The Travel and Tourism Industry

Question: The travel and tourism industry are growing at a faster pace in the UK. Explain. Answer: The travel and tourism industry are growing at a faster pace in the UK. Tourism is a multifaceted industry, because it affects many different businesses but the one thing which revolves or connects everything is that they provide products as well as services to the tourists. According to this industry, people are considered as tourists only if they stay at a place. This means that citizens on day trips are not categorised as tourists. Many of the firms in this industry are small. According to Government statistics, the tourism trade comprises of 127,000 businesses and out of these 80 per cent has a turnover of less than 250,000 per year. Technology also has a vital role in the growth of the industry. People are making their bookings in advance with the help of internet and getting a discount. Therefore, it is necessary to make websites attractive and give discounts to survive in this industry. People can check in at airports as well as view the brochures of the hotel where they would like to stay. International tourist arrivals have crossed an all-time track record of 760 million in 2004, according to World Tourism Organisation report. Further, the support services of airlines have made the travelling easy (Dev, Brown and Zhou, 2007). This scenario shows that travelling will grow manifold and expansion of hotel will be considered after analysing the costing factor. Sources of Financing There are various sources of financing the expansion of hotel. Some of them will be mentioned below: Equity Shares Equity shares are issued to the public in which the buyer will be entitled to only residual income. Although they do not have any preferential right on capital and dividend but they, have the right to control the dealings of business as well as the shareholders. The different ways in which the shares will be issued are: New Issue: A prospectus will be published by the company for inviting the general public so that they can subscribe the shares. The mode of collection is instalment which will be called as allotment and calls. The prospectus has all the details concerning the date of payment and amount payable on the allotment as well as calls. Rights Issue: It means issuing the shares to existing shareholders at a lesser rate equivalent to the proportion of their holding. It helps in raising the share capital. Preference shares In these one has the preferential rights of receiving dividend either on fixed rate or of fixed amount before paying any amount towards the shareholder. Preference share capital will be returned at the instance of the closing of the business. If there are excess profits after paying to equity shares then, preference shareholder has the privilege toparticipate at the time of redemption. These shares do not have voting rights. Thus control will not be diluted. Venture Capital Venture Capital financing is also known as potential risk capital because the money will be lost if the project fails (Mallick and Yang, 2011). The money mainly comes from outside investors and individuals who have high net worth to finance an expanding or troubled business. It is then pooled together by investment firms. Capital is not offered as a loan rather given for an equity stake in exchange. The returns take a longer period. Bank Lending It plays a vital role both in start ups as well the expansion of small business. In the UK there are various loan schemes available for e.g. peer to peer lending, asset-based financing, equity crowdfunding, start-up loans as well as bonds (Morellec, Valta and Zhdanov, 2015). Peer to peer lending is more popular as compared to equity crowdfunding. These days banks focus is on the companies which are expanding rather than start-ups. Bank also offers the variety of credit loans ranging from short term, middle term and long term loans. The interest rate rises with the term of advance. Overdraft and term loan are the two types of corporate bank credit. Retained Earnings The cost of Retained Earnings is one of the sources of long-term investment. It means cash flow accumulated from past investment projects. It is not dispersed in shareholders as a part of dividend but retained within the company because the sources are internal. They are the property of ordinary shareholders; therefore, this money can be easily reinvested. Further, the control is not diluted in these. Behaviour of Costs Behaviour of the cost is essential for the manager because it will help him in planning and utilization of the organisation cost. Change in few activities leads to amendment in the total cost which is known as cost behaviour. To understand it completely lets break down the three costs that can change as a result of the amendment in business activity. The manager should identify the activity which gives the estimate of the cost which needs to be spent, and he should also mention the activities in which cost changes are of interest. The major divisions of costs are fixed costs, variable costs as well as mixed costs. Fixed Costs Fixed costs remain same within the applicable range. If there are no units produced still the fixed costs will incur. For instance rent expense, depreciation expense, etc. but it decreases if there is an increase in production. Fixed cost remains same in figure 1 and decreases in figure 2 Variable Costs Variable costs, on the other hand, are directly proportional to production level. It means it increases with the increase in production and decreases when production is low. Although, variable in total, but they are constant per unit. Mixed Costs Mixed costs also know as semi-variable costs have the features of both fixed and variable costs because of the presence of components of both of them. They are not helpful in their raw form. Hence they are divided into components of fixed and variable components cost. Cost Volume and Profit Analysis Cost-Volume-Profit [CVP] analysis studies the relationship connecting quantity, price, and profits. It helps in planning revenue of the business. However, budgets and other forecasts are used for profit planning, but CVP analysis gives the overview of the profit planning process. Apart from this, it helps in evaluating the purpose and rationality of budgets and forecasts (Kim, 2015). Importance of CVP Analysis It is valuable for management in providing an idea of the effects and inter-relationship of factors, which control the profits of the business. Revenue structure will be made from the link among cost, quantity and profit. Thus, it is necessary for budgeting and planning the earnings of an organisation. Profit planning, it used for identifying the maximum sales output to avoid losses, and also to determine the sales volume at which the firm will start getting the profit. Thus, the profitable mixture of cost and quantity is achieved from this. Contribution margin It is the income or profit of the firm before subtracting the fixed costs. Once the fixed costs are deducted from the profit, the remaining part is the income. Break-even point It is the point when sales revenue is equivalent to variable plus fixed cost. It is also known as cost-volume-profit chart (Kim, 2006). Break Even = Variable + Fixed Cost Pricing Strategies Pricing strategy needs to be properly used in making the travel industry a successful venture. Travel and Tourism is a service business and in this kind of industry, it is not possible to accurately measure their costs, especially in working hours of the employee. Still, there are various key factors which play a vital role in deciding the rate of the product. Some of them will be mentioned below: Operating Costs These include both variable as well as fixed costs. These are the expenses incurred in the maintenance and management of the business on daily basis. Fixed costs include buildings, rent, machinery as well as insurances. On the other hand, variable costs include wages, electricity, gas, bank fees, repairs, maintenance, etc. The formula for calculating the operating cost is: Operating Cost =Cost of Goods Sold-Operating Expenses Profit margin To gain profit, the ideal practice is to set the price which includes all the costs i.e. fixed, variable and overhead and also profit. The custom which is adopted is to set the base price similar to their competitors. While doing this the size and strength of the firm should be taken into consideration. The communities which demand lower price to at least reach to break even, lower prices will be kept. One can set the prices low as compared to other firms to attract more customers. Therefore, pricing has to be decided by keeping everything in mind and still it should be in a position to earn profit Commission costs In travel and tourism industry mostly the bookings come from agents or third party who charges a commission, for instance, retail travel agents, whole sellers, inbound tour operator and online travel agent (OTA). Thus, the tourism operators add the rate of the commission in the pricing. If the prices in different distribution channels are different, then it confuses the travellers. Therefore, it should be simple (Wai Mun Lim and Hall, 2008). Seasonal Pricing A mix of pricing will be used throughout the year to cover low, shoulder and peak seasons (O'Neill and Rushmore, 2000). It is one of the typical ways for catering to differing levels of demand during the different period. These will remain same each year but in the case of school holidays or local events, there are chances of slight variation. Discounting It sounds easy path but actually, it is a rocky road as it reduces profitability and at times one misses even the break-even point . For concession certain conditions can be added such as a minimum number of stay or number of travellers. One should remember that one should book on reduced rates rather than not booking at all. Perception plays the key role in deciding the price in tourism; therefore, the price depends on the awareness of the customer (Ramanathan and Ramanathan, 2011). Package Deals Package deals with sightseeing partners are a better way to keep the booking on track as compared to discount. Deals with the local businesses such as getting their product on the net rate and offering them a package price can prove a beneficial deal in which both the parties are at the win-win situation. Packaging will be used in targeting the niche markets e.g. golf weekend, picnic packages, food and wine tours, etc. Recommendations The sources of financing are crucial factor for expansion of the hotel business. The various sources have been discussed above. The return in some of the sources makes them more costly as compared to others. Therefore, the wise decision should be made while choosing the sources for financing. There are already so many hotels. Therefore there has to be some unique features for e.g.: the location, swimming pool in each floor which makes it different from other hotels and serves as an added advantage in convincing the investors and later on in attracting the customers. The pricing should be decided efficiently so that not only the fixed, variable and overhead costs are recovered but also it turns into a profit generating project. The information should also be available online through agents or websites as today the major operations are carried out with the help of internet (Guo, Ling and Gao, 2015).Therefore, one has to keep pace with technology for making it a profitable venture. The past experience of industry as well as the trends of accountings can help in building the strong foundation and avoiding mistakes which will lead to legal obligation and wastage of time and money. The construction as well as the pricing should be decided according to the taste of customer and changing trends. The customer feedbacks are the great source of inspiration (Iyengar and Suri, 2012). Some of things mentioned there which can help in earning profit is banquet hall should have more capacity, swimming pool on every floor, the room should be made from 150 to 200 as the hotel is always packed. Conclusion: The travel and tourism industry is booming but at the same time, it is filled with challenges. Therefore, to succeed, the owner has to keep in line with the advancements of the tourism industry as there is no place for laggards. The uniqueness should be there so that more and more customers will be contacted (Baek, 2016). Prices should be at the competitive edge as there are so many competitors as well as various applications are helping in booking the hotels at lower prices. The idea of expansion will succeed, but the survey of the market should be done correctly because there are chances that things which are thinking are unique may be already existing in the market and thus making the project as a failure. The above-mentioned factors should be kept in mind. 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