Definition And Scope Essay Example Pdf - Free Essay Example

Sample details Pages: 10 Words: 3111 Downloads: 3 Date added: 2017/06/26 Category Finance Essay Type Research paper Did you like this example? Thomas Cook Group plc is one of the leading leisure travel groups in the world which offers wide variety of package to satisfy different needs generate from different market segment. Packages offered ranges from charter packages (two or more components of travel such as flights, hotels, transfers and representative services are bundled together), to independent travel management, and travel-related financial services (pre-paid foreign exchange, travel assurance and travel finances). The group manages its operations in 22 countries through six geographic operating divisions. According to the exhibit A, TCG shows a  £9.8b of revenue in FY11 where  £304m underlying the profit from operations. The main competitor for TCG is TUI Travel, which is another worlds leading leisure travel companies, with over 250 trusted brands. It competes head to head with TCG by providing similar services 2.0 Thomas Cook Financial and Non Financial Analysis 2.1 Financial Analysis 2.1.1 Analysis on Sales and Cost Graph 1 Table 1 above shows that there is a sales growth throughout the year but at the same time cost incurred has been increasing. Value for both cost and revenue from FY 2007 to FY2010 is relatively close (Graph 1). Financial situation was at the worst scenario where the total cost was even higher than the sales revenue generated. No gap between graph line for both sales revenue and cost indicating that TCG has a very minimum net profit margin. TCG failed to manage their cost effectively. Don’t waste time! Our writers will create an original "Definition And Scope Essay Example Pdf" essay for you Create order 2.1.2 Gross Profit Margin Gross Profit Margin (GPM) is a financial metric used to assess  a firms financial health by revealing the  proportion of money left over from revenues after accounting for the cost of goods sold (Steve, 1995). GPM for TCG was averagely at 23% and 24% and eventually fall to 22%. As sales revenue value is increasing and therefore, it could be the increment of cost of goods sold that leads to the downfall of gross profit margin at FY 2011. 2.1.3 Operating Profit Margin Table 5 Operating Profit Margin (OPM) indicates the effectiveness of a company in cost and expenses control associated with their normal business operations (Steve, 1995). In table 4, OPM has been dropping from FY 2007 to 2009 indicating failure for TCG in handling their overhead cost. TCG has made an adjustment on the proportion on overhead cost from 21.7% to 19.2% in FY 2011 which helps the company to slightly pick up in their operating profit margin. 2.1.4 Finance Cost Analysis Table 6 Table 6 shows that the interest cost has been increasing over the year and reaches its peak at 2009 and 2010 whereby the financial cost was  £0.018 every  £1 of sales. Financial cost has then reduced slightly in year 2011. 2.1.5 Tax on Sales Table 7 In table 7, income tax burden for TCG was relatively low from the FY 2007 to FY 2010. However, it has suddenly increased dramatically in year 2011. This could be one of the reasons that cause loss for the company. 2.1.6 Net Profit Margin Table 8 Net Profit Margin (NPM) is an indication on effectiveness in cost controlling and conversion of revenue into profit (Steve, 1995). TCG manages to earn a NPM of 2.38% initially at the FY 2007 but suffered from losses of 5.31% at FY2011. 2.1.7 Total Assets Turnover Table 9 Graph 2 Total assets turnover has an upward trend since 2007 to 2011 from 1.10 to 1.47. Hence it can be noticed that the sales level of TCG have improved with the utilization of the Assets. 2.1.8 Return on Assets Table 10 Return on assets indicates the profitability of a company in relative to its total assets (Steve, 1995). Table 10 shows that ROA for TCG has been decreasing and even dropped to the negative value. This indicates that the company is investing a high amount of capital into its production but receiving little income. 2.1.9 Financial Leverage *Note: Assuming that the total equity at the end of financial year 2006 is  £3,942m Table 11 In Table 11, financial leverage has been increasing throughout the financial years and this indicates that TCG falls at the risky side as they might face bankruptcy issue if they fail to repay their debt in the near future. 2.1.10 Return on Equity Table 12 In Table 12, return on equity has been declining throughout the financial year and even dropped to negative 29.6% at the FY 2011. According to DuPont Model analysis, we could further examine which part of the financial management resulted this (Atrill McLaney, 2011). First of all, looking into the net profit margin, the high total cost has leads to a downfall of NPM and negative at the FY 2011. Secondly, looking into the Total Assets Turnover, it shows an increment where TCG has improved in managing their Assets for generating sales. Lastly, looking into the financial leverage where there is an increment from 1.5 to 3.8 at the financial year. This indicates that the company has borrowed more money for the business and debt increased. Base on the analysis carried out, the decline of ROE of TCG is caused by two main reasons which are the increment of total cost and the large amount of debt borrowed. 2.2 Non Financial Analysis TCG has been in the market for ages and has built global umbrella brand for all the well known regional brands across geographies (refer to Exhibit D). This serves as a great strength that allows them to leverage better. Besides, TCG has a strong portfolio in other service category such as airlines, financial services and hotel which allow the group to cross sell their product and generate better revenue which eventually helps to increase the overall companys financial performance. Even though TCG is serving in 22 different countries, the revenue breakdown in appendix 3 shows that 55% of its revenue come from European market. This is identified as a very risky step as being over relying on this segment, the group is sensitive to the demand of this region. In addition, sovereign debt crisis in Euro zone has greatly affect the demand of TCG product as consumers become more reluctant in spending on travelling. This critical condition is predicted to be prolonged for quite some t ime and therefore, it is foreseeable that the turnover and profitability would fall under a negative development in the near future if TCG is still being overly dependent on the European market. As for the distribution channel, it is shown that TCG has established 799 of retail premises with  £2.5m of employees (appendix 8). Even though it is shown that the actual sales per employee are  £315,429 (appendix 4), the cost per employee inclusive with the rental as well as overhead cost should not be overlooked. The incremental of net profit is foreseeable with the switch of distribution channel to online distribution, which only contributes to 24.5% of the total sales in FY2011 (appendix 9) and highlighted the opportunity to growth, that allows redundant cost reduction. In addition to the reduction in cost, the switch of distribution channel is also essential as it helps TCG in preparing a better platform in serving the UK holiday market which is expected to generate  £22.7b n of sales in the near future, in FY 2015 (appendix E). As mentioned in the chairman statement, higher input cost such as fuel cost serves as a major threat in contributing another challenging year in the near future. Fuel price has been increasing rapidly after its decline in year 2007-2009 due to the recession. It is predicted that fuel cost would still continue to increase due to the high demand from china. Lowered sales revenue due to the lower demand could hardly covered the increment of fuel cost and eventually serve as a major threat to TCG. Company would face liquidity problem and sustained a negative working capital gap. . 4.0 Budgetary Control System According to the chairman, managers have been quite dissatisfied with their current traditional budgeting system which is based on previous year data, decisions, uncertain estimates and forecast (Drury, 2009). Despite the fact that traditional budgeting system provides a direction which can be used as a framework for planning and controlling the overall activity of the business, it is criticized on its failure in identifying the waste, incoming workloads and cost drivers. Critics also found out that it is very time consuming for the benefits to be achieve. In short, traditional budgeting practice does not seem to connect connected to the overall organizational strategy. Limitations of traditional budgeting give rise to many beyond budgeting techniques for instance, zero based budgeting. Zero Based Budgeting is one of the recommended options for TCG as it always assumes that the expenditures is always based on zero, is in contrast to the traditional budgeting system which assumes that the current years expenditure level is justifiable which may not be true. Zero based budgeting provides an efficient allocation of resources. It identifies and eliminates wastage and obsolete operations, detects inflated subjects and drives managers to find out cost effective ways to improve operations. But despite of all the benefits of it, there are also criticisms and drawback against it such as it may lead to micro management, it involves a huge amount of money and it may lead to a material shift in the use of resources. Another option which could be considered by the management is to implement flexible budgeting, a technique for budgeting based on the future variability of business volumes, which allows them to adjust accordingly toward the changing environment and economic factors. Despite the fact on its difficulties in associating with marginal analysis, it is one of the best control devices available to management as it is required to measure radical changes from n ormal operating levels. In addition to that, it provides management with real-time and offers much greater cost control over a business operation and makes it more competitive. This also targets more accurately where performance levels are falling below or meeting expectations. 5.0 Recommendation To decide whether to invest in to TCG, investor needs to look into the internal and external environment. Internally, financial information provided shown an incremental revenue throughout the financial year from 2007 to 2011 but majority of the key performance indicators such as ROE, NPM, ROA and other KPI are showing a downward trend. Financial leverage for TCG has been increasing throughout the financial years and this indicates that TCG falls at the risky side as they might face bankruptcy issue if they fail to repay their debt in the near future. Externally, global economic crisis is expected to prolong for 5 more years which would have a definite impact on travel industry where people have a general tendency to spend less and weakening pound further adds fuel to this. In short, analyzing the financial health of TCG indicating a clear lack in the way operations are managed currently and highlights room for improvement., as well as the macro environment of the industry which se rves as a non controllable factor, it is not encouraging for One-World Investment Consortium to invest in it. Profit maximization could be achieved via sales increment and cost reduction. In appendix B, it is seen that there is a great opportunity for independent growth in several areas such as city break, tailor made travel, flight only and hotel room in cities that TCG can explore by leveraging through their greatest strength, TCG brand. Appendix C further suggests the opportunities of growth by the introducing differentiated concepts allied with new product pipeline. Effective marketing strategy play an important role in introducing the right product to the right target market through the right distribution channel. For instance, identify the potential market by analyzing the TCG customer database and send them a customized email to introduce the promotion available. Vouchers and discount, which is only effective within certain period, could be included in the email as it help s in triggering customer interest. This benefited both customers and TCG as customer is satisfied with the great savings they had and TCG has obtained earlier sales. Cost reduction is another critical step that should be considered the result of the financial analysis shows that the high total cost is the key factor that results in the downward trend of NPM. Therefore, it is recommended for TCG to close down the non-profitable offline distribution retail and direct the market to online mode. This helps in reducing overhead cost such as rental, salary and other operating cost. Furthermore, due to the intense competition, HRM plays an essential role in ensuring retained employees to be trained with multi skilling capability and competence enough to be a source of the competitive advantage for TCG. Relationship with employees could not be overlooked as satisfied employees would helps in driving improved customer satisfaction by creating and fostering trust and relationship with cust omers. Therefore, it is recommended that TCG must ensure that employees need is met. Other than that, it is recommended for TCG to engage in a genuine B2B relationship with their suppliers as the cost is expected to be reduced when the organization has a deepening relationship with suppliers where margin premium is expected to improve. Zero based budgeting is recommended as it requires a programmes existence to be justified in each financial year, as opposed to simply basing budgeting decisions on a previous years allocation. It provides a systematic method of planning company financial resources. It may require an extensive amount of time and paper work. A combination of zero based budgets with traditional budgeting spreads the workload involved in justifying new budgets and is one possible method by which zero-based budgeting can be incorporated into current budgeting techniques. 6.0 Long Term Investment Decision Before making any investment decision, capital budgeting, should be taken into consideration by evaluating using different techniques. An organization which makes a capital investment incurs cash outlays in the expectation of future return or cash inflows (benefits). 6.1 Payback Period The payback period is commonly used as an investment appraisal technique in measuring on the period needed in recovering the initial investment. Despite the fact that it is very simple to apply and understand, it does not take the time value of money into account neither it take account of the earnings after the initial investment is recouped. Therefore it is not recommended as these may prevent the ranking of projects. 6.2 Accounting Rate of Return Another commonly used appraisal technique used is ARR which compares the profit that can be earned by the concerned project to the amount of initial investment capital that would be required for the project and projects that can earn a higher rate of return is accepted. However, again, ARR does not take into consideration the time value of money involved. In addition, this method uses net income rather than cash flows while net income is a useful measure of profitability where the net cash flow is a better measure of an investments performance. Furthermore, the inclusion of only the book value of the invested asset ignores the fact that a project can require commitments of working capital and other outlays that are not included in the book value of the project. 6.3 Discounted Payback Period The introduction of discounted payback period is to backup the drawback of the PB by adding the net positive discounted cash flows arising from the project. This could be useful as a performance indicator to contextualise the projects anticipated performance but is not recommended to use as the sole appraisal method. 6.4 Net Present Value In the NPV method, the revenues and costs of a project are estimated and then are discounted and compared with the initial investment. Projects with positive NPV should be accepted and rejected if the NPV value is as it indicates that the present value of the stream of benefits is insufficient to recover the cost of the project. Compared to other investment appraisal techniques such as the IRR and the discounted payback period, the NPV is recognized as the most reliable technique in supporting investment appraisal decisions. However, its sensitivity in discount rate is identified as the main drawbacks. Since discount rate is always the denominator of NPV and its always critical to know the final result of the output. NPV can be positive or it can be negative depending on the discount rate which has been taken in calculations. 6.5 Internal Rate of Return IRR corresponds to the rate for which the present value of the investments money in-flows are equal to the present value of the money out-flows. It helps evaluate individual projects as investment opportunities and helps investors in determining whether the projects would help in increasing the organization value and determining the percentage of return in comparison to the initial investment. In addition, it takes into account the time value of money  and adjusts for the risk that the project will not meet the income projections. However, many firms are guilty of rejecting worthwhile investments due to the understating of NPVs and IRRs because of the incorrect treatment of inflation and the use of excessively high discount rates. 7.0 Risks on Long Term Investment Failure in identifying risk in long term investment could lead to unforeseeable consequences. Therefore, there are two main traditional investment appraisal frameworks which could be considered by managers prior in making any investment decision. One of the simplest and most effective ways to analyse risk is through simple sensitivity analysis where investor could just change certain variable involved in a potential investment to see how that change would affect the overall investment. For instance, when considering buying a company, managers may look at the production cost of an item the company makes, and the cost of the components needed to make that product and further verify several eventualities, by adjusting these prices, either lower or higher. This will help them make an educated decision about their purchase in light of better understand the change of the company value if certain variables change. Another way to evaluate the risk is by conducting scenario analysis w here multiple analyses could be performed at the same time. Investors conducting this type of analysis will look at the variables that affect a companys bottom line and use them to plan accordingly. For example, managers considering purchasing a company will want to understand the cash flow of the business. This is more than just considering revenue and expenses. Expenses can manifest themselves in a number of ways including wages, pensions, benefits, costs associated with production, and so forth. By changing a combination of these factors, investors can get a feel for a number of different scenarios. Kaplan (1986) has further criticised aspects of traditional appraisal techniques are in truth a function of the user and not the technique itself by highlighting the mistake of the NPV user who use of static discount rates. In addition, the inconsistent treatment of inflation, the overemphasis on the short-term, faulty assumptions about the status quo alternative, and the adoption of a narrow organisational perspective are again all mistakes of the user. Even the difficulty of including nonfinancial benefits is seen as a lack of financial analyst imagination rather than an inherent shortcoming of traditional evaluation approaches.