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Importance of Finance and Funding in organization Sample

9061 Downloads1 I Published: 23 May ,2017

Introduction to Finance And Funding

Finance And Funding play an important role in the success organization. In order to achieve success business entity needs to manage financial resources in the organization . The aim of present report is to explain the areas of finance such as costs, volume, and profit, management accounting information, and sources and distribution of funding in respect with travel and tourism industry (Stolowy and Lebas, 2006). In this report, the use of management information and its role in decision making have been explained. Ratio analysis have been conducted to find out the financial position of company . Further the distributions of funding for public and non-public travel & tourism development have been conducted. Thomas Cook is the hospitality has been selected to access the role of finance and funding.

Importance of costs and volume

Prior to understand the importance of cost and profit, it is important to understand different type of cost as it helps in access the financial management of Thomas Cook. Following points presents types of costs:

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Direct costs: All the cost that are directly related to production are called as direct cost. it includes materials, labor and other direct expenditures. Without having such cost the manufacturing process is not possible. Hence, it can be said that human resources and materials that are used in manufacturing process are called as direct cost of the company(Shapiro,2008).

Indirect costs: Indirect cost is the cost that is not directly related to the manufacturing process. Such cost includes administration, personnel and security costs. hence all the factory cost are referred as indirect cost.

Indirect costs: Indirect cost is the cost that is not directly related to the manufacturing process. Such cost includes administration, personnel and security costs. hence all the factory cost are referred as indirect cost.

Fixed costs: All kind of expenses that do not change with the level of production are called as fixed cost. This cost is to be incurred on production of even a single unit. hence all the cost that are to be paid independent for any business activity are indirect cost.

Variable costs: The expenses that changes as per manufacturing level are referred as variable cost. In other words the cost that depends on the production volume is a variable cost. it changes as per number of units. In case the organization is producing 100 units and 1000units then variable cost for both will different (Vandyke, 2006.)t. There are variable cost such as advertising, insurance and office supplies etc.

Allocation of costs

The major aim of allocation of cost is to identify, aggregate and access the cost as per cost objectives. In order to calculate the cost per unit cost of production it is necessary to divide the cost in all the departments. With the help of allocation of cost the organization can easily set the prices of products and services. In service industry such a tourism it is very difficult to assess the price of service offered(Weil, 2012). In the present scenario, the organization is facing intense competition so it became important to offer services at competitive prices. In this regard it is mandatory to understand the concept of costing so that the expenses can be reduced or controlled. While using the various costing methods such as absorptions costing, activity based costing etc. it can allocate the expenses to each activity. All this things will help business entity in accessing cost per unit and making effective pricing decision. Hence customers can be attracted and market share can be increased.

Break even analysis

Break even analysis is the method for accessing the situation of no profit and no loss. This is considered as the best suitable method in which level of sales over net income can be easily calculated(Shapiro,2008). In other words, it is the point where net revenues are equal to total variable plus total fixed. At this point comes to the equal of fixed cost. Following example presents calculation of net present value .

Examples

Variable Cost per Unit $7
Total Fixed Cost; $9,000
We have,
p = $15
v = $7, and
FC = $9,000
The alternative formula to access the values breakeven point in sales units is
Breakeven Point in Sales Units (x)
= 9,000 ÷ (15 − 7)
= 9,000 ÷ 8
= 1,125 units
Break-even Point in Sales Dollars = $15 × 1,125 = $16,875

For Thomas Cook, it is important to calculate the break-even point in order to access the level of sales to cover fixed and variable cost. Using this technique, owner can manage the expenses and can find out the ways to increase the sales (Stolowy and Lebas). In order to generate the sales the volume of production can be changed, in this way business entity can generate higher profits and can make pricing decisions. In competitive era, it is the best method to calculate the identify of production to have cost efficiencies.

Economies of scale

Economies of scale are referred as cost advantage for the manufacturing organization. It can be achieve through reducing cost and increasing profits. In service industry it can be achieved through increasing level of services. It represents the relationship between quantity produced and cost earned. In this way it can be said that by increasing production volume the benefits of cost reduction can be achieved. The cost can be separated among the large number of units. As the cost shared over a larger number of goods it reduced the burden from the organization. Economies of scales help in decreasing the variable cost per unit and increase the operational efficiencies and synergies(Vandyck, 2006). With the help of increasing production level economies of scale can be achieved with will help in attracting more and more profits for the organization. In this case the organization has to increase the production level.

Dis-economies of scale

Economics of scale cannot be achieve in long run but to achieve this the organization have to take various initiatives. While increasing the output the marginal cost is also to be achieved. Following are the reasons for achieving diseconomies of scale:

If organization focuses on same level of production it cannot achieve economies of scale. further it cannot manufacture the same volume of production for every time. Let's have an example if company wants to produce product A and B together and product A has some level of diseconomies of scale than it can affect the production of product B.

In case the volume of production increases the cost of transporting will also increase. in this matter the organization can have diseconomies of scale. Let's have an example: if company has large plant to produce higher volume located in one location. if company produces more goods than it has to pay shipping cost.

Cost plus pricing

By the use of this method the pricing decision can be taken. Cost plus pricing help in setting the price as per addition amount of profits in cost of products and services(Weil, 2012).

Absorption costing

Absorption costing is the technique that is based on computation of fixed and variable costs. Both the cost can be generated at the time of production of products and services .This is the simple and traditional method for allocating the cost and valuation of for products at different level.

Marginal costing

The cost that increases with the level of increment production volume is called as Marginal costing. It is used to access the proper costing of services in tourism industry. At the time of increased quantity the cost increases. it is useful in assessing cost of producing one extra unit and price of the products and services. it is used to gain innovative and competitive situation in business operations(Friedlob, and Schleifer 2003).

Factors influencing profit

Every organization conducts business to increase profitability and to gain financial return or reward. For this it have to take major risk. Following points presents the factors that influence profits of the Thomas Cook.

Seasonal variations: seasonal variation can impact the profitability and revenues of company. The demand of products of Thomas Cook can be accessed.

Political environment: There may be various types of political parties that decide future of this sector

Economic environment: affect the profitability as it crisis the people may less tread to use such services.

Current trends also influence the business operations of company and its competition. The trend of the market can be changes in very short time period.

Types of management accounting information

Management accounting is one of the important fields of study and has significant implementation in organizations of present world. The management accounting deals with various financial concepts such as creating budgets, analyzing variances and allocating cost. It is essential for management of the organization to develop deep understanding of various accounting concepts and their practical implications (Palmer, 2012). It is through adoption of appropriate management accounting techniques that the business unit is able to achieve its objectives. Thomas cook can take help of management accounting so as to satisfy information needs of various stakeholders. Moreover, the information provided through accounts helps in planning, formulating strategies and adopting strict control mechanism. The various sources of information that assists in satisfying information needs through implication of management accounting is described underneath in detail.

Financial statements: The financial statements are considered to provide varied range of financial information such as information related to business profitability, stability and liquidity position. It is through financial statements that the stakeholders re able to judge efficiency of business operations (Shapiro, 2008). Moreover, the position of business unit and its possessions are ascertained by way of financial statements. It can be said that the financial statements are highly significant for satisfying information needs of various stakeholders.

Cost allocation reports: It is through cost allocation report that the business unit is able to provide reports related to utilization of resources. The organization should ensure effective utilization of resources. It is through cost allocation reports that the business unit is able to provide information related to various costs involved in operations. Henceforth, it can be said that the cost allocation reports are highly valuable and will result in satisfying information needs of different stakeholders.

Budgets: Budgets are created for the purpose of setting benchmarks and targets. It is through budget that appropriate financial plan are created. Moreover, the budgets help in development of financial plan. It is through budget that the organization is able to ascertain inflow and outflow of cash (Shim and Siegel, 2008). The budgeted figures help in creating target and adopting strict control and monitoring mechanism. It can be said that management can create plan and benchmarks through budget and also helps in analyzing variances. It is through budgets that management is able to satisfy information needs of stakeholders related to future plan of the business. It helps in understanding future business strategies and plan to manage funds and financial resources in future.

Use of management accounting information

The financial and accounting information can be accessed through annual reports of financial investment. The following points represents the use of accounting information in decision making process.

Cost analysis: in order to analysis the cost and to make decide what to sell and how to sell, the accounting tools are crucial. In addition to that, the decision regarding price of services and closing of operations can be taken. It also helps in comparing the cost and available alternatives to reduce it(Cafferky, 2010).

Make or buy decisions: The financial information such as break even points helps in taking decision whether to buy the product from outside or to make it. The decision over project can be taking using capital budgeting or investment appraisal techniques(Dayananda,2002).

Preparation of budgets: Using information of finance the effective future plans, strategies and policies can be made. For this, budget can be used to forecast the cost the operations.

Forecasting: In order maker future decisions and to access the future courses of actions forecasting techniques can be used that are the part of financial tools. By using this techniques the organization can make future decisions . Time series analysis can be used to forecast the courses of actions(Banerjee, 2006).

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Investment decisions: Based of financial information various investment decisions can be made. Further it helps in making growth and expansion decision.

Sources and distribution of funding

Thomas cook being a publically listed company can acquire funds through various sources of finance as mentioned below.

Equity financing: The business unit can acquire funds through acquisition of equity capital. The financing option helps in meeting demand of funds for long-run and of large amount of funds (Jones and McCaffery, 2004). Thomas cook can acquire funds through equity capital in case of funding long term requirement of the business unit.

Debt financing: The business unit can also meet its financial requirement through issue of denatures. It is the costliest means of financing and therefore is rarely preferred by the organization. The business unit can raise funds through debentures when there is a requirement of large amount of funds for long duration. The business unit can evaluate its capital structure for the purpose of deciding portion of debt and equity.

Retained earnings: It is the easiest way of financing that is available at the lowest cost. It can be acquired through internal sources of finances (Baker and Riddick, 2013). The organization can acquire funds through retained earnings in situations of uncertainties and to meet short term requirements.

Bank loan: It is considered to be the mostly preferred source of financing since it is able to meet all kinds of financial requirement. The business unit can evaluate its financial requirement that is whether required for short, long or medium term. Thereafter, type of loans can be selected. Thomas cook can raise fund through bank loan due to high credit worthiness and business profitability.

Conclusion

The report presented herewith is said to provide valuable insights related to financial analysis and it's planning. It is essential for the business unit to effectively plan its financial resources so as to achieve success in future. The origination can judge its performance and profitability through ratio analysis. Moreover, it is through adoption of various financial techniques that the business unit is able to decide appropriate course of action for future. It can be therefore said that the organization should adopt financial techniques for the purpose of formulating strategies that are viable on financial grounds.

References

  • Baker, H. K. and Riddick, L. A., 2013. International Finance. Oxford University Press.
  • Banerjee, B., 2006. Cost Accounting: Theory and Practice. PHI Learning Pvt. Ltd.
  • Cafferky, M., 2010. Breakeven Analysis. Business Expert Press.
  • Correia, C. and Flynn, D., 2012. Financial Management. Business Enterprises.
  • Dayananda, D.,2002. Capital Budgeting: Financial Appraisal of Investment Projects. Cambridge University Press.
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