INTRODUCTION TO FINANCE AND FUNDING
In the present time business firms are adopting effective financial techniques for assessing the performance of business. It supports in identifying total cost investments that has been done on a particular project and benefits and profits associated with the project can also be calculated by making use of this technique. Present report is based on Carib Happy Tours Company which is a leading holiday planner company which offers superior quality services for its consumers. The report describes about concept and advantage of CVP analysis for financial management of cited firm. In addition to this analysis of pricing methods have been done for determining the prices that are to be charged with the tourists who are availing services of the company. Moreover impact of various factors on profit earned by the company has been evaluated and different type of management accounting information that could be used in the company has been mentioned. Furthermore use of diverse investment appraisal techniques as decision making tools has been explained.
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A. Explaining the concept of CVP analysis and its importance in the field of financial management
The CVP (cost-volume-profit) concept can be defined as analysis us managerial accounting method that is related with the impact of sales volume and product cost on functional revenue of a business. The cost volume profit analysis refers to the study of way cost and profit have an alteration in the volume of production (Lu and Whidbee, 2013). The concept of CVP analysis help in knowing the way in which operating profit is impacted by modifications in fixed, variable cost, selling price etc.
CVP analysis is a strategically tools which supports in taking long term and short term decisions of business. This model is used for taking long term and short term decisions for business. In this model a critical point is selected where total revenues is equals to total cost (Schularick and Taylor, 2012). This point is known as critical point and whenever any company reaches this point no profit and loss is observed by the enterprise. Breakeven point is most significant point of CVP analysis and further calculations for evaluating profit and losses is done by making use of this strategically business tool. Tour and travel companies makes use of CVP analysis for evaluating the assumed profit and losses that can occur due to various operational activities performed in the enterprise.
The Carib happy tours company has planned summer holidays for some of its tourists and Carib holiday resort has been booked for that purpose. Management of Tour Company has planned to charter an air-plain that will carries its tourists. It has also been decided that a hotel will be booked at the resort site for accommodating the tourists it has been estimated that total cost will be £60,000 for charting air-plain and hotel accommodation (Vandoros and Avendano, 2013). In addition to this for providing food to the consumers company has decided to spend £150 on per tourist. All the tourists that will avail the services of the tour company will be charged £800 per head. Travel and tourism companies can make use of CVP analysis for calculating their overall investment cost that can occur for providing services to business clients of the organizations. The linear equation which will be used for assessing total revenues and total costs are as follows-
TOTAL COST = FIXED COST+ ( UNIT VARIABLE COST* NUMBER OF UNITS)
TOTAL REVENUE= SALES PRICE* NUMBER OF UNITS
Both the equations are used for calculating estimated profit and losses that can occur while executing the desired operations of tour companies (Drehmann and Nikolaou, 2013). The techniques proves useful in calculating break even analysis point where total profit of the enterprise becomes equal to total losses suffered by the companies. It is vital that certain things should be assumed while calculating CVP ratios and the elements are constant sales price, constant variable cost, constant total fixed cost and unit sold.
B. Analysing the pricing method which can be used by CTHC for setting suitable price
There are various pricing methods which are needed to be considered or can be used by Carib tour and travels for setting the prices of services which are offered by it. The venture provides superior class services to their business clients and funds are invested for providing the services to clients. It is vital that pricers should be set in an appropriate manner for recovering the investment cost. Proper data and information also needs to be collected for determining the cost of services rendered by the tour company for its consumers (Dixon, 2016). Various types of strategies are used by business firms for determining the cost of services offered by the enterprises. Target return pricing methods can be used for setting the prices for packages offered by the companies. In this pricing methods cost are determined with an objective to achieve a particular level of return on investment (ROI). A linear equation formulae is used for calculating targeted returning price on the services offered through the tour company.
TARGET RETURN PRICE= TOTAL COST + (DESIRED % ROI INVESTMENT)/ TOTAL SALES IN UNITS
TOTAL COST IS CALCULATED BY SUMMING UP THE ALL THE INVESTMENTS WHICH ARE DONE ON EXECUTING DIVERSE OPERATIONAL ACTIVITIES OF THE BUSINESS.
In addition to this method market oriented pricing methods can also be adopted for calculating prices of services offered through enterprise. In this technique prices are calculated by analysing the market condition under this pricing method perceived value pricing can be adopted in which the service provider tour company decide the cost of its packages by assessing perceptions of consumers and preferences given by clients for a specific service that is availed by them (Lu and Whidbee, 2013). Various elements are considered while determining the price of products and such elements includes advertisements and promotional tools, quality of services, channel of distributional and some other elements. Under perceived pricing policy consumers are willing and ready to pay higher prices for superior quality products. Value pricing is one more technique that can be used by Carib company for determining the prices of products offered by it. Under this pricing method low priced services are designed that offers higher quality services to clients of the venture.
Cost plus pricing: It method that is founded upon cost for determining the prices of products and services. In this method to determine the price of product, the cost of direct material, labour and overhead are added to profit margin that company wants.
Marginal cost plus: It is method of setting the price of an offering to equal the extra cost of manufacturing an additional unit of output.
Competition based pricing: It is practice of determining the price relative to that charged by competitors. This strategy help in preventing shift of customers to rival brand as result of less prices charged by them.
C. Stating the factors that influences the profit aspect of CTHC
There are various factors that affect the profitability of the CHTC and it is vital that these elements should be considered while taking decisions for business. Preferences and choice of the customers affect the overall profitability of the business. Services offered by rival firms also affect the revenues of the company and growth of the business also gets affected by it (Pratt and Hutton, 2013). If competitor firms will offer services at lower prices than clients will prefer to move towards availing the services offered by other business groups. Diverse external environmental factors also affects the services of the company and execution of business operations and profitability of business gets affected by it. Political factors and legal factors such as policies and legislative factors formulated by government of a nation gives impact on the working of the enterprise and profitability of the business will be getting influenced by it (Bender, 2013).
Technological advancements and innovations forces companies to adopt innovative methods in their existing operational procedures for making modifications in their services. Competitor firms makes use of technology for making improvements in their existing services and due to it it becomes challenging for the company to make alteration in their services. It enhances investments of the company and due to it there are reductions in the profitability of the company. There are different factors that can impact the profit of CHTCH that it can earn on the trip. Such as, in case of increase in number of tourist company can offer more product and services to prospective customers. Therefore, in peak season company can charge premium prices. This will further help in increasing profit margin of business.
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A. Explaining the different types of management accounting information that can be used by CTHC
Different type of management accounting information is used in CHTC for executing the desired functions of business in successful mode. It is vital that all the details and data should be collected from authentic sources so that authentic management accounting information can be collected for the enterprise. Diverse types of information are collected in the business and it is related to management accounting (Brulle, 2014). The information is collected for evaluating the performance of the business throughout a specific business period. Budget reports are collected by management for analysing the performance of the business in a given time frame.
Management accounting information supports in taking decisions of business and formulating future strategies for the enterprise. This information supports in doing performance management and risk management. Overall objectives of the business can be accomplished in effectual manner by making use of accounting information for formulating strategies. Tax accounting, financial accounting and internal auditing informations are gathered while taking management accounting informations from diverse sources. Budget for future can be prepared by evaluating the information that has been mentioned in the budget report.
In addition to this balance sheet and profit and loss statement is also assessed for examining financial performance of the business. Accounts details mentioned in the accounts register are also collected by management for checking cash flow statements that includes inflow and outflow of cash. Moreover job cost reports are also checked for calculating expenditure of an enterprise for a specific project. Estimated revenue that can be incurred on a specific project is mentioned in the job cost reports and it is collected for assessing the information that is required for estimating the overall cost that can occur while completing a specific project. The information for management accounting is calculated by diverse resources such as financial statements, balance sheet, profit and loss statements and cash flow statements (Mitchell, Basch and Dusetzina, 2016).
The details collected through management accounting aids in getting details about company's total investment cost, cost occurred for providing services to per unit head and required rate of return that is needed to make a new investment is also calculated and assessed by collecting management accounting information.
Variance analysis is quantitative investigation which help in calculating the amount of and identifying the cause of variance between actual cost and expected cost. It provides an effective method for comparing actual cost and estimated cost of various operational activities that are performed while running functions of enterprise.
B. Assessing the use of investment appraisal technique in the decision making aspect
There are various investment appraisal techniques which are used in the decision making process of CHTC enterprise. These techniques supports in assessing the impacts of investments on various business activities (Lane, 2013). There are various types of appraisal techniques that are used in the enterprise for taking various business related decisions of the enterprise. Accounting rate of return is a significant methods that is also used for doing investment appraisals (Vogel, 2014). Under this method profits are compared with the expected investments that are going to be done in the enterprise. ARR Is normally calculated on annual basis and it is also compared with the average amount of capital invested in the project. Investment appraisal techniques supports in estimating profits of business in financial terms. There are various benefits associated with the investment appraisal techniques and it supports in gaining larger market share and stronger market position (Dixon, 2016). In addition to this it also supports in taking quicker decisions due to better availability of information and executions of business activities can be done in more effective way by making use of this technique.
CHTC requires large sum of money for carrying out there business operations and and executing desired operations of business in successful manner. Company has plan to charter air-plain and doing other financial investments for carrying out diverse business activities. It is also require that potential future return of long term investments should also be calculated for assessing the risk and uncertainty for future (López-Espinosa and Valderrama, 2012) Investment appraisals are done by CHTC for measuring the benefits and profits associated with a particular project. The cited firm is planning to charter an air-plain and book a holiday resort for the tourists. In addition to this company also needs to do investment for providing food to consumers. All this activities requires financial funding and it is essential that prior evaluation should be done in a systematic manner for assessing the benefits and profits associated with the project.
PAYBACK: - it is defined as time limit in which initial investment made will be recovered. Total time duration that will be needed for recovering back all the investments made in the business for executing desired operations of business.
ARR: - It is defined as accounting rate of return and it is the ratio of estimated profit to the overall average investments made in the business. This ratio is mostly used in making investments appraisal.
NPV: - it is defined as net present value of which describes about net cash flows that are made by business. It also supports in defining time value of money and while calculating NPV it is vital to set target values.
IRR: - It is defined as internal rate of return which is defined as rate at which sum of discounted cash outflow becomes equals to sum of discounted cash inflow. It is also explained as rate at which cash flow reaches at Zero.
A. Evaluating the financial statements of TU travel by using the ratio analysis
Ratio analysis can be stated as financial tool that assist company and its stakeholders in assessing the financial documents in most effective and efficient manner. With the help of ratio analysis the CHTC Company can determine its profitability, liquidity and solvency is most suitable manner (Vandoro and Avendano, 2013). The description of which is as follows:
Profitability ratio: it is important ratio that are used by firm to determine its efficiency to generate income as compared to its expenses and other relevant expenses during particular rime frame (Vandoros and Avendano, 2013). They further describe how effectively entity attain revenue from its business activities. From the aforementioned ratio analysis, it has been identified that gross profits of company are improved as compared to last year.
Liquidity ratio: They can be defined as efficiency of company to meet its financial obligations as they become due. These ratio determine the capacity of CHTC Company to pay both its present and long term obligations as they become due. The liquidity ratio involve current, quick, inventory to working capital and absolute liquid ratio (Schularick and Taylor, 2012). TUI company current ratio in year 2014 is 0.98 whereas in year 2015 is 1 it means that firm perform well in 2015 Presently company hold much inventory in its company as compare to 2014 so, it is not beneficial for the company to hold much stock it because the ideal current ratio is 0.5 and company exceed its limit.
Efficiency ratio: It is important ratio that determine how effectively the entity use its assets and liabilities to generate income for business. It further help in knowing the time needed to convert inventory into cash. The higher ratio indicate the shareholders to make investment in the company. These ratio are also defined as asset management ratio. So, let see that the TU company inventory turnover ratio in year 2014 is 24.21 and in year 2015 is 30.83 it means that company in a good position as cost of good sold high so, company hold high stock in year 2015 as compared 2014.Whereas receivable turnover ratio is increase little in year 2015 as compared to 2014 that is from 1.20 to 1.26 it means that company is in bad position and it cannot manage their account receivable properly.
Solvency ratio: It is another vital ratio that is used to calculate the efficiency of entity to meet its debt and other expenses. They determine whether company have enough cash to pay off its short and long term obligations. The lower the solvency ratio of entity, the higher the chances that entity will default on its debt obligations. It further calculate three ratio, debt equity, total assets to debt ratio and proprietary ratio (Mitchell, Basch and Dusetzina, 2016). Let see from the table of ratio analysis of TU Company in that debt-equity ratio in year 2014 and 2015 both are same is 3.49 that shows company is in high risk and it is having high debt.
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A. Analyzing the sources of funding that company can obtain for developing the new hotel
In the present scenario businesses are available with wide range of internal and external sources which can be used in order to gain funds for growth and expansion. Furthermore, finance can be termed as lifeblood of any organization and effective management of finance is very essential. At the time of selecting sources finance companies are required to take wide range of factors into consideration (Greenbaum, Thakor and Boot, 2015). The key internal and external sources are mentioned below as:
Internal sources: The merits of internal sources of fund is that the capital available quickly, no interest payment and it is highly flexible. Whereas the demerits of this is that it is highly expensive and limited in volume.
Profits – It is another major source of finance which is available in front of business for carrying out growth and expansion. The brand can make use of its profits which has been received from existing sales.
External sources: Merit of external source of fund is that it allow the internal source for another purpose and its demerits is that various legal procedure may influence failure of power.
Equity or share capital source: It is one of the most common external sources of finance which can be used by the business to carry out expansion. However, it can be argued that it is not used too much by companies as there are wide ranges of legislations and rules which need to be taken care of at the time of raising funds. Along with this, the company will also require to share its ownership at the time of issuing finance from equity share. However, as compared to debt financing this external source of finance is considered as very costly or expensive (Mitchell, Basch and Dusetzina, 2016). It is a proportion of company's equity that can be collect by the firm through issuing shares such as cash and it generally sold at a premium. There are various type of share capital are nominal, issued, subscribed, reserve, paid up, called up and reserve capital etc.(Vazquez and Federico, 2015)
Loans- It is the most popular external source of finance which can be used by the selected business enterprise for carrying out expansion and introducing new hotel in the market. Here, the brand will need to pay interest in the sum which has been issued by bank and it will also need to pay the amount in various instalments. An issue of funds in the form of bank loan is also termed as one of the most convenient sources which can be used by the business (Schularick and Taylor, 2012).
Venture capital –this source of finance is considered as almost similar to equity share and the main difference between the sources is that here the investors are very high. The selected business can acquire required funds for its new hotel with the help of venture capitalist who are the person which invest in different new business or start-ups.
Summing up the present report it can be concluded that travel and tour companies can make use of various financial techniques for measuring total investments cost associated with a project. CVP analysis is a effective tool which can be used for calculating total cost and benefits associated with a project. Travels and tourism business can make use of such techniques for identifying total amount of funds needed for executing desired objectives of the enterprise. Consumers’ wants reasonable priced services at lower prices and it is vital that effective strategies should be formulated for providing services as per the needs of the consumers. Pricing methods are adopted by companies for determining cost for packages that are offered by the companies. Various pricing methods that can be used by companies includes target value pricing methods and return value methods can be adopted for determining cost of services that are offered through travel and tour companies. Various external and internal business factors affect the functioning of the enterprise and it is vital that effect of these elements should be considered while formulating policies for business. Various types of management accounting information is used by companies for assessing performance of business throughout a given period. It is vital that all the information should be collected from an authentic and reliable source and data analysis process should also be done in an organized manner.
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