Financial Advisory For Travel And Tourism Industry Accounting Essay
Financial advisor examines and evaluates financial and non-financial performance of hotel with another company including activity, liquidity and financing ratios. This study also examines basic CVP model with various pricing methods to price the products and services of hotel with the demonstration of CVP model. Assessing and evaluating the management accounting information as their decision making tool and then the identification and analysis of various sources in the distribution of funds associated with frequent capital investment to make company more competitive in the travel and tourism industry.
Financial advisory for travel and tourism industry is much important because it paves the path for successful growth for any company working in this business line. Hotel industry is expanding very rapidly in United Kingdom. When the management of a company wants to expand its operations then it take the services of a financial advisor which has now become the need of every company not only the travel and tourism industry alone. Financial advisor examines the current financial performance of the company with a detailed analysis of its financial accounts activity, costs and volume of profits, effective use of accounting information as a decision making tool and sources and distribution of funding. The services of financial advisor are very essential for financial matters and to make the necessary recommendations how to make the best utilization of their available financial resources.
Financial advisor always searches for new and challenging market opportunities and they often advice the clients on the products and services and making sure they become aware about their needs and how they can use products and services to meet their needs. These advisors specialize in their respective fields along with specific products and services. Similarly, advisors for travel and tourism are also well aware about this industry and how to examine their financial status and how to identify and promote new markets to increase the chain of services in the tourism industry. This study is based on the services of a financial advisor to successful evaluate and examine the financial status of the company and then take necessary steps with successful expansion.
The typical role of responsibilities of a financial advisor is based on following responsibilities including:
Investigating and interpreting the financial account associated with the travel and tourism company in UK.
Enhancing the importance of costs, volume and their profits in the travel and tourism industry with decision making ability.
Examining how to effectively use the accounts information as the best decision making tool for travel and tourism organization.
Making necessary investigation about the sources and distribution of funding for public and non-public tourism development.
Financial advisor in travel and tourism industry also contacts clients and setup meetings at their offices, client’s homes or business premises according to the client’s acceptance.
They also conduct very detailed reviews of their financial conditions with current provisions.
They research the marketplace and give all the necessary information to their clients about their travel and tourism related products and services.
Financial advisors design financial strategies and then they strive hard to implement them.
They also assist clients to make them well informed about making their decisions about their products and services.
They promote and develop financial products and then sell them to increase the revenues of their company in travel and tourism industry.
Financial advisors negotiate with product suppliers with best possible rates.
They liaison with other financial services providers and their company head offices.
Successful financial advisors always remain up to date with the financial products and legislation in the areas of travel and tourism industry.
Financial advisors always meet the regulatory aspects of the role such as costs of the services which are offered to the clients in the travel and tourism industry including hotels and restaurants arrangements for foreign clients, arranging their meals and taking care of their comfort in ideal way.
Discussions and Analysis
In this section, the study is focused on how financial advisor can meet an organization needs when it wants rapid expansion in travel and tourism industry operating in UK. The company is a well known UK hotels and want to increase their operations by opening a chain of world known pubs and restaurants across the city of London. This study highlights all the different areas according to the requirements of in different sections by answering some very specific and interrelated questions one by one. In discussions and analysis section all these questions are explained to make this expansion justified and successful according to the need of this hotel and restaurants industry.
Analyzing and comparing financial and non-financial performance of company in travel and tourism industry with another company in the same industry with company’s performance, activity, financing and liquidity ratios?
Financial advisor in tourism industry analyze the financial performance of their hotel company with other company on the basis of financial ratios. They are the best indicators used to measure the financial performance of any company in tourism industry or other manufacturing company. They are used to measure the company’s performance in terms of activity, financing and liquidity ratios. Financial ratios are used by various users to analyze the relevant data with meaningful information for their decision making about this industry. Hitchings (1999) has examined financial ratios as more sensitive and very valuable in the credit assessment of a hotel or chain of hotels and restaurants to predict their ability of their borrower how they meet with their debt obligations. They give necessary help to hospitality managers to evaluate the appropriate strategies to identify the problematic areas by giving them much attention and care. Schmidgall (1989) further presented that financial ratios are very meaningful information in the financial statements which are most widely used by financial advisors and hospitality managers. Financial advisors has examined that hotels generally had a higher range of debt and the use of financial ratios to investigate their financial performance has become much significant.
For measuring these ratios some specific formulas are used by financial advisors to measure the existing performance of their responsible areas of hotels with any other hotel in the region as the current company wants to expand the chain the hotels in London, UK. Firstly, activity ratios are measured by dividing the cost of goods sold with their average inventories for evaluating the inventory turnover. Then the assets turnover and fixed assets turnover of their responsible company and the other company are measured by using the formulas of the sales of their hotels with the sales of other hotel divided by their average fixed assets and which shows the best and promising results is preferred and the next steps are taken according to the findings. Similarly, liquidity ratios are much important which are used to examine the financial performance of your responsible company with other company in the same industry. You can measure and analyze them by dividing the current assets of your company and the current assets of the company with which you are comparing your hotel liquidity by dividing them with their current liabilities which will give you the financial performance evaluation in the best way. Then you can further measure the quick ratios of both companies by dividing the sum of cash and accounts receivables with their current liabilities, accounts receivable turnover by dividing the sales with average accounts receivables and similarly, financial advisors can measure and analyze operating cash flow to current liabilities by dividing their operating cash flow with their average current liabilities. Then the profitability ratios are examined by doing the analysis work on return on assets, return on equity and net profit margins and they are measured by using the financial formulas of income before extraordinary items by dividing them with their total assets and then multiplying them with one hundred. The same measurement tool is used in net profit margin by dividing the income before extraordinary items dividing them with sales and multiplying by one hundred (Dong Jin Kim, 2006, pp. 99-100).
The other main areas which financial advisor examines are the non-financial performance indicators which have become as important as the accounting measures such as earning, return on investment and return on assets in rewarding their managers. But the evaluation and analysis of non-performance indicators are much more important including their services standards as compared with other hotels, their customer’s satisfaction on their hospitality services with best accommodation, sitting and serving with best food facilities. The quality of food and staffing services are very important when a financial advisors examines the overall performance because if the facilities of services, staffing, and food are not up to the mark then the industry can never grow and compete with their competitors. It is also evaluated that for Chief Executive Officers of publically traded firms, the stock prices also play very vital role in examining their compensation contracts. The rationale of using stock prices covers both the financial and non-financial performance measures for any organization (Antonio Davila, 2001, p.1).
Using basic CVP model, examining various pricing methods to price the products or services of the hotel, demonstration of all calculations of CVP model by presenting them graphically.
Using a basic CVP model, prices of the products and services which are used in hotel industry are examined. These prices are also presented graphically and explain in which direction the company profit is going on. It gives a best direction to financial advisor when making its plan about different pricing strategies about hotels industry relevant food products and accommodation and servicing products. Cost-volume-profit which is known as CVP model analyzes the point where the total revenues of the hotel equal its total costs including both the fixed and variable costs.
Financial advisor makes the CVP analysis on the following assumptions including:
At the first level, it is assumed that both the revenues and costs of the hotel industry are linear in the range of activity.
Costs can be classified both fixed and variable.
Change in activity can affect the costs.
All units which are produced are sold without an ending finished goods inventory.
The sales mix is assumed to remain mixed when a company sells more volume of products or services in the hotel industry.
There are three methods which are most commonly used in the CVP model when pricing of products and services are examined. CVP methods are based on equation method, contribution margin method and the graphical presentation method. This study examines these methods one by one to explain how they work in pricing techniques when used in hotels industry.
Equation method examines operating income by subtracting revenues from fixed costs and variable costs. Out of which revenues are equal to selling price multiplied by quantity sold per unit and variable costs are equal to variable cost per unit multiplied by quantity of units sold. In equation form it is expressed as:
(Selling price*quantity of units sold) – (per unit variable cost*unit of quantity sold) – Fixed costs is equivalent to Operating Income of the under analysis hotels unit.
This study supposes that selling price is $500, number of units sold are 10, variable cost per unit is around $400 and fixed cost is $3000, then it equation form it is presented as:
($500*10) – ($400*10) – $3000 = $5000 – $4000 – $3000 = $1000 – $3000 = -$2000 …………………… (1)
By resolving equation 1 for quantity, which denote the output units must be sold are presented by Q,
$500*Q – $400*Q – $3000 = $0
$100*Q = $3000 → Q = $3000/$100 = 30 Units
It concludes if the hotel where financial advisor is appointed uses less than 30 units then it will suffer a loss and more than 30 or 30 units will give favorable profits to the hotel or chain of hotels in London.
Similarly, breakeven point is calculated to show the favorable position to the hotel to the financial advisor by showing;
The study calculates that, Breakeven revenues = breakeven units * selling price
Breakeven revenues = 30 units – $500 = $15000
Breakeven revenues = $15000
Graphical Presentation of Breakeven Point:
Graphical representation of CVP model clearly indicate that at 30 units sold the hotel industry will have the favorable position and after then it will get profits for every additional unit sold. Otherwise the company will suffer with losses and the financial advisor should concentrate the same arrangements for making their profits maximization and making sure the successful expansion of chain of hotels in UK.
Evaluation of Management accounting information as decision making tool to preparing budgeting and forecasting the revenues and costs on the hotel.
This section of the study is very important in which financial advisor examines what are the basic assumptions for getting maximum success in expansions with best preparations for budgeting and forecasting the revenues and costs of a hotel under study. Five categories which are assumed are examined as below including:
Basic Goals or Objectives
The role management has to play
The nature of decision making
The important role played by accounting department
Nature of accounting information
Basic Goals or Objectives: The basic goals or main objectives of a hotel in UK are to maximize its net income which has already been examined in the last section. The other goals include the maximization of sales with new chain of hotels, return on investment, earning per share unit and management accounting never need specific type of goals. But at all times, management will be focused to achieve the maximum satisfaction out of their level of profits achieved at every level in hotel industry.
The Role Management has to play: The success of every business depends on the skills and level of efficiency of role management plays and when financial advisor is offered with such a role then its responsibility becomes much essential and need of the time. The business can never grow at the mercy of market forces but its management has to play a very significant role in its vital success. Planning and control techniques and tools used by top level management include business budgeting, cost-volume-profit analysis, the analysis of incremental, budgeting on flexible basis, segment contributing reporting, the models of inventory and the models of capital budgeting. The management must be highly focused on all these areas to get the favorable position for the success of hotel unit under study then the expansion can be successful. Financial advisor must make the best use of flexible budgeting and the variance analysis.
The nature of decision-making: Decision making is very critical for the success of any organization and they are classified into marketing, production, and finance with strategic and tactical decision making at long term and short term basis. The main objective of the decision making is to achieve the optimum level of best utilization of available scarce resources and the business capital for the hotel unit.
Assumption of accounting department: Accounting department must analyze data meaningfully. They must distinguish between variable costs and fixed costs. Management must be provided with financial statements and the historical records of accounting systems. The management accounting must also provide other types of data for enhancing the decision making for the financial advisor including estimates, forecasts, future data and standards. Identification type of technique will be required for every managerial technique.
Implications of basic assumptions
These assumptions are implicated with three types of decisions including marketing, production and the financial areas for their decision making and they identify the decisions under the specific category. In marketing pricing, sales forecasting, number of people which should be inducted in the sales team, compensation of sales people, number of products, advertising costs, and credit are examined. The production department’s decision making is associated with the areas of units of equipment, the factory worker’s wages, overtimes, equipment replacements, the scale of inventory, size of orders and the supplies and assuring the supplies in time. The financial sector of decision making is associated with issuance of bonds, stock issuance, bank loans, and retirement of bonds, dividends, and the investment securities for the successful decision making on the further expansions.
Identification and analysis of various sources and distribution of funds associated with frequent capital investment to make the company more competitive in the tourism industry.
There are generally three main areas of funding for the travel and tourism industry and on this basis their expansion is possible and these areas of funding and capital investment are dependent on three areas including debt funding, equity funding, and government funding. All these areas are explained in detailed way to examine how they are significant for any business and their successful expansion.
Debt funding is associated with loans and other investment which are taken by a company (travel and Tourism Company) from banks, credit unions and other external funding sources such as suppliers and non-conventional private leaders. These loans are usually arranged in a repayment scheduling and on this rescheduling the company in travel and tourism industry can successfully meet its short-term or long-term financing obligations. The financial advisor can communicate with the representatives of these banks, credit unions and other financing resources and some banks even have hospitality and tourism lending experts with whom the advisor can meet. There are two types of loans that a company in hotels can take from financial institutions including operating loans and terms based loans (Tourism, pp. 7).
Operating loans are associated with short terms financial obligations of the hotels or restaurants or any company needs to meet their day-to-day operational activities including the wages of their staff, inventory purchasing, raw materials and accounts receivables.
Term loans are usually associated with long term capital investment or acquisitions and they are interrelated with scheduling loan repayment period. The assets of the hotels and restaurants are financed along with personal guarantees with business owners from any other assets which are owned by business including land, building, equipment and the leasehold improvements.
Equity funding is the personal money of the owner of a company in hotels or they can share their business with other shareholders of the corporations by using the share of their money. These funds have no claim on the assets of the company and these assets can be used as collateral for any type of debt financing in the future. These are the personal money of the business owner and the financial advisor can examine how much money can be owner of the business afford from their savings, inheritance, or from their personal borrowings from the financial institutions, relatives, friends or their other business associates (Tourism, pp. 9).
Sources of Equity Funding
Sources of Equity funding are based on founder capital, family and friends, partner and from investors. All these people or shareholders share their part in equity funding by sharing their money with the main owner of the company by joining as a partnership or joint venture or sharing their investment part to play an active role in the travel and tourism industry and making sure their growth and successful expansion in the travel and tourism industry in the outskirts of London, UK.
These funding are usually offered by government agency in the form of grant or loan in association with their specific program associated with government funding. Most of these programs have starting and ending date and government funding is associated with profit oriented and non-profit oriented businesses, organizations, and the communities in the travel and tourism investment industry (Alberta Tourism, pp. 10).