Finance and Funding in Travel and Tourism Sector - Assignment Example

Financial and Management Accounting in Travel and Tourism Sector Financial and Management Accounting in Travel and Tourism Sector Different Types Of Costs For The Business There are different types of costs involved in the business, which can be categorized with respect to different dimensions. Normally costs are categorized as direct/indirect costs and fixed/variable and semi variable costs. Following are the description of the cost categories: Direct costs: These costs can be easily identified and its relationship with the activity can be established more easily as compared to other costs. Such as labour charges for production per units is the direct cost associated to the production of the unit. Indirect Cost: These costs are identifiable but their relationship with a particular activity cannot be established smoothly. Such costs are therefore apportioned on the basis of any formula or any other mechanism. Such costs include administrative costs like janitorial services, utilities etc. Fixed Costs: These costs remain constant irrespective of the level of the activity. For instance, the machinery fuel consumption; this will not be reduced or increased with the level of production. Rather, the fuel expenses will be distributed over the units produced. Therefore, it is the behaviour of the fixed costs that they remain fixed in totality but reduce per unit as the production increases. Variable costs: Variable costs are such costs, which increase or decrease with respect to the level of the activity. For example, the labour cost for the production of the units of product will be nil in case the production halts and will be increased when the production starts. Such costs behave parallel to the level of the activity. Semi-variable costs: Semi-variable costs are such costs which consist of the features of variable costs also and that of the fixed costs. It implies that such costs are fixed up to a certain extent and then they get parallel to the level of the activity. Importance Of Cost Volume And Profit Analysis Cost volumes are significant in decision-making process of the management. Things get managed when they get measured; this is the main reason why costs volumes are always monitored. Constraints are established for the costs levels so that they do not exceed the prescribed budget. Costs volumes analysis sets the direction for the controls to be applied on different components of the variable costs. In addition to this, once the cost volumes are established, they can be then compared with the costs of prior periods, competitors and other departments by way of benchmarking. Comparison with prior period assists in comparisons and variance analysis with respect to the previous years. The results of the previous year are adjusted for with the time value of the money and activity levels so that current year results are compared with more precision. In a similar way, comparison with the results of the competitors assists in analysing the avenues where the competitors are excelling and the ventures in which they are lagging behind. Comparison within the departments inculcates the essence for healthy competition and performance efficiency. Such inter-department comparison ensures that the departments that are performing well are remunerated well too. Similarly, the profit analysis is important due to many reasons; the components of the profits are primary to the decision making process. Profit analysis assists in establishing whether the profits are to be increased by increasing revenues or by decreasing the costs. Moreover, the profit analysis is important for comparison with the prior year results and the financial performance of the competitors. This is useful to ascertain the standing of the company with respect to time and competition. The profit analysis helps in projecting the future growth of the organization. Due to the profit analysis, companies can assess the cash that can be generated from the operations and then re-invested for the capital expenditures for pursuing further growth. Additionally, the profit analysis can be used to establish the costs to comply with the government regulations. For instance, tax computation can be made with more precision and the benefits that are available to the companies in relation to the profit size can also be estimated with more precision. Break Even Point Breakeven point is the equilibrium position where the costs and the revenues of the companies meet each other. At this point, company neither enjoys profit nor suffers from losses. Normally, this point takes some time to be achieved because contribution is earned from the first unit sold but difficulty arises in meeting the fixed costs of the businesses. Initially, the company aims at balancing the marginal costs and marginal revenues but in the long run, the aim of the company is to outset the total costs by total revenues. Customers required for achieving Break Even Price ` (1) 200 Variable costs ` (2) 100 Contribution `(3) = (1) - (2) 100 Fixed costs ` (4) 18,000 Customers required to achieve the break even (4) / (3) 180 Customers required for achieving Profit of £ 11,000 Price ` (1) 200 Variable costs ` (2) 100 Contribution `(3) = (1) - (2) 100 Fixed costs ` (4) 18,000 Targeted Profit ` (5) 11,000 `(6) = (4) - (5) 29,000 Customers required to achieve desired profit (5) / (3) 290 Pricing Strategies in the Tourism Industry Following are the main pricing strategies that are followed in the travel and tourism industry (Pricing Strategy, 2009): 1. Penetration pricing: Penetration pricing is the strategy that is aimed at setting low prices well below the competitors so that edge can be gained to capture the market. Such strategy is mainly used to target the economy customers who are not very much brand conscious. While pursuing such a strategy, cost technique is used for setting the price. However, this strategy is only suitable for well-established companies who have reached the economies to scale otherwise their costs will exceed the revenue. 2. Neutral Pricing: Neutral pricing is normally used when a company is not able to pursue the penetration pricing strategy. Neutral pricing is pricing strategy that normally aims at maintaining the price level that is prevailing in the economy. Factors that Impact the Business There are many factors that impact the business of tourism and travel which are illustrated below: 1. Season: The season/climate of the place is a vital factor that impacts the industry. Extremely hot or cold weather is not suitable for the industry. For example, people are least interested in visiting Sahara deserts in hot seasons and similarly seldom people go to visit Antarctica as the survival of the human is at stake in such places. Contrary to these examples, people go to Malaysia and Switzerland due to moderate weather of these places. 2. Law and Order: The law and order situation of the country also plays a key role in determining the dynamics of the tourism industry. Visitors are least interested in visiting the areas where their security is at stake and contrary to this, they are more inclined towards the areas where they find themselves more secure. 3. Infrastructure of the country: The infrastructure of the place to be visited is a matter of concern to the visitors. If it is good then people will be more willing to have a tour of that place. Accordingly, if the infrastructure of a place is not well developed then it will create hurdles for the travel and tourism industry. 4. Taxes and General Inflation: The general price level of the target place really impacts the decision of the visitors. If there are two similar places with respect to the natural beauty, then people will give more priority to a place where taxes are lower because this will result in cheaper costs of travelling and recreation to them (Suzzane, 2010). 5. Fuel Prices: Fuel prices have a direct impact on the travel industry at global level. As fuel prices rise high in the global market, the fare prices also increase. This increase in the fair price impacts the decisions of the travellers; it results in lesser travelling (Investigating the Travel and Tourism Industry, 2014). Types Of Management Accounting Information Used In Travel And Tourism Sector Following are the main types of management accounting information that are used in the travel and tourism industry: 1. Cost Allocation Reports: Cost allocation reports are mainly used for allocating costs in different departments and products. In the tourism industry, hotels are main businesses. For hotels, different types of rooms, different banquets, different restaurants and different leisure activities are the departments on which costs are primarily allocates (Chris, 2009). Similarly, in the airline business, the main divisions on which costs are allocated normally include types of passenger seats, different departments such as engineering and technology and other such departments. Cost allocation reports are of primary importance because they help in controlling the costs per activity. In contrast to this type of cost allocation, financial accounting only provides the break-up of the costs as per the nature of the expense. 2. Budgets: Budgets is another type of management information tool that prevails in almost every company. The importance of this tool increases in the tourism and travel sector. This is due to the seasonal nature of the business of travel. As the business of travelling gets a hike on a seasonal basis, the employees are not use to of incurring the costs. In addition to this, many expenses are of ad hoc nature that comes upfront all of a sudden; employees are not well aware of the techniques to control such expenses. This is the main reason of establishing budgets so that the costs can be controlled and whenever the costs related to a certain activity is about to surpass the budgeted limits, the management is informed regarding such condition. In the airline business, the budgets are primarily for flights, departments and other such functions. 3. Forecasts: Forecasting is a sophisticated tool that requires much care and judgment to be exercised. Forecasts and budgets work parallel to each other; forecasts are future oversight and budget in monitoring of that oversight with respect to the present performance. Forecasting is dependent on many variables, which include macro-economic conditions, global economic conditions, consumer behaviours and past trends. In the airline business, the forecasts depend on many variables, which include the fuel prices and technological advancements. Similarly, in the hotel business the main factors that impact the forecasting includes climate, number of exhibitions and international events in the surroundings such as international football world cup. Explanation of Financial Statements 1. Income Statement: Income Statement shows the profit or loss of the company during the year. It shows the total revenues and total expenses during the period. The expenses are mainly broken into different categories such as costs of goods sold, operating expenses and financial expenses. Cost of goods sold shows the expenses that pertain directly to the production of the goods, which include the milling charges, repairs and maintenance of the machinery and inventory purchase costs. Financial expenses include the expenses related to financing and mainly include the interest expenses. Operating expenses include other expenses that are normally incurred in the daily operations of the businesses such as administrative expenses, utilities, entertainment and stationary (Roman, Katherine, & Jennifer, 2012). 2. Balance Sheet: Balance sheet normally shows the balances at the end of the year. The balances are normally of assets, liabilities and equity. Following are the main components of the balance sheet along with their description (Lynford, 2011): Non-current Assets These are the assets that have the useful life of more than 1 year. For example, plant and machinery, land and equipment. Current assets Current assets are those assets that have a useful life of less than 1 year. Such assets are estimated to be consumed by the end of next year. Current assets include inventory, Cash and bank balances. Current liabilities Current liabilities are those liabilities that will be paid in the next 12 months. Such liabilities normally include the bills payable to the vendors and lease payments to be made to the banks. Non-current liabilities Non-current liabilities are those liabilities that are to be paid in a period of more than 1 year. Such liabilities normally include the lease payments to be made to the financial institutions. Equity Equity represents the residual interest of the shareholders in the company. It normally includes the amount paid by the shareholders, revaluation gain on the valuation of fixed assets and total gains or losses remaining in the form of reserves. 3. Cash Flow Statement: Cash flow statement shows the cash inflows and outflows during the year as per the type of the activity. The cash flow statement is a reconciliation of the cash and cash equivalent that starts from the cash at the beginning of the year and then adds and subtracts all the cash in/outflows during the period to prove the cash balance at the year-end. The cash flow mainly shows cash movements as per operating activities, financing activities and investing activities. (Timothy, 2012) Findings from Ratio Analysis 2012 2011 Profitability ratio Operating Profit 0.03 0.05 Interest cover 1.35 3.22 Liquidity ratio Current ratio 0.60 0.75 Efficiency ratio Trade receivables period 16.45 16.81 Trade payable period 124.51 120.15 Shareholders ratio Price Earnings ratio 1468.26 217.54 Although, trade payables period has worsened over a period of time, the company has made some efforts to improve its receivables period so that the cash flow problem is not created. Though the company sustained loss in 2012, it has been able to restrict the interest cover ratio to 1.35. This shows that the company has the ability to pay off its interest expenses so that it does not go into any liquidation process. Yet the signals are not positive as the company’s current ratio has also deteriorated. It is alarming because once the cash flow cycle get disturbed, the company will not be having sufficient current assets to pay off its immediate upcoming liabilities (Roman, Katherine, & Jennifer, Financial Accounting, 2012). British airways has made some efforts to get rid of this problem by way of increasing the payables paying off period from 120 days to 124 days, but this is still not a guaranteeing situation that the company will escape from any cash flow problems (John & Scott, 2012). Moreover, the operating profit ratio has also decreased which has added to the problems for British Airways. Had its profits improved, the cash flow problems would not have become probable. However, British Airways is expending extensively on its technology and is taking aggressive efforts for customer satisfaction. Such steps are retaining the confidence of the investors who are expecting better future prospects for the company, which is proved from Price Earnings ratio (Charles, 2011). Despite the decrease in earnings, the share price has increased. The shareholders are confident that this loss is temporary and British Airways will be able to recover from this loss in the future. References Charles, G. (2011). Financial Reporting and Analysis. Mason: Cengage Learning. Chris, G. (2009). Accounting Essentials for Hospitality Managers. Burlington: Elsevier Ltd. Investigating the Travel and Tourism Industry. (2014, June 4). Retrieved from http://travelandtourismindustry.weebly.com/trends-and-factors-currently-affecting-the-travel-and-tourism-industry.html John, G., & Scott, S. (2012). Introduction to Corporate Finance. Mason: Cengage Learning. Lynford, G. (2011). Accountants Handbook. New Jersey: John Wiley and Sons. Pricing Strategy. (2009, October 8). Retrieved from http://www.hotelmule.com/html/45/n-2045-7.html Roman, W., Katherine, S., & Jennifer, F. (2012). Financial Accounting. Mason: Cengage Learning. Suzzane, R. (2010, August 19). Factors that Affect the Tourism Industry. Retrieved from Thttp://www.travelersguide360.com/index.php/factors-that-affect-the-tourism-industry-2-7907/ Timothy, J. (2012). Cash flow Analysis and Forecasting. New Jersey: John Wiley and Sons. Appendix Balance Sheet 2012 2011 Non-current assets Property, plant and equipment: 5,909 5,765 Fleet 831 856 Property 202 207 Equipment 6,942 6,828 Intangibles: Goodwill 40 40 Landing rights 655 242 Emissions allowances 39 12 Software 85 53 819 347 Investments in subsidiaries Investments in associates 174 232 Available-for-sale financial assets 39 39 Employee benefit assets 1,194 1,100 Derivative financial instruments 8 6 Other non-current assets 25 28 Total non-current assets 1,440 1,405 Non-current assets held for sale 2 15 Current assets and receivables Inventories 117 139 Trade receivables 488 460 Other current assets 393 273 Derivative financial instruments 37 73 Other current interest-bearing deposits 1,118 1,259 Cash and cash equivalents 481 570 Total current assets and receivables 2,634 2,774 Total assets 11,837 11,369 Shareholders equity Issued share capital 290 290 Share premium 937 937 Other reserves 1,331 1,355 Total shareholders equity 2,558 2,582 Non-controlling interests 200 200 Total equity 2,758 2,782 Non-current liabilities Interest-bearing long-term borrowings 3,226 3,358 Employee benefit obligations 238 232 Provisions for deferred tax 721 778 Other provisions 244 179 Derivative financial instruments 67 62 Other long-term liabilities 185 295 Total non-current liabilities 4,681 4,904 Current liabilities Current portion of long-term borrowings 466 385 Trade and other payables 3,600 3,117 Derivative financial instruments 31 21 Current tax payable 9 12 Short-term provisions 292 148 Total current liabilities 4,398 3,683 Total equity and liabilities 11,837 11,369 Group consolidated income statement For the year ended 31 December Group £ Million Note 2012 2011 CONTINUING OPERATIONS Traffic revenue Passenger 9,499 8,721 Cargo 737 739 10,236 9,460 Other revenue 591 527 Revenue 10,827 9,987 Employee costs 2,345 2,153 Restructuring 36 12 Depreciation, amortisation and impairment 720 683 Aircraft operating lease costs 98 73 Fuel, oil and emission costs 3,712 3,246 Engineering and other aircraft costs 625 543 Landing fees and en route charges 726 691 Handling charges, catering and other operating costs 1,213 1,052 Selling costs 466 436 Currency differences -1 13 Accommodation, ground equipment and IT costs 613 567 Total expenditure on operations before exceptional items 10,553 9,469 Operating profit before exceptional items 274 518 Business combination costs -71 Settlement of competition investigation 30 Operating profit 233 518 Gain on bargain purchase 58 Gains/(losses) on fuel derivatives not qualifying for hedge accounting 8 -11 Finance costs -173 -161 Finance income 25 32 Net financing (expense)/income relating to pensions -215 160 Retranslation credits on currency borrowings 5 2 Loss on sale of property, plant and equipment and investments -3 -3 Share of post-tax (losses)/profits in associates accounted for using the equity method -66 -6 Revaluation of convertible bond derivative liability -10 169 Net charge relating to available-for-sale financial assets -1 -21 (Loss)/profit before tax from continuing operations -139 679 Tax 69 -7 (Loss)/profit after tax from continuing operations -70 672 DISCOUNTINUED OPERATIONS Loss after tax from discontinued operations -30 (Loss)/profit after tax -100 672 Attributable to: Equity holders of the parent -116 654 Non-controlling interest 16 18 -100 672 Read More