Finance and funding in the travel and tourism sector

FINANCE AND FUNDING IN THE TRAVEL AND TOURISM SECTOR STUDENT NAME: AZEB GEBREKIRSTOS STUDENT ID:14818 Executive Summary The business report mainly focuses on the mechanism of financing and funding in the travelling and tourism sectors. The report here give a brief introduction of the various topics regarding financial management in regards with the tourism industry. It further classifies the sections in to four learning outcomes where in the first part it analysed the importance of cost and its importance in decision making process. In the second part it focuses s on the different uses of management accounting and various tools in the tourism industry. In the next part it interpreted the financial accounting to assist decision making in business. And lastly it understands the different sources of funding for development of tourism sectors. It also attaches a brochure and a power point presentation in the last to visualize the accounting change in the industry.

Table of Contents Introduction

Being one of the largest sectors in the industry, tourism and food sector industries has rapidly growing at a continuous pace for more than a half a century. One of the most vibrant and most thriving industries in the world, these two sectors has been one of the significant factors that have readily affected the economic growth, environmental factor and most importantly the investment sector. It has been since the booming sectors in the economy where large scale investment has been involved.

The report helps us to acquire knowledge and technique which will assist with controlling of efficient decision making process in the tourism and food sectors. The report will emphasize the importance of cost that helps to generate huge profits in

these sectors. The majority of the report gives importance to the financial reports, which are practised in the micro level and funding arrangement system for developing of large scale projects at macro level. The report highlighted that the learners can gain knowledge on tourism and travel sectors and food sectors and understands the basic fundamentals of all the financial cost and funding arrangement in the process. This report has taken Merlin Enterprise and The Restaurant Group (TRG) to analysis the funding and investment procedure.

TASK 1 (LO1, AC1.1, 1.2, 1.3, M1, M2, M3, D1, D2, D3) LO1- Understand the importance of costs, volume, and profit P1.1 Explain the importance of costs and volume in financial management of travel and tourism businesses According to Guttentag(2015, p.1192), tourism business sectors are huge business and such huge business are known by the term “business entities� because of their large scale volume of investment and generation of profits. The tourism sectors also involve the different kinds of financial structure whose financial reporting is slightly different from others. Merlin enterprise is one of the most leading sectors in the entertainment and Leisure Company in the world.

In this section the importance of cost is analysed in order to emphasize its importance in financial management. Different objectives of the business enterprise the management of the company needed to keep a proper balance between its various sources of expenditure. These include understanding of various types of cost like direct cost, variable cost, fixed cost, capital cost and cost on other social heads. Merlin entertainment has to understand several types of cost in order to access several types of spending and accessing different prices of services (Usaid.gov, 2017).

In this approach, Cost Value Profit (CVP) analysis has been considered to establish the relationship between cost and sales of the company. The CVP analysis is concerned with the operating profits and how it is influenced with the change in the variable cost and fixed cost. This process helps the managers of the company to achieve to desired profits without acquiring any loses in the future which will help in turn to evaluate fixed cost and estimating financial losses (Maloletko et al. 2014, p.25).

There are also other cost which involves direct costs, indirect costs, fixed costs, variable costs, allocation and apportionment in the tourism industry.

Direct costs are those costs which are attributed towards the production of certain commodities or department or projects. This kind of cost entails the company to achieve a specific cost objective. This production of commodities includes software, labour, resources and materials equipments. According to SchrĂśder et al. (2015, p.311), direct cost involves the majority of the funding in case of tourism industries where they need to spend[Question: Are you attempting to explain what direct costs are? If so your answer is incorrect: Look at the handouts for help]. While indirect costs are those cost which are overhead that remains same whether they make any sales or not. These costs are those cost which are left for calculation after the computation of the direct cost.

Fixed costs are those costs which remains the same irrespective of the sales of business or level of business activity. This cost might rises up due to inflation. In this case of tourism industry, rent is the most common fixed cost (Eichfelder and Vaillancourt,2014, p.10).

Variable costs are those costs which vary with the level of business activities. In the case of tourism industry if Merlin entertainment sells more packages on cruises they will require more vessels this will increase the number of employees, fuel, insurance, service etc.

Allocation and Apportionment overhead are the methods that is use to classify the different cost into different cost centres according to which department each cost belongs. Cost Apportionment mainly occurs cost cannot be connected with their

particular cost centre and cost allocation occurs when cost, expenses and overheads are identified to the specific cost centre (Gean and Gean, 2015, p.127).[You have attempted to explain costs – though not successfully; but you failed completely to talk about VOLUME which is key to T & Tourism Sector!]

P1.2 Analyse pricing methods used in the travel and tourism sector These are various price methods which are adopted by tourism industries in determining the prices of different services in tourism industry: Discounting prices: This pricing strategy is mainly being applied during the off season. Merlin group by applying this method could acquire quick profit and revenue.

This process also enables to inspire customers to avail various services at discounted prices.

Value adding: By this method management of Merlin services industry can add extra features with their services to diversify their products so that it can lead a positive impact on the consumers (Sahut and Hikkerova,2014, p.1). This is the most attractive approach for any kind of business process in the industry.

Cost plus pricing:As per Han and Hyun (2015, p.25), this method is adopted by all types of industryto achieve their both short and long term goals. The managers of Merlin Group considered fixed along with variable cost in rendering this services. After the computation of fixed and variable cost, the company intend to add some amount of percentage profit in their business activities.

Marketing pricing: this is the most widely and common method applied by most of the companies in travelling and tourism industry. Merlin group can adopt this pricing strategy where they can involve pricing of honeymoon package by keeping their prices high during the wedding seasons. According to Figueroa-Domecqet al. (2015, p.89), this also involves seasonal pricing which is meant to offset the demand during the time when they are peak or low, this will be important for any company or else it would be difficult for them to achieve break even.

[You could add more from your books & internet sources] P1.3 Factors affecting Profit For a global business organisation Merlin Entertainment Plc there are several factors which may either directly or indirectly the influence profit for the firm. The most basic factor which affects profitability is the number of units produced by a business firm. In the case of Merlin Plc, the units of production can be calculated in terms of the resorts operating under the organisation. It is known that the company has around 115 attractions over 23 countries spread across 4 continents. This positively reflects upon the financial condition of the business group indicating that the profit-making capacity of the group is large. It is a simple concept that the more the number of units produced, the better potential it provides for sales and this affects the profits earned. The general scale and size of Merlin Plc is a major factor which determines the long-term profit making the ability of the business group. This also helps the company to identify a specific pricing strategy which needs to be adopted taking into consideration the market structure and the needs of the target audience.

Another important factor which influences profit is the concept of cost which is naturally incurred during the production of any goods or services. By controlling variable and the operating costs of the firm, the profit margin in turn increases. The cost incurred by Merlin Plc will generally be in the context of the construction of resorts[But this is Fixed Cost NOT VARIABLE COST!] as well as the expenses incurred in the field of marketing and promotion (Knight, 2012, p.12). The organisation is operating worldwide and is catering to a large customer base. It is important to control the overall costs in order to maximise profits and increase efficiency in the long run.

The economic condition, the rules and standards of taxation and law are also to be taken into consideration as the company operates on a different platform which may affect the profit making margin. The economic factors such as inflation, taxation, [and subsidiary]are different for different countries and need to be acknowledged in order to analyse the financial position of the firm in the current market (Drury, 2013, p.11). The information available from the market scenario is to be effectively used to maximise the profits of the firm that help induce better financial management decision making. Other factors which affect the profitability of Merlin Plc are the overhead or the fixed costs incurred by the company and the changes in the technology which are used to construct such resorts.[You could add current trend (e.g. in diets etc.) seasonal variations; -political (e.g. taxation policy), economic & social –environments; demography, staff & planning etc. – see handout] Task 2 (LO2, AC2.1, 2.2, M1, M2, D1, D2, D3) LO2- Understanding Management Accounting Information as Decision-making Tool P2.1 Types of Management Accounting Information The basic function of management accounting is to provide information regarding the business to the leaders and managers of a business firm in order to assist in better decision making.

[The difference between financial accounting and management accounting is that financial accounting is normally published on an annual basis to a general public at large such as investors and shareholders of a business firm (Obrinsky, 2015, p.18). The information in the financial accounting is addressed to the people that are interested in the transactions and the activities carried out by a profit making organisation. On the other hand, the information generated in terms of management accounting is generally published internally from within a business.]NOT Important The purpose of management accounting is to provide data to the managers regarding the financial operations of the firm concerned and verify and correct the mistakes and loopholes which are currently present in the system. The management accounting reports are published more frequently either on a monthly or quarterly basis and directly affects the long-term operation carried out by a firm.

The different types of management accounting information are generally obtained from the financial statements of the company concerned and various other reports which are provided to the managers of the firm such as a budget report, variance analysis, and MIS reports (Ozdagli, 2012, p.1045). These reports are prepared with the sole purpose of simplifying the decision making the ability of the management in terms of money management as well as human resource management smoother in nature.

The reports provided in terms of the costs incurred by a business firm reflects upon how much amount of money from the capital resources is spent on acquiring any new product as well as it helps to allocate the resources present in hand. The costing technique which is to be adopted for complete utilisation of the resources is also determined with respect to the cost reports provided (Drury, 2013, p.11). The management takes the decision of adopting marginal costing, activity based costing or throughout costing strategies based on the reports provided to them. The data obtained from these reports are also used to forecast the financial position of the business by comparing the past activities and finances of the company to the present activities and making a summarised decision regarding the future scope of the company. According to this the goals and objective of a business organisation are also chalked out.

For instance, by the analysis of the financial reports, it is estimated that the financial position of Merlin Plc is at a favourable position where there is scope to cut down cost in the marketing department. Also, the weaknesses of the firm in pricings strategies are identified (Pettigrew, 2014, p.19). The management now can come to a decision that

more time and money needs to be invested in order to rectify the problems related to the pricing strategies of the company and allocates resources to this field accordingly by cutting down cost which is incurred in the marketing sector. This is how the information provided by management accounting tool helps simplify decision making in the long run.

Task 2 [MIS system must have data to make short term & long term decisions: How can management accounting help in management decision making? It helps in the following ways: Forecasting, comparison with trends; investment; raising capital; new products; current issues set against criteria. Plus (using marginal cost approach to make short term decisions e.g. make or buy etc.]

P2.2 Management Accounting Decision-making tools for Merlin Plc As per the analysis conducted above it can be safely deduced that management accounting helps to simplify and aid managers in making the daily decisions required for Merlin Plc to function adequately. The information provided by the decision-making tools of management accounting in the context of Merlin Plc generally induces decisions in terms of operation, budget and strategies to be adopted.  Operation Decision –[The data available in the balance sheet of Merlin Plc can be used to calculate the working capital of the organisation. Simply by subtracting the current assets held by the firm to the current liabilities of the company the working capital can be analysed. The working capital gives a clear about the required amount to successfully run the daily operation of the firm (Ward, 2012, p.15). The data present also aids to allocate the inventories present for the tours and travel organisation so that the customers can receive the adequate services at the right time and place.]  Strategies to be Adopted – It is of utmost importance for a competitive firm to follow strategic business which not only increases profit but also controls the expenses at the same time (Schneeweiss, 2012, p.14). The strategies adopted should look to fulfil the future goals and objective of Merlin Plc with effective utilisation of the resources. For instance, the company has adopted a more specific form of marketing strategy and is looking to avoid the technique of mass marketing which is adopted by most of the firms in the economy. The concept has helped the company to limit its expenses and focus on a specific set of target audience rather than trying to appeal to the public at large. The aspect of strategic investment decision is also influenced by management accounting where the cash and fund flow statements can be compared simultaneously and a final investment decision can be reached.  Allocation of Budget – Tools of management accounting is essential to analyse and forecast the finances of Merlin Plc and these are nothing but the allocation of resources in the form of a budget. To bring about this decision the income statement of the firm is critically analysed along with the expenses incurred by the company concerned. The short term goals are also formulated which add up to achieving the bigger objectives for the future (Bodie, 2013, p.20). Unless a specific target is set, it will be impossible for the firm to reach a break-even and gain an advantage from that of its competitors in the current market. The budget estimated also helps to increase the number of shareholders as the information when released in the stock market makes it clear to the third party about the profit making intention of Merlin Plc.

Task 3 [Same as Task 2 BUT now you compare in the following areas how Merlin specifically uses management accounting to help in management decision making. It helps in the following ways: Forecasting, comparison with trends; investment; raising capital; new products; current issues set against criteria. Plus (using marginal cost approach to make short term decisions e.g. make or buy etc.]

Task3 (LO3, AC3.1, M1, M2, M3, D1, D2, D3) LO3- Financial Statement Analysis Case Study: The Restaurant Group Plc (Trgplc.com, 2017) The following are the ratios of The Restaurant Group Plc which are calculated upon the analysis of the consolidated annual sheet of the organisation. All the figures are in thousands: (Refer to Appendix 1 and 2 for Balance Sheet) [Where are they? Either you add Appendix 1 and 2 for Balance Sheet to your work OR you give an Extract of it.(That is: you type it) Current Ratio = Current Assets/Current Liability Current Ratio 2015 = 38005/136403 = 0.27:1 Current Ratio 2016 = 49806/139909 = 0.35:1 Leverage Ratio = Total Liability/Total Equity Leverage Ratio 2015 = 184518/289560 = 0.63:1 Leverage Ratio 2016 = 212754/209437 = 1:0.98 Working Capital Ratio = Working Capital/Sales Working Capital = Current Assets – Current Liabilities Working Capital 2015 = (98398) Working Capital 2016 = (90103) The business of Restaurant Group Plc can be analysed with the help of the ratios calculated. To begin with, the financial position of the firm does not look to be in a good shape at present. The current ratio of the firm is being favourable to the liabilities of the firm rather than being heavier in the assets column. The liabilities in the form of borrowings, bonds, long and short term debt of the company has been on the rise. Even though the assets of the company are increasing gradually, but it is completely overshadowed by the overall liabilities of the business group.This also directly affects the working capital of the organisation which is currently at a negative balance even though improvements are made from 2015 to 2016 which at the current movement makes little or no difference (Trgplc.com, 2017).

With the present situation in hand, Restaurant Group Plc will struggle to attract the general public at large to purchase their shares in the stock market. The expenses of the group have been at an all-time high and the cost of sales has also been gradually increased with no improvement made in the company revenue (Robb and Robinson, 2014, p.169). The financial leverage is the tool which measures the financial position of the firm and analyses the risk factor as well as the stability in the finances of a company. The more the financial leverage of a firm the greater the risk of liquidation and bankruptcy. The ratio is determined to take into account the total liabilities held by a firm to the equity owned by the organisation. For a company to be financially stable in

nature and to attract more shareholders the ratio must at all times be in favour of equity. This is the case for the financial year of 2015 where the leverage ratio is barely in favour of equity held and is in the ratio of 0.63:1.

However, with the increasing liabilities and decline in the shares issued the leverage ratio switches over in favour of the liabilities held by the company (Trgplc.com, 2017).

This indicates that the risk factor of losing money for the investors and shareholders will be greater in nature as the business is financially unstable. The company will also fail to apply for any loan from any financial institution due to the declining balances in equity.

A bank will not be willing to take the risk of granting a loan to a company which is operating with the risk of potential liquidation and eventual bankruptcy. If at all a loan is passed the rate of interest which is to be charged by the bank will be extremely high and by analysing the financial statements of the Restaurant Group Plc it can be safely assumed that the company will not be able to pay the interest charges.

Task 4 (LO4, AC4.1, M1, M2, M3, D1, D2, D3) LO4- Funding for Public and Non-public Tourist Development P4.1 Analysis of the Sources of Capital Funds The sources of business funding are important for a business organisation especially for travel and tourism companies is important to analyse and identify as without a capital funding the business cannot exist. In the case of non-public or private tourist firms, the initial capital is provided by the owner or the partners present who help incorporate the business. After the settlement and development of the business further capital for the organisation can be generated with the help of bank loans which are provided by financial institutions.

If the business concerned grows and develops further, the company can also become public in nature by issuing shares in the stock market to the interested external parties.

Shares can either be provided in the form of preference or common shares and provides special privileges to the individual holding them (Robb and Robinson, 2014, p.169). A share can simply be explained as a certificate which is purchased by a person at base price. With the growth and development of the business of an organisation, the price of a share goes high and the person holding it can make a profit out of it by selling it to another individual at a higher price (Pettigrew, 2014, p.19). This is the most common way of raising capital for most of the public organisation present in the current market.

The individual holding the share is provided certain voting rights as per the number of shares held by the person concerned. These votes are used to formulate the entire management hierarchy of a company. However, the person holding the share does not have any right or obligation to directly take part in the decision-making process regarding the operations of the firm.

There is the presence of various governing bodies such as the Ministry of Tourism, who are not responsible for directly funding small-scale tourism firms but provide help raise funds to improve the existing infrastructure and client base. There are also certain funds maintained by the government in certain countries in order to support the upcoming as well as establish tourism firm. This step is taken as tourism is a heavy contributor to the national income of a country.

[In this context Public means Central & Local Government Agencies. So what is the source of capital for do these Agencies? From both Central & Local Governments, Reginal Tourist boards etc. Then Non-Public = Private firms as Merlin? Share Capital; Bank loans, Retained capital; occasional subvention from governmental bodies etc.]

Conclusion Based on the study conducted above it can be safely concluded that an effective pricing strategy can only be developed when there is a presence of a well-organised costing

system in the context of the tour and tourism industry. The importance of management accounting has also been highlighted and how it can be used to aid and simplify the decision-making process. This gives rise to an overall efficiency which affects the profitability of a firm and saves valuable time. Financial funding and the identification of the sources of finances should be focused on tourism firms in order to achieve long-term organisational goals.

Reference List Bodie, Z., (2013). Investments. New York: McGraw-Hill DRURY, C.M., (2013). Management and cost accounting. Berlin: Springer.

Eichfelder, S. and Vaillancourt, F., (2014). Tax compliance costs: A review of cost burdens and cost structures.

Figueroa-Domecq, C., Pritchard, A., Segovia-PĂŠrez, M., Morgan, N. and VillacĂŠ-Molinero, T., (2015). Tourism gender research: A critical accounting. Annals of Tourism Research, 52, pp.87-103.

Gean, F. and Gean, V., (2015). The Desirability of an Integrated Learning Methodology for Enriching CVP Analysis. Journal of Business and Accounting, 8(1), p.127.

Guttentag, D., (2015). Airbnb: disruptive innovation and the rise of an informal tourism accommodation sector. Current issues in Tourism, 18(12), pp.1192-1217.

Han, H. and Hyun, S.S., (2015). Customer retention in the medical tourism industry: Impact of quality, satisfaction, trust, and price reasonableness. Tourism Management, 46, pp.20-29.

Higgins, R.C., (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.

Knight, F.H., (2012). Risk, uncertainty and profit. Courier Corporation