Assignment Guide - Finance & Funding in Travel & Tourism LO 1- Understand the importance of costs, volume and profit for management decision making in travel and tourism You are required to carry out a research as specified in the assignment brief and use supportive materials like books, websites, etc.—and give a feedback to the findings on P1.1,1.2,1.3. The answers need to be reflected to the instructions as specified and chosen for the purpose. Answers without application to International Airlines Group (IAG) or Thomas Cook Group Plc will be marked as resubmission. P1.1 explain the importance of costs and volume in financial management of travel and tourism businesses using International Airlines Group (IAG) or Thomas Cook as your case study Introduction: Profits depend on growing sales and managing costs, which include variable and fixed costs. Managing cost is one of the most important aspects of a successful business. A firm should have a clear understanding of the financial impact of every decision it takes. For example, when a firm acquires loan, its fixed cost increases due to increase in payment by way of interest. In such a situation, a firm should be able to analyse sales volumes required to cover the additional cost incurred.  Explain what costs are o Definitions [how cost is sometimes misconceived as price; how costs add up to price] o types of cost [direct, indirect, fixed, variable, semi-variable], and their implications, e.g. the higher the volume, the less the unit cost [i.e. cost of producing a single unit], o Implications of various types of cost, e.g. when costs are fixed, the organisation can also 'drive' sales to maximise profit.  Importance of costs and volume: o Costs are important in determining the prices of products or services offered by International Airlines Group; o Costs are important elements or components for effective competition in the Travel & Tourism industry o Understanding costs is also important for the purpose(s) of profitability o Volume in travel and tourism denotes quantity i.e. increase in the demand for an organisation's products or services within a specified period. o Volume helps to reduce the unit cost(s) of products or services in Travel & Tourism companies [economies of scale – the more you produce, the less the cost per unit of production/services being offered]. o Break-even analysis helps us to determine the sales volume required to recoup invested costs. o Price increases for the service(s) offered by International Airlines Group (IAG) will have an effect on the sales volume of that service. o Price increases affect consumer demand and subsequently sales volume; provide examples, where possible. o This relationship enables the management to analyse profit over a wide range of volume, which in turn is very useful in flexible budgeting. o It enables the firm to price its product appropriately so as to ensure stability in cash flows. o It is very useful in decision-making. It helps the firm to evaluate whether to make or buy, to increase the existing capacity or not. It also helps in profit evaluation etc. o It helps in profit planning. Under profit planning, the company first declares the profit it wants to achieve during the year, and then makes estimates regarding appropriate level of sales (through budgeting) that would yield the profit. http://www.themanagementor.com/enlightenmentorareas/finance/cfa/Cost_Profit_Vol.htm P1.2 analyse pricing methods used in the travel and tourism sector using International Airlines Group (IAG) or Thomas Cook Group Plc as your case study  Explain the concept of pricing [definitions, relationship with organisational objectives, relationship with cost, etc.....]  Cost-based pricing [e.g. mark-up, mark-down]  Demand-based pricing [seasonal tickets such as 'peak' periods and 'off-peak' periods]  Competition-based pricing  You may also include pricing strategies: o Psychological pricing [Odd-number pricing, Multiple-unit pricing, Reference pricing, Bundle pricing, Everyday low price (EDLP), Customary pricing, etc.]; o Product line pricing [Captive pricing, Premium pricing, Price lining]; o Promotional pricing [Special event pricing, Comparison discounting, etc.] o Discounting [Trade discounts, Quantity discounts, Cash discounts, Seasonal discount, Allowance, etc.] P1.3 analyse factors influencing profit for travel and tourism businesses using International Airlines Group (IAG) or Thomas Cook Group as your case study  PESTEL factors  Demand factors [the rate at which customers want your products and services];  Marketing factors [the 7Ps – Marketing Mix – Product, Price, Place, Promotion, People, Process and Physical Evidence]  Management factors o Budgets [discuss the advantages of budgeting], o strategic decisions such as mergers and acquisitions e.g. the merger of British Airways and Iberia, resulting in IAG. LO2- Understand the use of management accounting information as a decision making tool in travel and tourism businesses You are required to carry out a research as specified in the assignment brief and use supportive materials like books, websites, etc—and give a feedback to the findings on P2.1, and P2.2 The answers need to be reflected to the instructions as specified and chosen for the purpose. Answers without application to International Airlines Group (IAG) or Thomas Cook Group Plc will be marked as resubmission. P2.1 explain different types of management accounting information that could be used in travel and tourism businesses using International Airlines Group (IAG) or Thomas Cook Group Plc as your case study  Explain or define management accounting. If possible, differentiate between management accounting and financial accounting. ["Management accounting concerns the provision of financial information to internal management. This information is designed to help managers in their decision-making and control of businesses" (Guilding, C., 2012; p.8)]. Management accounting is a field of accounting that analyses and provides cost information to the internal management for the purposes of planning, controlling and decision making. Management accounting refers to accounting information developed for managers within an organization. CIMA (Chartered Institute of Management Accountants) defines Management accounting as "Management Accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of information that used by management to plan, evaluate, and control within an entity and to assure appropriate use of an accountability for its resources". This is the phase of accounting concerned with providing information to managers for use in planning and controlling operations and in decision making. Management accounting is concerned with providing information to managers i.e. people inside an organization who direct and control its operations. In contrast, financial accounting is concerned with providing information to stockholders, creditors, and others who are outside an organization. Management accounting provides the essential data with which organizations are actually run. Financial accounting provides the scorecard by which a company's past performance is judged.  Identify and explain the various forms of management accounting information: Management accounting information exists in different forms and can be classified as follows: a) Financial Statements:  The balance sheet – "The balance sheet is a financial statement that shows what the business is worth at one point in time. A standard company balance sheet has three parts, assets, liabilities and ownership equity or capital" https://www.e-conomic.co.uk/accountingsystem/glossary/balance-sheet  The income statement (Profit & Loss account) - The income statement is one of the major financial statements used by accountants and business owners. (The other major financial statements are the balance sheet, statement of cash flows, and the statement of stockholders' equity). The income statement is sometimes referred to as the profit and loss statement (P&L), statement of operations, or statement of income. The income statement is important because it shows the profitability of a company during the time interval specified in its heading. The period of time that the statement covers is chosen by the business and will vary.  The statement of changes in owner's equity – It is a financial statement showing the beginning balance, additions to and deductions from, and the ending balance of the shareholders' equity account, for a specified period. It is also called the statement of shareholders' equity. The purpose of this statement is to report the changes in each separate component of owner's equity for a period of time. [Equity is increased by additional investments of cash or other assets by the owner or owners. Net income also increases equity. Because additional owner investments or net income increases equity, one can deduce what decreases equity: withdrawals by or a distribution of assets to the owner or a net loss.] The statement of owner's equity helps link the owner's equity shown in the balance sheet at the beginning of the period with that shown at the end of the period. It presents the amount and causes of the change in owner's equity from the beginning to the end of the first year (Kramer and Johnson, 2009). (http://www.businessdictionary.com)  The statement of cash flows – This statement presents a summary of the cash flows of a business during a specific period. It shows the amounts and causes of the change in the cash balance during that time and links the previous year's balance sheet to the current year's balance sheet by reconciling the cash balance at the beginning of the year with the cash balance at the end of the year. (Kramer and Johnson, 2009).  The income statement calculates the net income (or loss) by subtracting expenses from revenues. However, these revenues are not necessarily equal to the cash inflows and outflows, because revenues are recorded when earned and expenses are recorded when incurred. The statement of cash flows focuses on cash. Thus, some revenue earned by selling goods to a customer who has not yet paid would appear on the income statement, but not on the statement of cash flows. In other words, a company could be profitable and still be 'cash-poor' if most of its revenues are earned, but not yet received in cash. The cash flows are presented in three categories: operating, investing and financing. (Kramer and Johnson, 2009). b) Budgets – Hinka (2007) defines a budget as "a set of financial statements resulting from a particular scenario – generally the most likely or hoped for scenario" (p.4) https://books.google.co.uk/books?id=LhpFO7UNUssC&pg=PA4&dq=definition+of+a+budget&hl=en&sa=X&ei=hi6iVMPnN82f7gau8YH4Dg&ved=0CCwQ6AEwAjgU#v=onepage&q=definition%20of%20a%20budget&f=false c) Variance analysis – This is a simple, but powerful technique for monitoring the financial progress of an organisation. Once the budget cycle has started, it is important to compare the budget figure with the actual figure. The variance can be used to identify areas on overspending or revenue shortfalls (Stewart, 2007). d) Forecasts - e) MIS – P2.2 assess the use of management accounting information as a decision-making tool for International Airlines Group (IAG) or Thomas Cook Group Plc  Describe the relevance of management accounting information to their users within the context of IAG or Thomas Cook Group Plc. Management accounting produces information that is used within an organization, by managers and employees. The main objective of management accounting is to help management by providing information that is used to plan, set goals and evaluate these goals. Management accounting aims to provide internal users with the basis to make informed business decisions. Unlike financial accounts, management accounting information is usually not publicly reported and is forward looking rather than historical. Management accounting reports are often far more detailed than financial accounting, as they cover activities and performances of individual departments, products, and customers. It is specifically conducted to achieve the goals of the organization at any particular time. Source: Boundless. "Managerial Accounting." Boundless Business. Boundless, 04 Dec. 2014. Retrieved 05 Jan. 2015 from https://www.boundless.com/business/textbooks/boundless-business-textbook/financial-statements-18/accounting-information-109/managerial-accounting-513-3253/  Internal users (Primary Users) of accounting information include the following: Management: for analysing the organization's performance and position and taking appropriate measures to improve the company results. Managers require information that will assist them in their decision-making and control activities; for example, information is needed on the estimated selling prices, costs, demand, competitive position and profitability of various products/services that are provided by the organization. Managers review accounting information so they may take measures to improve departmental results. Employees & Union Officials: for assessing company's profitability and its consequence on their future remuneration and job security. Employees (and organisations that represent them - e.g. trade unions) require information about the stability and continuing profitability of the business. They are crucially interested in information about employment prospects and the maintenance of pension funding and retirement benefits. They are also likely to interested in the pay and benefits obtained by senior management! Employees require information on the ability of the firm to meet wage demands and avoid redundancies. Employees assess the company's profitability to gauge job security and future remuneration. They may have interest in their company's financial information if they receive performance bonuses, commissions, revenue sharing or simply want to know the financial standing of their employer Owners: for planning and evaluating business activities; for analysing the viability and profitability of their investment and determining any future course of action. Business owners use these reports to analyse the viability and profitability of their investment and determine alternate courses of action. Owners review the streams of revenue their businesses bring in as well as the amount of expenses consumed to decide which opportunities to pursue and which processes to discontinue. Please, do not forget to highlight the respective INTERNAL USERS within your chosen organisation.  Decisions by internal users include, but are not limited to the following: 1. To analyse the profitability by products and operational units 2. To decide the need for cash flows to support the operations 3. To decide whether to buy or sell business segments 4. To decide whether to build new production facilities  ..  Discuss or explain the implication/importance of management accounting information  Summary: Management accounting information include: o Financial statements – Each statement presents different information, but the statements are all interrelated (Kramer and Johnson, 2009). The operating activities of the business are summarised and presented in the income statement, which shows the revenues earned, the expenses uncured, and the resulting net income. Cash receipts and payments arising from operating activities of the business are summarised and presented in the statement of cash flows. o Financial statements provide information useful to business owners in planning and controlling the activities and finances of the business and to other parties making investment and credit decisions about the business (Kramer and Johnson, 2009). o Information on the costs of an organization's products and services - for example, managers can use product costs to guide the setting of selling prices. In addition, these product costs are used for inventory valuation and income determination (Horngren and Foster, pp. 2). o Budgets - A budget is a quantitative expression of a financial plan. o Performance reports - these reports often consist of comparisons of budgets with actual results. The deviations of actual results from budget are called variances (Horngren and Foster, pp. 3). o Other information which assist managers in their planning and control activities – examples are information on revenues of an organization's products and services, sales back logs, unit quantities and demands on capacity resources (Kaplan and Atkinson, pp. 1). Google Books Links: 1) Financial Statements Demystified By David Hey-Cunningham (2002) https://books.google.co.uk/books?id=NmCSsofkTw4C&pg=PA17&dq=financial+statements&hl=en&sa=X&ei=LyOiVPyTAoGdPeWPgIAJ&ved=0CCkQ6AEwAA#v=onepage&q=financial%20statements&f=false 2) Financial Statements Demystified: A Self-Teaching Guide: A Self-teaching Guide By Bonita Kramer, Christie Johnson (2009) https://books.google.co.uk/books?id=bpdIj3l0eCcC&pg=PA2&dq=financial+statements&hl=en&sa=X&ei=LyOiVPyTAoGdPeWPgIAJ&ved=0CC8Q6AEwAQ#v=onepage&q=financial%20statements&f=false 3.1 interpret financial accounts of TUI Travel Plc for the year ended 30 September 2013 focusing on the ratios given below and showing at least two years performance (comparing 2013 to 2012). You may use this table or not. It all depends on your style of reporting/analysis. However, the key figures and brief descriptions can all be found below the table Ratio & Brief Description Formula Calculation (2013) Calculation (2012) Analysis Current ratio Acid test Return on capital employed Return on net assets Debtors' collection period Creditors' payment period Stock turnover Ratio of administration costs to sales Gross profit as a percentage of sales Net profit as a percentage of sales Capital gearing a) Current ratio [Liquidity Ratio] [Balance Sheet] This is also known as "liquidity ratio", "cash asset ratio" and "cash ratio". It is used to assess a company's ability to meet its financial obligations. This is calculated by dividing the current assets by the current liabilities; both of these figures are from the balance sheet. Assets and liabilities are "current" if they are receivable or payable within one year. A current ratio of two or higher shows that current assets can likely cover current liabilities as they come due. Formula: 3,252 = 0 .554 2,348 = 0.462 (5,870) (5,085) Significance and Interpretation: The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1, as can be seen in TUI Travel Plc suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign. The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. Because business operations differ in each industry, it is always more useful to compare companies within the same industry. b) Acid test [Liquidity Ratio] [Balance Sheet] Not all assets can be turned into cash quickly or easily. Some - notably raw materials and other stocks - must first be turned into final product, then sold and the cash collected from debtors. The Acid Test Ratio (sometimes also called the "Quick Ratio") therefore adjusts the Current Ratio to eliminate certain current assets that are not already in cash (or "near-cash") form. The tradition is to remove inventories (stocks) from the current assets total, since inventories are assumed to be the most illiquid part of current assets – it is harder to turn them into cash quickly. The formula for the acid test ratio is: 3,252 – 57 = 0.544 2,348 – 61 = 0.450 (5,870) (5,085) Significance and Interpretation: An acid test ratio of over 1.0 is good news; the business is well-placed to be able to pay its debts even if it cannot turn inventories into cash. Some care has to be taken interpreting the acid test ratio. The value of inventories a business needs to hold will vary considerably from industry to industry. For example, you wouldn't expect a firm of solicitors to carry much inventory, but a major supermarket needs to carrying huge quantities at any one time. An acid test ratio for Tesco or Asda would indicate a very low figure after taking off the value of inventories but leaving in the very high amounts owed to suppliers (trade creditors). However, there is no suggestion that either of these two businesses has a problem being able to pay its debts! Companies with ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme caution. Furthermore, if the acid-test ratio is much lower than the working capital ratio, it means current assets are highly dependent on inventory. Retail stores are examples of this type of business. c) Return on capital employed [Profitability Ratio] [Balance Sheet & Income Statement] A financial ratio that measures a company's profitability and the efficiency with which its capital is employed. Return on capital employed (ROCE) is a broader measure than return on shareholders' equity. ROCE measures the performance of a company as a whole in using all sources of long-term finance. Profit before interest and tax is used in the numerator as a measure of operating results. It is sometime called 'earnings before interest and tax' and is abbreviated to EBIT. Return on capital employed is often seen as a measure of management efficiency. Return on Capital Employed (ROCE) is calculated as: ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed The capital employed figure normally comprises: Share capital + Retained Earnings + Long-term borrowings (the same as Equity + Non-current liabilities from the balance sheet) "Capital Employed" as shown in the denominator is the sum of shareholders' equity and debt liabilities; it can be simplified as (Total Assets – Current Liabilities). Instead of using capital employed at an arbitrary point in time, analysts and investors often calculate ROCE based on "Average Capital Employed," which takes the average of opening and closing capital employed for the time period. A higher ROCE indicates more efficient use of capital. ROCE should be higher than the company's capital cost; otherwise it indicates that the company is not employing its capital effectively and is not generating shareholder value. Return on Capital Employed (ROCE) is a profitability ratio that helps determine the profit that a company earns for the capital it employs. Return on capital employed ratio is computed by dividing the net income before interest and tax by capital employed. It measures the success of a business in generating satisfactory profit on capital invested. The ratio is expressed in percentage. Formula: Net (Operating) Profit x 100 Capital Employed (Total Assets-Current Liabilities) 297 x 100 301 x 100 9,529 - 5,870 8,621- 5,085 (3659) 8.12% (3536) 8.51% The basic components of the formula of return on capital employed ratio are net income before interest and tax and capital employed. http://www.learnmanagement2.com/Return%20on%20capital%20employed%20%28ROCE%29%20Profitability%20Ratios.html Significance and Interpretation: Return on capital employed ratio measures the efficiency with which the investment made by shareholders and creditors is used in the business. Managers use this ratio for various financial decisions. It is a ratio of overall profitability and a higher ratio is, therefore, better. A higher ROCE indicates more efficient use of capital. ROCE should be higher than the company's capital cost; otherwise it indicates that the company is not employing its capital effectively and is not generating shareholder value. To see whether the business has improved its profitability or not, the ratio can be calculated for a number of years. ROCE is a useful metric for comparing profitability across companies based on the amount of capital they use. ROCE is used to prove the value the business gains from its assets and liabilities. A business which owns lots of land will have a smaller ROCE compared to a business which owns little land but makes the same profit. It basically can be used to show how much a business is gaining for its assets, or how much it is losing for its liabilities. Drawbacks of ROCE The main drawback of ROCE is that it measures return against the book value of assets in the business. As these are depreciated the ROCE will increase even though cash flow has remained the same. Thus, older businesses with depreciated assets will tend to have higher ROCE than newer, possibly better businesses. In addition, while cash flow is affected by inflation, the book value of assets is not. Consequently revenues increase with inflation while capital employed generally does not (as the book value of assets is not affected by inflation). d) Return on net assets [Profitability Ratio] [Balance Sheet & Income Statement] The return on net assets (RONA) is a comparison of net income with the net assets. This is a metric of financial performance of a company that takes into account earnings of a company with regard to fixed assets and net working capital. The return on net assets (RONA) helps the investors to determine the percentage net income the company is generating from the assets. This ratio tells how effectively and efficiently the company is using its assets to generate earnings. This is an important ratio because in many companies the fixed assets are a single largest component of the investment. Although there are no fixed standards or benchmarks for RONA but the higher this ratio is the better it is. Higher RONA means that the company is using its assets and working capital efficiently and effectively. An increasing RONA is an indicator of improving profitability and improving financial performance of a company. This ratio should usually be used in capital-intensive industries where major purchases are for fixed assets. It should be used in subsequent years to see how effective the investment in new fixed assets has been. Calculation (formula) The return on net assets (RONA) is calculated by dividing the net income of a company by the sum of its fixed assets and net working capital. This can be expressed in the following formula. Return on Net Assets = Net Income / (Fixed Assets + Net Working Capital), where working capital is Current Assets – Current Liabilities. The figure for net income can be found in the income statement. Net income is also known as profit after tax. The figure for fixed assets can be found in the balance sheet. Fixed assets include property, plant and equipment, long term investments, and other non-current assets. The net working capital is defined as current assets minus current liabilities. A measure of financial performance calculated as: Net Income Fixed Assets + Net Working Capital (Current Assets – Current Liabilities) 63 137 6,277 + (3,252 – 5,870) 6,273 + (2,348 – 5,085) 6,277 + (– 2618) [3659] = 0.02 6,273 + (-2737) [3536] = 0.04 Fixed assets are tangible property used in production, such as real estate and machinery. Net working capital is calculated by taking the company's current assets minus its current liabilities. The higher the return, the better the profit performance for the company. Individually, no single calculation tells the whole story of a company's performance, and Return On Net Assets is just one of many ratios that can be used to evaluate a company's financial health. http://www.investopedia.com/terms/r/rona.asp http://www.readyratios.com/reference/profitability/return_on_net_assets_rona.html e) Debtors' collection period [Efficiency Ratio/Activity Ratio] [Balance Sheet & Income Statement] Indicates the average length of time the firm must wait after making a sale before it receives payment. This has implications for financial management and quality of customers (marketing). Debtors are organisations or people that owe the business money. This means that debtor's collection period, is the average amount of days it takes, for the business to receive the money it is owed from its customers. The sooner debtors pay the business the better, so a short debtor's collection period is good. If debtors pay quickly, it helps cash flow and reduces the risk of customers not paying the money they owe. The calculation for debtor's collection period is as follows: Debtor's Collection Period = Debtors (amount of money owed) x 365 Sales Turnover (205 + 1331) x 365 (225 + 1312) x 365 15,051 = 37.25 14,460 = 38.80 The debtor days ratio focuses on the time it takes for trade debtors to settle their bills. The ratio indicates whether debtors are being allowed excessive credit. A high figure (more than the industry average) may suggest general problems with debt collection or the financial position of major customers. The efficient and timely collection of customer debts is a vital part of cash flow management, so this is a ratio which is very closely watched in many businesses. The average time taken by customers to pay their bills varies from industry to industry, although it is a common complaint that trade debtors take too long to pay in nearly every market. Among the factors to consider when interpreting debtor days are:  The industry average debtor days needs to be taken into account. In some industries it is just assumed that the credit that can be taken is 45 days, or 60 days or whatever everyone else seems (or claims) to be taking.  A business can determine through its terms and conditions of sale how long customers are officially allowed to take.  There are several actions a business can take to reduce debtor days, including offering early-payment incentives or by using invoice factoring.  If your Debtor Days are increasing beyond your normal trading terms it indicates that the business is not collecting debts from customers as efficiently as it should be, or perhaps terms are being extended to boost sales. For example if your normal terms are 30 days and your Debtor Days ratio is 60 days the business on average is taking twice as long to collect debts as it should do.  Any upward trend in the Debtor Days ratio means that an increasing amount of cash (possibly from overdrafts) is needed to finance the business, this can be a major problem for an expanding businesses.  The Debtor Days should be the same as your Terms of Trade with customers.  A cash business should have a much lower Debtor Days figure than a non-cash business.  Typical ranges for Debtor Days for a non-cash business would be 30-60 days. http://oxfordindex.oup.com/view/10.1093/oi/authority.20110803095705185 http://www.learnmanagement2.com/Activityratios_debtors%20collection%20period.html http://www.firsttrustbank.co.uk/servlet/Satellite?channel=C007&cid=1141323556851&pagename=FTBusinessPortal%2FFTBContent_C%2Fftb_debtor_collection_tool f) Creditors' payment period [Efficiency Ratio/Activity Ratio] [Balance Sheet & Income Statement] The creditors' payment period is an activity ratio. It measures the average amount of days the business takes to pay its creditors i.e. suppliers. The more days available to pay the better. "Creditor days" is a similar ratio to debtor days and it gives an insight into whether a business is taking full advantage of trade credit available to it. Creditor days estimates the average time it takes a business to settle its debts with trade suppliers. As an approximation of the amount spent with trade creditors, the convention is to use cost of sales in the formula which is as follows: (4,773) x 365 (4,549) x 365 (13,395) (12,965) =130.06 days = 128.07 days Significance and Interpretation:  If your Creditor Days are increasing beyond your suppliers normal trading terms it indicates that the business is not paying its suppliers as efficiently as it should be. For example if your normal terms are 30 days and your Creditor Days ratio is 60 days the business on average is taking twice as long to pay suppliers as it should do.  Generally, increasing payables days suggests advantage is being taken of available credit but there are risks:  losing supplier goodwill  losing prompt payment discounts  suppliers increasing the price to compensate.  Any downward trend in the Creditor Days ratio means that an increasing amount of cash (possibly from overdrafts) is needed to finance the business, this can be a major problem for an expanding businesses.  The Creditor Days should be the same as your Terms of Trade with suppliers. If the creditor days ratio is continually higher it means the business is paying its suppliers late which could eventually lead to supply problems. If the creditor days ratio is trending lower than the normal terms of trade it could indicate that suppliers are being paid too early, reducing the amount of cash available in the business, or it might possibly be due to early settlement discounts being taken from suppliers.  A cash business should have a much lower Creditor Days figure than a non-cash business.  Typical ranges for Creditor Days for a non-cash business would be 30-60 days. http://www.double-entry-bookkeeping.com/activity-ratios/creditor-days/ g) Stock turnover [Efficiency Ratio/Activity Ratio] [Income Statement & Balance Sheet] The rate of stock turnover is an efficiency ratio which determines how quickly a firm goes through its stock. A high stock turnover is preferable as this means stock is selling – marketing and purchasing are doing their jobs properly! If stock turnover is low then this means stock is not being bought and there may be many reasons such as poor quality of goods, poor customer service or poor advertising. Stock turnover ratio = Cost of goods sold ÷ average stock holding The formula is: (13,395) (12,965) 57 61 235 times/year 212.54 times/year Significance and Interpretation: Stock turnover helps answer questions such as "have we got too much money tied up in inventory"? An increasing stock turnover figure or one which is much larger than the "average" for an industry may indicate poor inventory management. Rate of stock turnover is an efficiency ratio which determines how quickly a firm goes through its stock. A high stock turnover is preferable as this means stock is selling – marketing and purchasing are doing their jobs properly! If stock turnover is low then this means stock is not being bought and there may be many reasons such as poor quality of goods, poor customer service or poor advertising. A business can take a range of actions to improve its stock turnover: • Sell-off or dispose of slow-moving or obsolete stocks • Introduce lean production techniques to reduce stock holdings • Rationalise the product range made or sold to reduce stock-holding requirements • Negotiate sale or return arrangements with suppliers – so the stock is only paid for when a customer buys it  Inventory turnover is a measure of how efficiently a company can control its merchandise, so it is important to have a high turn. This shows the company does not overspend by buying too much inventory and wastes resources by storing non-saleable inventory. It also shows that the company can effectively sell the inventory it buys.  This measurement also shows investors how liquid a company's inventory is. Think about it. Inventory is one of the biggest assets a retailer reports on its balance sheet. If this inventory can't be sold, it is worthless to the company. This measurement shows how easily a company can turn its inventory into cash.  Creditors are particularly interested in this because inventory is often put up as collateral for loans. Banks want to know that this inventory will be easy to sell.  Inventory turns vary with industry. For instance, the apparel industry will have higher turns than the exotic car industry.  Usually, a higher inventory turnover ratio is preferred, as it indicates that more sales are being generated given a certain amount of inventory. Alternatively, for a given amount of sales, using less inventory to do so will improve the ratio.  Sometimes a very high inventory ratio could result in lost sales, as there is not enough inventory to meet demand. It is always important to compare the inventory turnover ratio to the industry benchmark to asses if a company is successfully managing its inventory.  Benchmarking your business - You can compare your stock turnover rate to other similar businesses when benchmarking your business. This can help you work out how well you are performing and what areas you might need to improve on.  Valuing your business - Your stock turnover rate can help you value your business, which can be useful if you are thinking of selling.  Seasonal build - Inventory may be built up in advance of a seasonal selling season.  Obsolescence - Some portion of the inventory may be out-of-date and so cannot be sold.  Cost accounting - The costing method used, combined with changes in prices paid for inventory, can result in significant swings in the reported amount of inventory.  Flow method used - A "pull" system that only manufactures on demand requires much less inventory than a "push" system that manufactures based on estimated demand.  Purchasing practices - The purchasing manager may advocate purchasing in bulk to obtain volume purchase discounts. Doing so can substantially increase the investment in inventory.  A low turnover rate may point to overstocking,[2] obsolescence, or deficiencies in the product line or marketing effort. However, in some instances a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or expected market shortages.  Conversely a high turnover rate may indicate inadequate inventory levels, which may lead to a loss in business as the inventory is too low. This often can result in stock shortages.  Additionally, firms may reduce prices to generate sales in an effort to cycle inventory. It should be noted that, the terms "cost of sales" and "cost of goods sold" are synonymous.  An item whose inventory is sold (turns over) once a year has higher holding cost than one that turns over twice, or three times, or more in that time. Stock turnover also indicates the briskness of the business. The purpose of increasing inventory turns is to reduce inventory for three reasons.  Increasing inventory turns reduces holding cost. The organization spends less money on rent, utilities, insurance, theft and other costs of maintaining a stock of good to be sold.  Reducing holding cost increases net income and profitability as long as the revenue from selling the item remains constant.  Items that turn over more quickly increase responsiveness to changes in customer requirements while allowing the replacement of obsolete items. This is a major concern in fashion industries.  When making comparison between firms, it's important to take note of the industry, or the comparison will be distorted. Making comparison between a supermarket and a car dealer, will not be appropriate, as supermarket sells fast moving goods such as sweets, chocolates, soft drinks so the stock turnover will be higher. However, a car dealer will have a low turnover due to the item being a slow moving item. As such only intra-industry comparison will be appropriate. The last point to remember is that stock turnover is an irrelevant ratio for many businesses in the service sector. Any business that provides personal or professional services, for example, is unlikely to carry significant stocks. http://www.accountingtools.com/inventory-turnover-ratio http://www.tutor2u.net/business/accounts/ratio_stock_turnover.html h) Ratio of administration costs to sales [Efficiency Ratio/Activity Ratio] [Income Statement] Reported on the income statement, it is the sum of all direct and indirect selling expenses and all general and administrative expenses of a company. Significance and Interpretation: The Sales to Administrative Expenses ratio measures how well the company is keeping its administrative costs under control for its current sales level. Some companies include their sales and marketing expenses in with administrative expenses, but others will keep these figures separate. If the company you are analysing reports sales and marketing costs separately, you will have to make the decision whether or not you will include these with the Sales General and Administration expenses. High SG&A (selling, general & administrative) expenses can be a serious problem for almost any business. Examining this figure as a percentage of sales or net income compared to other companies in the same industry can give some idea of whether management is spending efficiently or wasting valuable cash flow. For example, in the television industry businesses that depend on a great deal of advertising must carefully monitor their marketing expenses. A good management team will often attempt to keep SG&A expenses under tight control and limited to a certain percentage of revenue by reducing corporate overhead (i.e. cost-cutting, employee lay-offs). Calculation: Administrative Costs x 100 So: Sale 1,376 x 100 1,199 x 100 15,051 14,460 9.14% 8.29% Importance of Sales to Administrative Expenses  An increasing Sales to Administrative Expenses ratio is generally a positive sign, showing the company is more able to generate sales using its Sales General and Administration expenses. Rarely does a company's performance suffer from administrative expenses being too small.  Hiring based on sales forecasts that turn out to be lower than expected, corporate mergers, and rapid growth phases tend to leave the company with a disproportionately high percentage of administrative expenses – often primarily consisting of salaries and benefits of the administrative staff.  Too much administrative overhead can indicate an overly complex managerial structure, redundant departments, and slow reaction to market changes. Keeping track of this ratio over time will yield a clearer picture of how the company keeps control of its administrative expenses, and comparing this ratio to competing companies provides even more insight.  Expense ratio shows what percentage of sales is an individual expense or a group of expenses. A lower ratio means more profitability and a higher ratio means less profitability.  Analyst must be careful while interpreting the ratio of an expenses to sales. Some expenses vary with the change in sales (i.e. variable expenses). The ratio for such expenses normally does not change significantly as the sales volume increases or decreases.  For fixed expenses (rent of building, fixed salaries etc.), the ratio changes significantly as the sales volume changes.  The ratio is helpful in controlling and estimating future expenses. http://www.investopedia.com/terms/s/sga.asp i) Gross profit as a percentage of sales [Profitability Ratio] [Income Statement] Sales revenue does not tell the total picture of performance. The sales revenue of a business may significantly increase with only marginal increase in actual gross profit. Gross profit as a percentage of sales provides information on the profitability of sales The gross margin ratio is also known as the gross profit margin or the gross profit percentage. The gross margin percentage is a calculation that shows the proportion of sales comprised of those costs directly related to either the goods sold or services rendered in order to generate sales. Gross profit ratio (GP ratio) is a profitability ratio that shows the relationship between gross profit and total net sales revenue. It is a popular tool to evaluate the operational performance of the business. The ratio is computed by dividing the gross profit figure by net sales. Formula: The following formula/equation is used to compute gross profit ratio: When gross profit ratio is expressed in percentage form, it is known as gross profit margin or gross profit percentage. The formula of gross profit margin or percentage is given below: Gross Profit x 100 So: Sales 1,656 x 100 1,495 x 100 15,051 14,460 11% 10.34% http://wizznotes.com/accounts/preparation-and-analysis-of-financial-statements/gross-profit-net-profit-as-a-percentage-of-sales-ratios The basic components of the formula of gross profit ratio (GP ratio) are gross profit and net sales. Gross profit is equal to net sales minus cost of goods sold. Net sales are equal to total gross sales less returns inwards and discount allowed. The information about gross profit and net sales is normally available from income statement of the company. Significance and interpretation: Gross profit is very important for any business. It should be sufficient to cover all expenses and provide for profit. There is no norm or standard to interpret gross profit ratio (GP ratio). Generally, a higher ratio is considered better. The ratio can be used to test the business condition by comparing it with past years' ratio and with the ratio of other companies in the industry. A consistent improvement in gross profit ratio over the past years is the indication of continuous improvement. When the ratio is compared with that of others in the industry, the analyst must see whether they use the same accounting systems and practices. It is customary to closely track the gross profit percentage over time, since a decline in it can signal any of the following problems:  A decline in prices  A change in the mix of products and services sold  An increase in production costs  An increase in bad debts  An increase in charges for scrap and spoilage in the production process  An increase in charges for obsolete inventory. A significant decline in the percentage is a strong indicator that the market is becoming more competitive, and that management should therefore begin to pare back on its selling and administrative expenses in order to avoid losses. A decline can also indicate that a customer is becoming too powerful, and so is demanding steep price discounts. The gross profit percentage can yield misleading results for any of the following reasons:  The cost of direct materials can vary, depending upon the cost layering method used (such as FIFO, LIFO, or weighted average costing).  The cost of direct labour does not really vary with sales volume, since the cost of staffing the product line will probably stay the same, even if production volumes vary.  The cost of factory overhead is largely fixed within general ranges of production volume. Thus, some changes in the gross margin percentage may be caused by changes in the amount of fixed costs and the number of units produced, rather than any real costing issues that management can fix. A variation on the gross profit percentage is the contribution margin percentage, which eliminates all fixed costs from the gross profit percentage calculation. With just variable costs included in the calculation, the contribution margin percentage tends to be a better measure of performance. Since gross margin ratios vary between industries, you should compare your company's gross margin ratio to companies within your industry. However, you should keep in mind that there can also be differences within your industry. For example, your company may use LIFO while most companies in your industry use FIFO. Perhaps your company focuses its sales efforts on smaller customers who also require special administrative services. In that case, your company's gross margin ratio should be larger than your industry's in order to cover the higher selling and administrative expenses. j) Net profit as a percentage of sales [Profitability Ratio] [Income Statement] Net profit ratio (NP ratio) is a popular profitability ratio that shows relationship between net profit after tax and net sales. It is computed by dividing the net profit (after tax) by net sales. Formula: Net Profit as a % of Sales = Net Profit x 100 So: Sales 63 x 100 137 x 100 15,051 14,460 0.42% 0.95% Net profit as a percentage of sales provides information on the profitability of sales. http://wizznotes.com/accounts/preparation-and-analysis-of-financial-statements/gross-profit-net-profit-as-a-percentage-of-sales-ratios Significance and Interpretation: Net profit (NP) ratio is a useful tool to measure the overall profitability of the business. A high ratio indicates the efficient management of the affairs of business. There is no norm to interpret this ratio. To see whether the business is constantly improving its profitability or not, the analyst should compare the ratio with the previous years' ratio, the industry's average and the budgeted net profit ratio. The use of net profit ratio in conjunction with the assets turnover ratio helps in ascertaining how profitably the assets have been used during the period. k) Capital gearing [Balance Sheet] Capital gearing ratio is a useful tool to analyse the capital structure of a company and is computed by dividing the common stockholders' equity by fixed interest or dividend bearing funds. Analysing capital structure means measuring the relationship between the funds provided by common stockholders and the funds provided by those who receive a periodic interest or dividend at a fixed rate. A company is said to be low geared if the larger portion of the capital is composed of common stockholders' equity. On the other hand, the company is said to be highly geared if the larger portion of the capital is composed of fixed interest/dividend bearing funds. Formula: Or, Capital Gearing Ratio = Equity/Fixed Interest Bearing Funds (Note: Fixed interest bearing funds include debentures, preference shares and long-term loans; Equity includes Equity share capital, Free reserves, and Profits and loss account balance) 1,491 1,609 (1,012) (868) 1.5 1.9 Or, Capital gearing ratio = Prior charge capital/Total capital (Note: Prior charge capital is capital carrying right to fixed return; Total capital is 'total assets less current liabilities') Or, Capital gearing ratio = (Preference share capital + Debentures + long term borrowings) / Equity funds In the above formula, the numerator consists of common stockholders' equity that is equal to total stockholders' equity less preferred stock and the denominator consists of fixed interest or dividend bearing funds that usually include long term loans, bonds, debentures and preferred stock etc. All the information required to compute capital gearing ratio is available from the balance sheet. Significance and interpretation: Capital gearing ratio is the measure of capital structure analysis and financial strength of the company and is of great importance for actual and potential investors. Borrowing is a cheap source of funds for many companies but a highly geared company is considered a risky investment by the potential investors because such a company has to pay more interest on loans and dividend on preferred stock and, therefore, may have to face problems in maintaining a good level of dividend for common stockholders during the period of low profits. Banks and other financial institutions reluctant to give loans to companies that are already highly geared. http://www.accountingformanagement.org/capital-gearing-ratio/ http://financelearners.blogspot.co.uk/2011/04/capital-gearing-ratio-formula-example.html Limitations of Financial Ratios • On their own, most financial ratios are fairly meaningless. They can only be meaningfully interpreted when compared to similar ratios, including historical values for the same company, industry standards, or the ratios of competing companies. • In addition, most ratios should be considered in the context of other ratios. For example, comparing the return on equity and the debt to equity ratio for a firm will demonstrate the firm's level of financial risk and performance, and how these are related. • Some ratios, such as the operational efficiency ratios, use year-end values for figures such as inventory and trade payables and receivables. These values may not be representative of the actual figures throughout the years, as seasonal variations may have affected them. • Different accounting standards and methods can change the value of certain ratios. As such, the accounting policy of a company, and any changes in that policy, should be considered when analysing the company's ratios. LO 4 – Understand sources and distribution of funding for public and non-public tourism development 4.1 analyse sources and distribution of funding for the development of capital projects associated with tourism such as the Cross Railway project, Tourism Information Point, small scale tourism/environmental improvement with associated interpretation, development of small-scale, heritage sites with interpretation and information, integrated footpath development and improvement, integrated bridleways development and improvement, cycle route development and improvement, provision of secure cycle storage Introduction [Definition of Tourism]: The World Tourism Organisation (UNWTO) defines tourism as "a social, cultural and economic phenomenon which entails the movement of people to countries or places outside their usual environment for personal or business/professional purposes" [Accessed: 26/01/2015]. Over the decades, tourism has experienced continued growth and deepening ‎diversification to become one of the fastest growing economic sectors in the world. ‎Modern tourism is closely linked to development and encompasses a growing number ‎of new destinations. These dynamics have turned tourism into a key driver for socio-‎economic progress.‎ Today, the business volume of tourism equals or even surpasses that of oil exports, ‎food products or automobiles. Tourism has become one of the major players in ‎international commerce, and represents at the same time one of the main income ‎sources for many developing countries. This growth goes hand in hand with an ‎increasing diversification and competition among destinations.‎ Tourism is seen as a tool for development, economic growth and poverty alleviation. This justifies why different agencies, entities, governments, NGOs, etc. finance, through various instruments, projects that seek to achieve these objectives through tourism, influencing in a direct or indirect way on the development of this activity. Highlight the various sectors of Tourism Industry and mention a few of the capital projects associated with the sectors:  Transportation [railways, train coaches, etc…]  Accommodation [hotel construction, renovation, etc…..]  Attractions [construction of new sites, installation of equipment, etc…..]  Food & Catering [installation of new equipment, staff training, etc……]  Entertainment [building or constructing new sites, renovation of theatres, night clubs, etc……] These all require some form of funding. The major sources of finance for tourism businesses are grants/aid. These grants can be accessed through different governmental and non-governmental organisations. Sources of grants: [identify the sources and elaborately discuss the various implications – objectives and criteria - of at least 5 of the identified sources] 1) International Financial Institutions [IFIs] International financial institutions finance the implementation of tourism projects with the aim of contributing to economic development in less developed countries, and in this way, achieving their goals of reducing poverty and improving the quality of life of their population.  The World Bank Group [http://www.worldbank.org/en/about] a) The International Bank for Reconstruction and Development b) The International Development Association c) The International Finance Corporation d) The Multilateral Investment Guarantee Agency e) The International Centre for Settlement of Investment Disputes  United Nations Development Programme  Asian Development Bank  The European Union [EU] a) Structural funds [4 structural funds]  ERDF (European Regional Development Fund) for investments in infrastructure and SMEs  ESF (European Social Fund) for training of the labour force  EAGGF (European Agricultural Guarantee and Guidance Fund) for promotion of agricultural and rural development  FIFG (Financial Instrument for Fisheries Guidance) for the development and reconstruction of areas dependent on fisheries b) European Regional Development Fund c) Cohesion Fund d) European Social Fund e) European Agriculture Fund for Rural Development f) European Maritime and Fisheries Fund g) LIFE h) Horizon 2020 i) COSME j) Creative Europe Programme k) ERASMUS l) Employment and Social Innovation [EASI] 2) Department of Culture, Media and Sport [DCMS]  Funding VisitEngland o Alongside the private sector, we fund VisitEngland to run marketing campaigns that encourage people living in the UK to take their holidays in England (known as 'domestic tourism'). o With the help of VisitEngland campaigns, we want to increase the proportion of UK residents choosing to holiday in England to match those who holiday abroad.  Funding VisitBritain o Alongside the private sector, we are funding a £100 million campaign byVisitBritain to encourage international tourism. The GREATBritain image campaign has already provided more than £22 million to VisitBritain. o Together, we estimate both campaigns will bring 4.6 million extra visitors to Britain, £2.2 billion more spending in our economy and over 60,000 new jobs between 2011 and 2015.  Promoting the UK tourism industry o We work with the UK tourism industry to make it easier for it to grow by participating in international trade events and forums, advising it on ways to raise standards, and reviewing rules and regulations affecting the industry.  Ministers regularly meet with industry figures, host tourism roundtable meetings and go on regional visits, all with the aim of making better policy that helps the tourism industry to grow.  DCMS has also been helping tourism grow by: o making £1.7 million funding available to People 1st to provide 500 new apprenticeship places in the tourism industry and help create 15,000 jobs o simplifying the visa application process, publishing visa application guidance in 6 languages in 2011, setting up new online visa application forms and making it easier for tourists from China to apply for visas to travel to the UK o making 80 recommendations to change or reduce regulations, including 60 regulations in hospitality, food and drink, as part of the government's Red Tape Challenge 3) National Lottery Commission [through its six distributors] a. the Arts Council of England, b. the Sport England Lottery Fund, c. the Heritage Lottery Fund, d. the Millennium Commission, e. the National Lottery Charities Board and f. the New Opportunities Fund. The most likely source of grants for tourism-related businesses are: The Heritage Lottery Fund is able to make grants to conserve privately-owned property but applicants must prove that there is a public benefit. The Sport England Lottery Fund gives grants of over £5,000 to non-profit making organisations for the development of sporting facilities which increase the number of people involved in sport. The New Opportunities Fund is responsible for distributing grants for projects relating to the environment, including £125 million for green spaces and sustainable communities. This programme is to be launched early in 2000. Part of every pound spent on National Lottery tickets goes directly to good causes for the benefit of communities across the UK. The money is allocated to good causes in the following way: i. arts: 20% ii. charities, health, education, environment: 40% iii. heritage: 20% iv. sports: 20%  Heritage Lottery Fund The national lottery, and with it lottery funding for good causes like heritage, the arts, sport and charities – was established in 1994. Responsibility for the UK-wide distribution of National Lottery proceeds allocated to heritage was given to the Trustees of the National Heritage Memorial Fund (NHMF). The Lottery-distribution arm of NHMF became known as the Heritage Lottery Fund (HLF). Today the Heritage Lottery Fund is a non-departmental public body accountable to Parliament via the Department for Culture, Media and Sport (DCMS). This means that, although the fund is not a government department, the Secretary of State for Culture, Media and Sport issues financial and policy instructions to it, and the fund reports to Parliament through the department. Decisions about individual applications and policies are entirely independent of the Government. i. Largest dedicated funder of heritage in the UK since 1994 ii. Leading advocate for the value of heritage iii. Supporting the full breadth of heritage iv. £375million to invest each year v. Offices across the UK vi. Grants from £3,000 Heritage is really wide-ranging. The Heritage Lottery Fund supports all kinds of projects, as long as they make a lasting difference for heritage, people and communities. These include: i. Buildings and monuments ii. Cultures and memories iii. Community heritage iv. Land and natural heritage v. Museums, libraries and archives vi. Industrial, maritime and transport 4) Country-specific Funds a. Northern Ireland i. Arts Council of Northern Ireland ii. Big Lottery Fund iii. Community Foundation iv. Community Relations Council v. Northern Tourism Board [NITB] http://www.nitb.com/Home.aspx  Capital Development Funding Support  Events Funding  Tourism innovation fund  Tourist Accommodation Business Support http://www.nitb.com/BusinessSupport/FundingOpportunities/OtherFundingBodies.aspx Private charities: Carlson Family Foundation 1) Useful websites: 1) http://www.welcomeurope.com/list-european-funds.html 2) http://www.hlf.org.uk/looking-funding/what-we-fund 3) https://www.gov.uk/government/organisations/department-for-culture-media-sport 4) http://www.hlf.org.uk/about-us/our-history References Texts: 1) Hinka, R. (2007) Budgeting Approaches and Shortcomings. Norderstedt: GRIN Verlag 2) Mash, C. (2009) Mastering Financial Management: A Step-by-Step Guide to Strategies. Financial Times Series. Harlow: Pearson Education 3) Stewart, B. (2007) Sport Funding and Finance – Sport Management Series Routledge 4) Weetman, P. (2006) Financial and Management Accounting – An Introduction 4th ed. Financial Times Series. Harlow: Pearson Education Websites: 5) http://www.dineshbakshi.com/igcse-gcse-economics/private-firm-as-producer-and-employer/revision-notes/1298-types-of-cost 6) https://www.e-conomic.co.uk/accountingsystem/glossary/balance-sheet 7) http://www.businessdictionary.com/definition/statement-of-owners-equity.html 8) http://media.unwto.org/en/content/understanding-tourism-basic-glossary 9) https://s3-eu-west-1.amazonaws.com/staticunwto/Statistics/Glossary+of+terms.pdf 10) http://www.worldbank.org/en/about 11) http://www.readyratios.com/reference/profitability/return_on_net_assets_rona.html 12) http://www.accountingformanagement.org/classification-of-financial-ratios/