PM101 Business Economics Level 4

Task 1

1.1 Explaining the importance of cost and volume in financial management in the context of Carnival Corporation & Plc

Financial management is highly concerned with the effective and efficient management of funds which in turn makes contribution in the accomplishment of organizational objectives. Hence, cost, volume and profit analysis is highly significant which ensures effectual financial management in the context of CC & Plc.

Cost: It includes expenses which business unit has incurred for offering attractive tour packages and accommodation services to the customers. In the context of travel & tourism sector, cost assessment is highly significant for setting suitable price of the services (Titman, Keown and Martin, 2017). Manager can distinguish cost under two different categories such as direct and indirect.

• Direct expenses: This is also known as prime cost which in turn directly associated with offering services to the customers. Examples of direct expenses include material and labor etc. In the context of travel & tourism sector firms usually incur only indirect expenses.
• Indirect expenses: Such expenses can further be categorized in terms of fixed and variable which firm has to incur for ensuring smooth functioning of operations (Bekaert and Hodrick, 2017). Fixed expenses include salaries of personnel, insurance expenses etc which remains the same at each level of offerings. On the other side, variable cost changes in accordance with the offerings such as commission charges, electricity expenses etc.

Volume and profit: This is the most significant factor which ensures effectual use of financial resources. Moreover, when serves or offer services to the large number of people then it may result into high economies of scale (Tan and et.al., 2017). Hence, high economies positively contribute in cost reduction and thereby enhances profit margin (Kiu and et.al., 2017). By using BEP tool CC & plc can assess the number of visitors which it needs to serve for attaining no profit and loss. Further, it also helps in ascertaining the number of visitors which need to be served for the attainment of desired level of profit margin.

1.2 Analyzing different pricing methods which can be used by Carnival Corporation & Plc

Price of the products or services include both unit cost and profit margin which firm wishes to earn from each customer. There are several types of pricing methods and strategies which can be used by CC & Plc such as:

• Cost-plus pricing: Under such method, emphasis is placed on the determination of unit cost by dividing total expenses from the number of services or customer offerings. Thereafter, mark-up, profit margin that firm wants to attain by offering services, is added in the cost per unit. Hence, it is one of the most effectual ways which in turn enables firm to get the desired level of profit margin.
• Marginal costing: Using marginal costing tool, CC & Plc can set suitable prices of the offerings. Considering this, firm can assess change which takes place in unit cost on one additional service offering (Barr, 2018). It assists company in identifying both unit cost and profit margin.
• Penetration pricing: This pricing method or strategy lays high level of emphasis on setting lower prices of the offerings at initial level. Once, satisfaction and loyalty has built among the customers thereafter by setting higher prices CC & Plc can get the desired level of outcome or success.
• Competitive pricing: In accordance with such method, company sets prices by taking into account the competitors strategies and framework (Hsu, 2017). Moreover, now customers give high level of preference to the firm which offers quality services at suitable prices.

1.3 Analyzing factors which have influence on the profit margin of the company

In the context of CC & Plc, the main motive of the company is to earn enough profit margin by offering quality and satisfactorily services to the customers. Moreover, without generating high profit concerned travel firm would not become able to invest money in R&D and other innovative activities (Veal, 2017). Thus, at the time of developing plan CC & Plc should consider factors which have influence on profit margin such as:

• Current trends: Now, needs, wants and expectation level of customers have increased significantly over the past time frames. Thus, if business unit fails to meet the expectation level of customers then it results into decline in revenue and profit margin.
• Seasonal variations: This is another main factor which has high and significant impact on firm’s profitability. During non- peak / holiday season cruise brands like CC & Plc offers specific discounts to the customers. Hence, seasonal aspects closely impact profit margin of the firm (Burtonshaw-Gunn, 2017).
• Bad debt: CC & Plc’s operations are also linked with the tour companies which offer attractive travel packages to the customers. Hence, CC & Plc faces bad debt or payment default risk in relation to such tour operators. This in turn places direct impact on cash flow and profitability aspect of firm.
• Skills and capabilities of staff: Competent staff or personnel are to key to success in service sector specifically travel & tourism (Sheehan, Grant and Garavan, 2018). Thus, if CC& Plc fails to employ and retain skilled personnel then it negatively influences customers’ satisfaction and meanwhile both sales as well as profit margin.

Task 3

3.1 Interpreting financial statements of Dalata Hotel group plc for assessing financial position and performance

On the basis of cited case situation, for assessing financial performance and position of Dalata hotel group plc ratio analysis tool has been used. The rationale behind undertaking such tool is that it helps in evaluating and summarizing financial statements from several perspectives such as profitability, liquidity, solvency etc (Financial Ratio Analysis, 2017).

Profitability ratios

(Source: Annual report of Dalata Hotel Group Plc 2017, n.d.)

Referring the results of ratio analysis it can be depicted that both GPR and NPR of Dalata hotel group was increased over the time frame. In FY, net profit margin of hotel group plc was 12%, whereas at the end of 2017 it accounted for 19.5%. Increasing sales trend presents that customers prefer to experience services which are offered by Dalata hotel group Plc. Further, high profit margin also entails that business unit has exerted effectual control on both direct and indirect expenses level. Thus, considering overall trend it can be depicted that profitability position of hotel unit is good.

Liquidity ratios

The above depicted table presents that liquidity position of Dalata hotel group was not in 2017. Moreover, current ratio of hotel unit was declined from 1.46 to .46 at the end of 2017. Further, decreasing trend has identified in the quick ratio of Dalata Plc. On the basis of ideal measure current ratio of hotel unit must be 2:1. Further, as per standard quick ratio business unit must have 1 current asset except stock & prepaid expenses which can easily be converted into cash for meeting obligations. In against to 2016, liquidity aspect of Dalata Plc has deteriorated over the period. In addition to this, current ratio of the hotel unit was far from ideal ratio in 2017. Thus, for improving liquidity position focus needs to be placed on the maintenance of current assets such as cash, receivables etc.

Solvency ratio

Considering above table, it can be mentioned that debt-equity ratio of Dalata Plc declined from .43 to .23. In 2017, long-term debt level of firm declined from 265 to 242 GBP million respectively. It presents that business unit has repaid loan amount owe to it. Further, shareholders equity inclined from 620 to 737 in 2017. By taking into account the outcome of such evaluation it can be mentioned that, in 2017, solvency position of Dalata was good but not sound. Moreover, as per industry benchmark business unit should issue 2 equities in against to 1 debt. Thus, in the near future, while raising funds hotel unit should keep in mind such ideal measure which in turn helps in developing optimal capital structure.

Efficiency ratio

Efficiency ratio evaluation presents that fixed assets turnover ratio declined from.41 to .38 times. In contrast to this, total assets turnover ratio is showing increasing trend from .31 to .33 times. Such trend presents that Dalata Plc failed to make effectual use of fixed assets while carry out operations. Thus, hotel unit needs to lay focus on conducting training session and maintenance of fixed assets. This in turn helps in generating high turnover or revenue from the resources available to hotel unit.

In addition to this, inventory turnover ratio is showing increasing trend from 69.40 to 71.61 times. It indicates that inventory has sold and replaced by Dalata Plc more frequently. Considering this, it can be stated that stock management of the concerned hotel unit was good. However, payables period declined from 42.33 to 38.98 days. Thus, for ensuring effectual management of working capital Dalata should focus on approaching creditor which grants credit for long time period.

Conclusion

From the above report, it has been concluded that effectual financial management helps company in making prominent use of resources and getting high margin. It can be seen in the report high level of volume reduces cost and enhances profitability of Carnival Corporation & Plc. Further, it can be stated that competitive pricing strategy helps company in attracting more visitors or tourists. It can be summarized from the report that changing customer expectations and market trend has significant impact on the profit margin of Carnival Corporation. Along with this, it has been articulated that financial position of Dalata hotel group in terms of profitability and efficiency aspect has improved over the time frame. However, business unit needs to take effectual measure for improving liquidity and solvency position.

You may also like to read: 

• Sample on Managing Financial Resources

References

• Barr, M. J., 2018.Budgets and financial management in higher education. John Wiley & Sons.
• Bekaert, G. and Hodrick, R., 2017.International financial management. Cambridge University Press.
• Burtonshaw-Gunn, S. A., 2017.Risk and financial management in construction. Routledge.
• Hsu, P. P., 2017. Examination of Taiwan's travel and tourism market cycle through a two-period Markov regime-switching model.Tourism Management.63. pp.201-208.
• Kiu, M. S. and et.al., 2017. The roles, challenges & improvement of project manager in project financial management in building development in Penang, Malaysia.International Journal of Supply Chain Management (IJSCM).6(1). pp.238-245.
• Sheehan, M., Grant, K. and Garavan, T., 2018. Strategic talent management: a macro and micro analysis of current issues in hospitality and tourism.Worldwide Hospitality and Tourism Themes, (just-accepted). pp.00-00.
• Tan, S. H. and et.al., 2017. The impact of the dimensions of environmental performance on firm performance in travel and tourism industry.Journal of environmental management.203. pp.603-611.

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