). Mainly, there are three types of costs i.e. fixed, variable and semi variable cost.

According to the present given case, Travel and Tourism sector is becoming one of the most competitive market to operate in. There are various companies making valiant efforts to execute business activities by managing financial position systematically. In this regard, top level management of Magical Mystery Tours Ltd should identify different types of costs for preparing variable cots structure. By the means of this, management will be able to make feasible and effective utilisation of available resources and make smart decision for increasing profitability. 

Fixed Cost: This is cost which is periodic in nature and does not affect the change in production level. In the present case, fixed cost for Magical Mystery Tours Ltd is 300 pounds. This means it will not change on the basis of tickets demand and sales. Fixed cost for Magical Mystery Tours Ltd are maintenance cost, administration cost, depreciation of fixed assets and rental charges.



Variable Cost: It is the amount of expenditure which changes as per the level of production. In this case, variable cost per ticket is 2. However, the variable cost of Magical Mystery Tours Ltd are fuel, food charges etc.

Relationship between cost, volume and profit All three of the elements of managerial accounting are used to determine the change in costs and volume that directly affects the firm’s operating and net income. The main purpose of identifying relationship between these elements is that they aid in making decisions. Further, it assist manager in Get the best Tourism Assignment Help from Vetted UK Writers @ pocket friendly prices.

evaluating different ways of meeting firm’s net income goals. Following image assist in illustrating relationship among sales, fixed costs, variable costs and net income.

Figure 1: Relationship between cost, volume and profit

B) Calculate price of New Romantic Movement tour Capital employed

5000

ROCE

20.00%

Profit

1000

Total price of ticket

6000

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Mark up

30.00%

Total cost

3800

Profit

1140

Total price of ticket

4940

Appropriate price for the Tour: From the above computation of both the methods it has been identified that price based on the method of mark-up value will be more feasible and suitable for Magical Mystery Tours Ltd in order to generate higher profits. Comparing both the methods it can be evaluated that price of Mark-up value method is higher than cost plus pricing method. The price as per the mark up method for a ticket is £4940 per ticket which is comparatively low than the cost plus pricing method which is £6000 per ticket.

Therefore, in order to generate higher profit of around £1140 than Magical Mystery Tours Ltd should undertake the pricing strategy of mark-up method set price accordingly.

However, when comparing both the methods it can be said that, Cost plus pricing method is feasible for the company because it is helping the course of Magical Mystery Tours Ltd in generating desired profits as well as allowing the company to charge lesser price (£4940) for Romantic Movement Tour. Therefore, by the means of this method company can influence large couples to book the tour as well as provide them quality of services at affordable prices and achieve desired corporate aim of long term sustainability.

C) Analysis of factor influencing profit for travel and tourism businesses Profitability of a business enterprise can be affected by several internal and external environmental aspects. However, there are some of the factors which are not in the control of businesses and raises the level of risks and uncertainties (Williams, 2012). Bellow discussed are some of the factors which needs to be taken care of by the senior authority of Magical Mystery Tours Ltd to attain growth and profitability. 

Seasonal Variations: In travel and tourism sector, seasons are of great importance. People likes

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different season to travel in different destinations. However, for creating demand about the services of tour packages it is important for top level management of Magical Mystery Tours Ltd has to develop tour plan as per the seasonal variations so that best possible services can be offered to clients (Helfrit, 2001). For example: there is high demand in June and July in travel industry as the prices of tickets are relatively high as compared to other months. 

Economic environment: In economic environment factors like purchasing power, per capital income and inflation rate in the economy are majorly concerned. Positive alteration in economic condition encourages senior managers of Magical Mystery Tours Ltd top explore new opportunities so that company can attain growth in near future.



Tactics of competitive firms: Competition leads to affect the pricing structure of Magical Mystery Tours Ltd. In case, if the price of competitor fluctuates than it is important for senior managers of cited firm bring modifications within the pricing policy. However, customers will face the obligations of fluctuations (Liu and et. al, 2007). Therefore, it can be stated that Magical Mystery Tours Ltd has to make changes in its pricing strategy by considering the strategies of competitors.



Political environment: There are several ways in which political environment can affect the functioning of business enterprise. However, Tax is considered as one of the most significant element which changes with the political environment. Magical Mystery Tours Ltd is working in such a dynamic political environment of UK, that its managers are responsible to generate desired results and outcomes easily. Decision regarding tax increase and decrease may affect the overall profit margin of the cited firm.

TASK 2 Investment Appraisal Techniques Capital investment appraisal also known as capital budgeting. However, it is primarily a planning process which facilitates the determination of concerned firm investments both short and long term. The main aim of using these investment techniques is to evaluate and analyse the financial viability and reliability

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of the investment. There are several appraisal techniques which are used by managers to evaluate and analyse the reliability of project (Jin, Yu and Mi, 2011). All the techniques have different implications on the outcomes and helps management in making smart and effective judgement on the future contingency.

Following are the three main investment appraisal techniques:

Payback Period: It is one of the easiest methods of computing feasibility and reliability of a financial project. The main purpose behind calculating this techniques is that it assist managers in identifying the time required by project to regain the invested amount, this process is termed as payback period. In general less the time require by any project is considered to be more feasible as compared to ones with longer payback periods (Hopwood and Mckeown, 2003). The formula to compute payback period of a project highly depends upon the cash flow per period from the project is even of uneven. In case of even the formula to calculate payback period is: initial investment / cash inflow per period. While on the other hand, in case of uneven cash flows, manager have to calculate the cumulative net cash flow of each period and then use in the following formula: A + B / C. Where, A is last period with the negative cumulative cash flow; B is the absolute value of cumulative cash flow at the end of period A; C is the total cash flow during the period after A. In the present given scenario, cash flows of two projects has been shown which will help researcher in evaluating and comparing the both the project easily (Beck, Levine and Loayza, 2000).

Looking at the uneven cash flows it is important for manager of Magical Mystery Tours Ltd to calculate cumulative value and then evaluate the time required to regain the initial investment.

Project A: year

Inflow

Cumulative inflow

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0

-£80,000

-£80,000

1

£35,000

-£45,000

2

£35,000

-£10,000

3

£40,000

£30,000

4

£50,000

£80,000

Payback Period

2.25 Years

Project B: year

Inflow

Cumulative inflow

0

-£1,50,000

-£1,50,000

1

£30,000

-£1,20,000

2

£45,000

-£75,000

3

£75,000

£0

4

£75,000

£75,000

Payback period

3.67 Years

From the above technique of investment appraisal it can be evaluated that, in comparing both the Get the best Tourism Assignment Help from Vetted UK Writers @ pocket friendly prices.

project's payback period Magical Mystery Tours Ltd should invest in Project A. However, it is because this project will assist top level management of cited firm to recover initial investment in 2.25 years. On the other hand, Project B will recover the initial investment at 3.67 years which more as compared to Project A. Therefore, from payback period it can be stated that Magical Mystery Tours Ltd

top level

management should invest in project A for minimizing risks and uncertainties in near future as well as generate desired results and outcomes.

Accounting Rate of Return: Accounting rate of return is the method which helps manager in evaluating the return earned from the projects which clearly means that if business has invested in certain project than either it is generating return or not able to recover the amount (Beck, Levine and Loayza, 2000). In other words, it is the ratio of estimated accounting profit of a project to the average investment made in the project. Formula of calculating accounting rate of return is: Average accounting profit / Average investment. However, it is the arithmetic mean of accounting income that is expected to be earned during each year of the project's entire lifetime. Moreover, in this investment appraisal technique, return which will be earned by firm at the end of the life of whole project is calculated as it does not determines the yearly return values from cash inflows (Lampe and Hofmann, 2013). Other than this, it also does not consider the present value of the money as it operates on the normal values of the inflow from the project.

Project A: year

Inflow

1

£35,000

2

£35,000

3

£40,000

4

£50,000

Total inflow

£1,60,000

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Average inflow

£40,000

average investment

£80,000

ARR

50.00%

Project B: year

Inflow

1

£30,000

2

£45,000

3

£75,000

4

£75,000

Total inflow

£2,25,000

Average inflow

£56,250

average investment

£1,50,000

ARR

37.50%

From the above computation of accounting rate of return it can be evaluated that for Magical Mystery Tours Ltd Project A will give the return of 50% which is highly beneficial in such competitive market. On the other hand, Project B is generating the return at 37.50% which is comparatively low as compared to Project A. Therefore, it can be recommended to senior authority of Magical Mystery Tours Ltd that they should invest in Project A as it will help them in generating higher returns and increase the

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chances of future growth and profitability.

Net present Value: Net present value is the calculation that assist finance manager in comparing the amount invested today to the present value of the future cash receipts from the investment. It is considered as the most significant tool of evaluating and analysing the feasibility and reliability of investment project (Diamond, 2002). The main purpose behind selecting this technique is that it accounts for time value of money by using discounted cash flows. Furthermore, this approach considers present value of money as the value of cash can change in different situations of market which may be due to inflation or deflation. Along with this, Net present value also does not calculate that what amount of return will be generated from this method. In corporate world it is the mots used approach to analyse the feasibility and it is all due to its reliability of determining correct and suitable outcomes. Following is the computation of net present value for Magical Mystery Tours Ltd.

Project A: Year

Cash flow

1

(ÂŁ)

P.V. Factor @ 10%

Present Value (ÂŁ)

35000

0.909

31815

2

35000

0.826

28910

3

40000

0.751

30040

4

50000

0.683

34150

Total Present value

124915

Initial investment

(80000)

Net Present value

44915

Project B:

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Year

Cash flow

1

(£)

P.V. Factor @ 10%

Present Value (£)

30000

0.909

27270

2

45000

0.826

37170

3

75000

0.751

56325

4

75000

0.683

51225

Total Present value

171990

Initial investment

(150000)

Net Present value

21990

From the above calculation of net present value of both projects it can be stated that, top level management of

Magical Mystery Tours Ltd should consider Project A for the future investment because

it is showing higher results as compared to Project B. However, Net present value of project A is 44915 as compared to project B 21990. Therefore, calculation clearly illustrates that project A is more feasible in terms of investment as by the means of this

Magical Mystery Tours Ltd will generate higher returns

maintain its position in such competitive market.

Henceforth, from the above computation of all the investment appraisal techniques it can be recommended that, project A is more feasible for Magical Mystery Tours Ltd to invest in as it is showing higher return than project B when compared.

TASK 3 Ratio Analysis Ratio

Formula

Calculation

Outcome

Current ratio

Current Assets / Current Liabilities

1100/500

2.2

Quick assets or

Current Assets – Inventories / Current

1100-600/500

1

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acid test ratio

liabilities

Return on capital

EBIT / Capital employed*100

300/3600*100

8.33%

Gross profit / net sales*100

800/1200*100

66.67%

Net profit / Net sales

300 / 1200*100

25.00%

employed Gross profit margin Net profit margin



Current Ratio: It is a financial ratio that assist in measuring whether or not company has the capability or enough resources to pay its short term debt over the next one year. In other words it shows the market liquidity of firm and its ability to meet creditor's demand. However, current ratio vary from one industry to another but it is generally between 1.5 and 3 for a healthy running business (Mongiello and Harris, 2006). Having higher current ratio clearly indicates that firm is maintain and managing financial resources effectively and due to which it is able to meet its short term financial needs and wants. According to the present given scenario, current ratio for Magical Mystery Tours Ltd is showing fruitful results of 2.2 which is comparatively high in the travel and tourism industry. By the means of this outcome it can be said that, top level management of Magical Mystery Tours Ltd are making optimum utilisation of available financial resources in order to meet short term financial needs. This also shows the ability of company in paying current liabilities which is feasible and reliable enough in terms of competitiveness of travel and tourism sector.



Quick Assets or Acid Test Ratio: The main purpose behind computing this ratio is to evaluate and understand the relationship between quick assets and current liabilities of the firm. Acid test ratio highlights the ability of

Magical Mystery Tours Ltd in meeting out its short term financial

obligations with its most liquid assets (Paulo, 2010). By the means of this ratio, manager can understand how quickly and easily assets can be converted into liquidity for meeting short term financial obligations. In general terms, acid test ratio should be 1:1 or higher but it totally depends Get the best Tourism Assignment Help from Vetted UK Writers @ pocket friendly prices.

upon the nature of industry (Steffan, 2008). However, higher ratio indicates better liquidity position of business and vice verse. According to the present given information, acid test ratio of Magical Mystery Tours Ltd is 1 which is relatively good in travel and tourism industry. This indicates that, there are adequate assets which can be converted into cash whenever required to meet short term financial needs. This outcome also indicates that cited firm's quick assets are equal to current liabilities. 

Return on Capital Employed: This ratio highlights the relationship between net profit and capital employed by the firm. Herein, capital employed is evaluated by deducting current liabilities from the total assets available with the firm. The main aim of computing this ratio is that it assist in comparing profitability of companies after taking into account the amount of capital invested (Atrill and McLaney, 2008). This helps in proving the value of business which it will gain from the use of its assets and liabilities. However, companies create value when they are able to generate higher returns on capital above the weighted average cost of capital (WACC). The main drawback of this ratio is that it measures the return against the book value of assets available in the business. In the present given case, return on capital employed for Magical Mystery Tours Ltd is 8.33% which clearly indicates that firm is generating relatively average returns by employing its capital. This result indicates that managers have to make efforts in attracting large investors to invest in business and enhance the level of business enterprise.



Gross Profit Margin: Through the help of gross profit margin, managers can understand the relationship between gross profit and net sales. Further, it also defines how much Profit Company earned form its sales to execute future business activities. In other words, it is the difference between revenue and cost before accounting for certain costs or expenditures. The main purpose behind computing this ratio is that it helps in determining the value of incremental sales as well as creates appropriate platform for managers to make decision regarding pricing and promotions (Cadle and et. al, 2010). From the above ratio analysis table it can be evaluated that, gross profit margin of Magical Mystery Tours Ltd is relatively high and showing fruitful results. This outcomes clearly indicates that cited firm have good and adequate margin over its entire sales.

This shows company is making valiant of efforts to minimize the cost of sales and increase overall revenue. However, higher profitability of company means overall better financial position.

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

Net profit margin: net profit ratio assist in evaluating the efficiency of business enterprise in managing and controlling the expenses which are related to administration, manufacturing, selling etc (Financial ratio and Analysis, 2013). However, this ratio shows the relationship better net profit and entire sales of Magical Mystery Tours Ltd. The main purpose behind computing this ratio is to make internal comparison within business and accordingly judge the performance of firm's activities. A low margin of profit indicates a low margin of safety and higher risk that will reduce the sales and minimize profits which may result in net loss of a negative margin. In the present case, net profit margin of Magical Mystery Tours Ltd is showing positive outcome.

25% of net profit margin clearly indicates that cited company is generating higher returns on its sales which ultimately increases profit margin.

TASK 4 Analyse sources and distribution of funding for development of capital project

To, The Chief Executive, Magical Mystery Tours Ltd, London Subject: Different source available for funding Respected Sir, Operating in is such competitive market of travel and tourism it is important for firm to look for expansion at constant period so that they can maintain position in market and generate desired results and outcomes. For the present case two project has been chosen: development of tourism information system and small tourism and environmental improvement with associated information (8 Tips and Resources for Managing Your Business Finances). The main purpose behind selecting these projects is to enhance the management of data as well as sharing information easily and providing appropriate

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platform for customers to present their feedbacks, needs and wants. In order to carry out both the projects it is important for top level management of Magical Mystery Tours Ltd to undertake both public and private source of funding which are as follows: 

Government Funding: This is considered as one of the most significant source of public funding.

By the means of this, Magical Mystery Tours Ltd can generate large amount and execute or carry out both the projects (development of tourism information system and small tourism and environmental improvement with associated information) in appropriate manner (Riley, 2012).

In this government initiate in providing funds for the development of specific region so that society can be improved. Therefore, this source can be used for the commencement of projects and expand business for better future contingency. It is also one of the major source of public funding. The main purpose of this source is that it helps in acquiring large amount which are issued in the purpose of enhancing the level of society so that standard of livings can be improved. Major benefit of national lottery committee source is that it is cheap and can be obtained for long term periods. Therefore, senior managers of Magical Mystery Tours Ltd should focus on such source and execute both the projects feasibly and smartly.



Equity Funding: Equity financing is one of the most effective public source of funding. By the means of this large amount of money can be gathered and utilize for different purposes. In this, Magical Mystery Tours Ltd has to issue shares in the market and attract shareholders to purchase shares and raise the capital for future expansion. Another benefit of this source is that, principle amount is not paid to its holders, infect company has to pay interest to its shareholders in the form of dividend at the end of financial period (Management accounting. 2014). On the other hand, this source is risky and can harm the overall performance of business enterprise in the existing market.



Debt Funding: There are several financial institution available in the market who are providing funds at different interest rates. This is considered as long term borrowing where firm has to pay interest at certain amount at the end of every month. Magical Mystery Tours Ltd can borrow money from bank and carry out expansion process. The main benefit of this source is that it enhances liquidity position of business but also increases the liability in terms of monthly

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interest.

Date: 22nd June 2015 Finance Manager

CONCLUSION In conclusion to above report it can be evaluated that finance and funding are the two major aspects of business enterprise which needs to be managed and controlled in effective and efficient manner. In the first part report highlight the importance cost and volume in making decision regarding pricing strategy. With the help different method best possible pricing method has been recommended to Magical Mystery Tours Ltd which is Mark up Cost pricing method. Other than this, in the second part different investment appraisal techniques has been used to evaluate and determine the reliability However, through the computation Project A has been recommended to Magical Mystery Tours Ltd for future investment as it was providing higher returns for the the firm in such competitive market. Lastly, financial tool ratio analysis has been used to evaluate the financial position of business in 2014. Through the help of different ratios, liquidity and profitability of Magical Mystery Tours Ltd has been evaluated and it clearly indicates that despite of working under such high competition company is generating better returns due to which its financial position is stable.

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REFERENCES 

Atrill, P. and McLaney, E., 2008. Accounting and Finance for Non-Specialists. 6th ed. Financial Times/Prentice Hall.



Beck, T., Levine, R. and Loayza, N., 2000. Finance and the sources of growth. Journal of Financial Economics. 58(1-2). pp.261-300.

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Cadle, J. and et.all., 2010. Business Analysis Techniques: 72 Essential Tools for Success BCS, The Chartered Institute.

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Cahill M, 2010. Financial Times Guides: Making The Right Investment Decision: How to analyse Companies and Value Shares, 2nd edition (ROCE).



Diamond, J. 2002. Performance Budgeting--Is Accrual Accounting Required?. International Monetary Fund.



Helfrit, E., 2001. Financial analysis tools and techniques. McGraw Hill Professional.

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