The Travel And Tourism Industry

Published Date: 02 Nov 2017

BTEC QCF Level 5 HND in Travel and Tourism Industry

Unit 3: Finance and Funding in the Travel and Tourism Industry

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Word Count: 3195

Table of Contents

Introduction

The following report was prepared with the intention to give insights to the different aspects of finance of a firm, specifically a company which is involved in travel and tourism industry in United Kingdom.

For the analysis purposes, a leading organisation involved in the travel and tourism industry was selected. InterContinental Hotels and Resorts is one of the leading company involved in the travel and tourism industry in the United Kingdom with five- star hotels and resorts in 60 countries. London park lane, situated in Hamilton place, London is a fully owned subsidiary of InterContinental Hotels and Resorts Group.

In order to give a clear and deep understanding about different aspects of finance, an in detail analysis of the above mentioned company, specifically their published financial statements were studied.

http://www.londonhotelsoffer.com/hotel/hotels/intercontinental_hotel.jpg

Task 1

In order to analyse the financial and non-financial performance of the company, the published annual reports of the focus company (Intercontinental Hotels and Resorts) were examined. To have an effective understanding, the results of the company should be compared with another company, preferably which is the same size of the focus company and that does business in the same industry. Thus, Marriott Hotel which located in London, United Kingdom was selected and studied.

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1.1 Calculation of ratios

According to Siddiqui (2006: p.623) ratio analysis is one of the methods of analysing financial statements. It is an attempt to present the information of the financial statements in simplified, systematised and summarised form.

Ratio

Method to calculate

Intercontinental Hotel

Marriott Hotel

Liquidity Ratios : Short term liquidity

Current Ratio

Current assets/ current liabilities

660/ 780 = 0.846

1475 / 2773 = 0.531

Quick ratio

(Current assets- inventory)/ current liabilities

(660-4) / 780 = 0.841

(1475- 10) / 2773 = 0.528

Liquidity Ratios : the working capital cycle

Total receivable days

(Average receivables/ sales) * 365

(((422+369)/2)1835) * 365 = 78 days

(((1028+875)/2)/ 2409) * 365 = 144 days

Total payable days

(Average payables/ purchases) *365

((563+497)/2)/ 772) * 365 = 25 days

(((569+548)/2)/ 824) * 365 = 247 days

Performance Ratios

Gross profit margin

((Sales- cost of sales)/ sales for the period ) * 100

((1835- 772) / 1835) * 100 = 57.9%

((2409-824)/ 2409) * 100 = 65.79%

Operating profit margin

(Operating profit/revenue) * 100

(614/1835) *100 = 33.46%

(940/ 11874) *100 = 7.91%

Net profit margin

(Net profit/revenue) * 100

(407/ 1835) * 100 = 22.17%

(571/11874) * 100 = 4.80%

Activity Ratios

Assets turnover

Revenue/ total assets

1835/ 3263 = 0.56

11874/ 6342 = 1.87

Inventory turnover

Cost of sales/ Average inventory

772/ ((4+4)/2) = 193 times

1585/((10+11)/2) = 10.5 times

Return on capital Ratios

Return on assets

(Operating profit/ total assets) * 100

(614/ 3263) * 100 = 18.81%

(940/ 6342)* 100 = 14.82%

Return on equity

(Profits attributable to shareholders/Share holders` funds)*100

(406/ 308) * 100 = 131.81%

(571/6099) * 100 = 9.36%

Financing Ratios

Debt ratio

(Total Debt / Total assets) *100

(2946/3263)*100 = 90.28%

(7627/6342) *100 = 120.26%

Valuation Ratios

Earnings per share

(Net income- dividends on preferred stock)/ Average outstanding shares

141.50 ¢

$ 1.77

1.2 Interpretation of results

1.2.1 Liquidity Ratios: Short term liquidity

According to Brigham et al (2009: p. 87) the liquidity ratios help answer the question: Will the firm be able to pay off its debts as they come due and thus, remain a viable organisation. A liquid asset is one that trades in an active market and thus can be quickly converted to cash at the ongoing market price. Accordingly, if the assets of the company are not liquid, the company will be considered as having trouble in their liquidity and thus, the main priority should be given to increase their liquidity level. In order to assess the liquidity of a firm, two ratios are calculated as current ratio and quick ratio.

Current ratio measures the ability of a firm to pay off their current liabilities from the use of their current assets. According to Moyer et al (2009: p. 63) the ratio can be interpreted to mean how many times a company should convert each dollar of current assets in order to satisfy the claims of short term creditors and other non- current liabilities. According to the above calculations, current ratio of Intercontinental is 0.846 which means, in order to pay off $1 of current liabilities, the company has only $o.84. In comparison, the current ratio of Marriott is only 0.531.

According to Rao (2003: p.87) quick ratio which is also known as acid test ratio, is a refinement of the current ratio and a second testing device for the working capital position. This ratio is a more rigorous test of liquidity than the current ratio and when used in conjunction with it, gives a better picture of the firm`s ability to meet its short-term debts out of short term assets. The quick ratio of Intercontinental is 0.841 whereas the quick ratio of Marriott is 0.528. The values have no considerable changes from the current ratio as both companies seem to have lower levels of inventory stocked up.

Thus, it is fair to say that, Intercontinental is doing well than Marriott in terms of liquidity.

1.2.2 Liquidity Ratios: the working capital cycle

As receivables and payables connect with the working capital cycle of a firm, these ratios are referred to as liquidity ratios of the working capital cycle. According to Chamblee et al (2010: p.68) total receivable days indicates how many days a client balance sits in accounts receivable before being collected. Accordingly, the receivables of the Intercontinental is taking 78days to settle their balances whereas the clients of Marriott are taking nearly 144 days to settle their bills.

According to Weli et al (2010: p.268) the number of days that a firm`s accounts payables remain outstanding indicates the length of the period between the purchase of inventory and the payment of cash to suppliers during each operating cycle. The above calculations indicate that Intercontinental is taking 25days to pay off their debt whereas Marriott is consuming 247days. Having a long total payable day can be advantageous to the company as they can retain the money for a comparatively long time period so they will not face working capital difficulties. But, it may also impact on the relationship with creditors negatively. This mainly should depend upon the industry and the size of the company.

According to the above information, it is clear that the company is managing their working capital cycle and related liquidity in a sound manner than his competitor.

1.2.3 Performance Ratios

According to Conrad (2001: p.159) gross profit margin is a basic ratio that measures, for a manufacturing firm, the value that the market places on the companies` non-manufacturing activities. For a company that resells products, the ratio measures the value placed by the market on the activities that enhances those products. The gross profit margin of Intercontinental is 57.9% while it was recorded as 65.79% for the competitor firm. Accordingly, Marriott is doing well than Intercontinental in terms of their gross profit.

According to Vasigh et al (2010: p.169) the operating profit margin ratio compares the operating profit of a company with the total revenue generated. The ratio of Intercontinental is 33.46% while it was recorded as 7.91% for the competitor company. This indicates that for every dollar of revenue $0.33 is generated as an operating profit for the Intercontinental while it is only $0.079 for Marriott.

According to Baker et al (2005: p.62) the net profit margin measures the percentage of sales that results in net income. For the year 2012, the net profit margin for Intercontinental and Marriott has been recorded as 22.17% and 4.80% respectively. A higher net profit margin suggests a firm can control its costs or has a solid competitive position within its industry that is not threatened by cost-cutting competitors. If this ratio is low, then it suggest that the firm has not controlled its costs well or that other firms in the industry offers lower prices that threaten its competitiveness. In the case of Intercontinental and Marriott, the net profit margin of Intercontinental is higher than Marriott and the most likely reason for that is not because their rates are lower than Marriott ( Because the gross profit margin of Marriott is higher than Intercontinental), but because Intercontinental is controlling their cost structure well.

1.2.4 Activity Ratios

According to Ehrhardt et al (2011: p. 94) total assets turnover ratio measures how effectively the firm uses its total assets in the process of generating revenue. The total assets turnover for Intercontinental and Marriott was recorded as 0.56 and 1.87 respectively for the year 2012. This says that while Intercontinental is earning $0.56 from $1 of investment in total assets, Marriott is producing $1.87 per $1 of investments in total assets. Thus, the Marriott is managing their assets in the revenue generating process more effectively than Intercontinental.

According to Burns et al (2011: p.204) the solvency ratio that is said to be the most important in inventory management is inventory turnover, which is used to assess efficiency in inventory control. It basically calculates how many times the inventory of a company is sold and replaced over a specific period. Above calculations show that Intercontinental has sold and replenished their inventory nearly 193 times over the past year while Marriott has only replenished 10.5 times. This may be either because Marriott`s inventory level is high or their sales are lower than Intercontinental.

1.2.5 Return on capital ratios

As mentioned earlier, profit margin focuses on income statement results and measures how well a firm is managing its costs per dollar of sales. On the other hand, asset turnover ratio focuses on how efficiently balance sheet assets are used to produce sales. According to Crosson et al (2011: p.573) return on assets ratio combines these two ratios to measure the earning power of a business. I.e. it measures the overall earning power or the profitability of the company. Above calculations show that the return on assets ratio of Intercontinental is higher that the Marriott and thus, can say that the overall profitability of Intercontinental is good than its competitor.

According to Chandra (2008: p.79) the return on equity measures the profitability of equity funds invested in the firm. Because maximizing shareholder wealth is the dominant financial objective, ROE is the most important measure of performance in an accounting sense. Return on equity of Intercontinental is greater than Marriott with a huge difference. Thus, it is fair to say that the investors may have a positive perspective about the Intercontinental than Marriott and thus, it may be easy for the company to raise additional equity capital without any doubt.

1.2.6 Financing ratios

According to Lasher (2010: p.94) the debt ratio uses the total debt concept and measures the relationship between total debt and equity in supporting the firm`s assets. In other words, this ratio tells how much of the firm`s assets are supported by other people`s money (debt). When focusing on Intercontinental, nearly 90% of their assets are financed via debt while Marriott has financed 120% of their assets via debt. Since, the debt ratio of the competitor is very high, this company may be viewed as risky by investors, especially lenders.

1.2.7 Valuation Ratios

According to Gibson (2010: p.348) this is the amount of income earned on a share of common stock during an accounting period. This applies only to common stocks. According to the above table, the earnings per share of Intercontinental is very high than Marriott. That is, an investor of Intercontinental is earning more than an investor of Marriott and thus the share prices of Intercontinental may be higher than Marriott.

Task 2

2.1 CVP model and pricing methods

According to Maher et al (2012: p.182) CVP model is a basic financial model which summerises the effects of volume changes on an organisation`s costs, revenue and income. Users can extend such analysis to include the impact on profit of changes In selling price, service fee, costs, income tax rates and the organisation`s mix of products or services. There are few assumptions used in developing a CVP analysis namely,

All costs can be separated into fixed and variable.

Total fixed cost does not change over the given volume range.

Per unit selling price and per unit variable cost does not change.

In the multi-product situations, sales mix of the products does not change.

http://maaw.info/ABKYBook/LinearCVPModel.gif

Figure 2: CVP model

Source: http://maaw.info/ABKYBook/LinearCVPModel.gif

When focusing on pricing methods, there are several methods practiced by the companies today. According to Cant (2006:p.340) various pricing methods fall into mai three categories as,

Cost oriented pricing

This includes cost plus pricing, using absorption costing, contribution approach, rate of return pricing and break even analysis. Here a markup percentage is added to include the desired profit (or return on investment) in the list price. This does not take current market conditions in to consideration.

Profit value (to the customer) oriented pricing

According to Nijssen et al (2000: p.119) with customer oriented pricing, customer price perception and customer demand are taken as the starting point for the company`s price setting.

Competition oriented pricing

Under competition oriented pricing strategy, competitors` prices are the point of reference for the organisation`s price setting.

Thus, before making any decision about the prices of products or services offered by the company, they should have a detailed understanding about current market prices, market conditions, customer preferences and their bargaining power in the market and competitor prices and their pricing strategies.

Task 3

There are two main branches of accounting as financial accounting and management accounting.

Figure 1: Users of accounting information

Source: http://simplestudies.com/repository/lectures/ch1_accounting_types_users.gif

According to the above figure, the main users of financial accounting information are external to the company. But, when it comes to managerial accounting, they are prepared for the use of the internal management and employees and most of the time external users do not have the access to these management accounting information. According to Weygandt et al (2010: p.298) an important purpose of management accounting is to provide managers with relevant information for decision making. Making decisions is an important management function. Whether these decisions are operational decisions which concentrates mainly on day to day activities or strategic decisions that concentrate on the long term growth and survival, they are important to any company and should be made with correct and timely information.

Thus according to Bhattacharyya (2011: p.2) management accounting can be defined a the branch of accounting that deals with \presenting an providing accounting information to the management in such a systematic way so that it can perform its managerial functions of planning, controlling and decision making in an effective and efficient manner. It acts as a decision making support to the management.

According to Rao (2003: p.5) the scope of management accounting includes,

Financial Accounting

The statements prepared under financial accounts forms the basis for analysis and interpretation which serves as a meaningful data for managerial decision making.

Cost accounting

This primarily concerned with collection, analysis, allocation, apportionment and absorption of overhead with a view to ascertain the cost of production of goods or services. Cost accounting furnishes useful data to management showing areas of inefficiency and the steps to be taken to avoid losses and wastage.

Budgetary control

This is concerned with fixation of budgets, comparing actuals with budgets and taking corrective measures to set right adverse deviations. In fact, management accountant acts coordination when budgets are prepared for various departments. Hence, budgetary control is part and parcel of management accounting.

Capital budgeting and investment decisions

The term capital budgeting refers to long term planning for proposed capital outlay and their financing. It includes raising both long term funds and their utilization. When current funds are invested in long term activities, it results in future benefits. Capital budgeting decisions are very important as they involve large funds, risk and uncertainty and they are of an irreversible nature.

Accordingly, management accounting helps major fields of an organisation.

Task 4

According to Page et al (2007: p.245) the development and management of the tourism industry and its related organisation depends upon the accessibility to capital and sources of finance. Unlike most of other business firms, a company which involved in the travel and tourism industry is greatly affected by the location and the nature of the business. In order to have the attraction of local and foreign visitors and customers, the company should be located in a convenient place, and should be equipped with all the modern and new technologies and facilities. Furthermore, the company needs to have good employees with pleasant and outgoing personalities to serve their customers. These factors will decide the demand and revenue and also the perception about the hotel I customers mind. If they have a positive perception, the company can definitely expect, repeat sales to be occurred in the future. With the tight and continuously increasing competition level given in the tourism industry, no company can afford to create a negative perception in their customers mind. Thus, finance is of vital importance to a company involved in travel and tourism industry.

According to Needham et al (1990: p.477) a business organization has to take into account many factors before deciding how to satisfy its financial requirements including, the length or period which finance may be required, type of business structure and also the cost and the impact to the control power of the company. Based on the time period, sources of finance are categorized as short term and long term. Although short term finance is more expensive, it is also more flexible and this benefit would offset the lower cost of long term funds which might not be fully employed owing to the fluctuations in the business activities. Many companies expand by using short term finance and then later replace it with long term finance through a funding operation. Funding raises long term funds to pay off the short term finance so that further short term finance is then available to help the business expand again.

According to Moore et al (2006: p.244) sources of financing available for a firm includes, personal savings, commercial banks, business suppliers, asset-based lenders, venture capital firms, public sale of stocks and using retained earnings. All these sources are inherent with their advantages and disadvantages. Thus, a company should be minful to select the best source depending on the factors like, the cost, required securities and time period.

Conclusion

This report was prepared mainly to touch the primary but is of major importance in the field of finance and funding in the travel and tourism industry which will help the reader to acquire a deep understanding about the skills and techniques that assist with management decision making process. The report begins with a detailed ratio analysis which was carried out to the focus company (Intercontinental Hotels Group) and a competitor company in the same industry (Marriott Hotels and Resorts Group). a detailed analysis as such helps the reader to compare both companies and assess the performance of them. In the second part, it discusses about the CVP model and pricing methods used by companies to price their goods and services. Then the report moves to discuss and evaluate the importance of management accounting information as a decision making tool and finally it discusses the various sources of finance available for a company and their implications.