10. tourism finance mgt

7/31/2019 10. Tourism Finance Mgt

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R'tist@Tourism,

Tourism Finance

MgtRamakrishna Kongalla


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R'tist@Tourism,

Meaning of Financial Management

Financial Management means planning,

organizing, directing and controlling thefinancial activities such as procurementand utilization of funds of the

enterprise. It means applying generalmanagement principles to financialresources of the enterprise.

Scope/Elements Investment decisions includes

investment in fixed assets (called as

capital budgeting). Investment inR'tist@Tourism, 22


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There are three key elements to theprocess of financial management:

(1) Financial Planning

Management need to ensure thatenough funding is available at the righttime to meet the needs of the business.In the short term, funding may be

needed to invest in equipment andstocks, pay employees and fund salesmade on credit.

In the medium and long term, fundingR'tist@Tourism, 33


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ManagementEstimation of capital

requirements: A finance manager hasto make estimation with regards tocapital requirements of the company. Thiswill depend upon expected costs and

profits and future programmes andpolicies of a concern. Estimations have tobe made in an adequate manner which

increases earning capacity of enterprise.Determination of capitalcomposition: Once the estimation have

been made, the capital structure have toR'tist@Tourism, 44


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Importance (i) success of

PromotionDepends onFinancial

Administration.One of the mostimportant reasonsof failures of

businesspromotions is adefective financial

plan. If the plan

(iii) Financial

AdministrationCo-ordinatesVarious

FunctionalActivities. Financialadministration

providescomplete co-ordination

between variousR'tist@Tourism, 55


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(v) Determinantof Business

Success. It hasbeen recognised,even in India thatthe financialmanger splay avery importantrole in the

success ofbusinessorganisation by

advising the top

importance of financialmanagement can besummarized as follows:

It brings economic growth and

development through investments, financing, dividend and riskmanagement decision which helpcompanies to undertake betterprojects.

When there is good growth anddevelopment of the economy itwill ultimately improve thestandard of living of all people.

Improved standard of living willlead to good health and financial

stress will reduce considerably.

It enables the individual to takebetter financial decision which willreduce poverty, reduce debts andincrease savings and investments.

Better financial ability will lead toR't

ist@Tourism, 66


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Types of Finance

Overdraft

A popular form offinance because ithas the

advantages ofavailability,convenience andflexibility.

However, becauseinterest rates arehigh, it should only

be used for short-

Invoice

discountingSimilar toReceivables

Finance, this isusually onlyoffered to largercompanies withstrong creditmanagementsystems.

R'tist@Tourism, 77



organisation Financial Goals

of OrganizationThe two

important

financial goals oforganization canbe

profitmaximization and

wealthmaximization.

Earnings are

valued bydeducting the totalcosts from total

income. Hence Net

Earnings = Total

Income - Totalcosts.

Cash flows will

only take cashinflows and cashR'tist@Tourism, 88



Financial Forecasting Financial Forecasting describes the

process by which firms think about andprepare for the future. The forecastingprocess provides the means for a firm

to express its goals and priorities andto ensure that they are internallyconsistent. It also assists the firm inidentifying the asset requirements andneeds for external financing.

For example, the principal driver of theforecasting process is generally thesales forecast. Since most BalanceR'tist@Tourism, 99


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Financial plan a financial plan is a series of steps

which are carried out, or goals thatare accomplished, which relate to anindividual's or a business's financialaffairs.

This often includes a budget whichorganizes an individual's financesand sometimes includes a series ofsteps or specific goals for spendingand saving future income.

This plan allocates future income tovarious types of expenses, such asR'tist@Tourism, 1010


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Break Even analysis

Break-even

analysis is atechnique widelyused by

productionmanagement andmanagementaccountants. It isbased oncategorisingproduction costs

between those

The Break-Even

Chart In its simplest

form, the break-

even chart is agraphicalrepresentation of

costs at variouslevels of activityshown on thesame chart as the

variation ofR'tist@Tourism, 1111


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Fixed Costs

Fixed costs arethose businesscosts that arenot directly

related to thelevel ofproduction or

output. In otherwords, even ifthe business hasa zero output or

high output, theR'tist@Tourism, 1212


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Variable Costs

Variable costs are those costs which

vary directly with the level of output.They represent payment output-related

inputs such as raw materials, direct

labour, fuel and revenue-related costssuch as commission.

A distinction is often made

between "Direct" variable costsand "Indirect" variable costs.

Direct variable costs are those which

can be directly attributable to theR'tist@Tourism, 1313


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Break-Even Analysis

Study ofinterrelationships

among a firmssales, costs, andoperating profit atvarious levels of

output Break-even point

is the Q where TR= TC (Q1 to Q2 ongraph)

TR

TC

Q

$s

Profit

Q1 Q2

1414R'tist@Tourism,


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anagemen o currenAssets

Working

capital (abbreviated WC) is afinancial metric

whichrepresents operatingliquidity availableto a business,organization orother entity,

including

Net Working

Capital =Current Assets Current

Liabilities Net Operating

Working Capital

= CurrentAssets NonInterest-bearing Current

LiabilitiesR'tist@Tourism, 1515


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Calculation Current assets and current

liabilities include threeaccounts which are of specialimportance. These accounts representthe areas of the business wheremanagers have the most direct impact:

accounts receivable (current asset)

inventory (current assets), and

accounts payable (current liability)

The current portion of debt (payable

within 12 months) is critical, because it-R'tist@Tourism, 1616


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capital Guided by the above criteria,

management will use a combination ofpolicies and techniques for themanagement of working capital.

These policies aim at managingthe currentassets (generally cash and cash

equivalents, inventories and debtors)and the short term financing, such thatcash flows and returns are acceptable.

Cash management. Identify the cashbalance which allows for the business toR'tist@Tourism, 1717


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Characteristics ofWorking Capital

Needs that areShort Term:Working capital isbeing utilized inacquiring currentassets which willbe converted to

cash for a shortperiod only.

Circular

Movement:

Sources ofWorking Capital

Operational funds Sales of assets

that are non-

current Long term

investments sales

Physical fixedassets sales

Intangible fixedassets sales

Financin forR'tist@Tourism, 1818


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Several strategies are available to afirm for financing its capital

requirements. Three strategies areillustrated by lines A,B, and C below.

Strategy A: Long term financing is used tomeet fixed asset requirement as well aspeak working capital requirement. Whenthe working capital requirement is lessthan its peak level, the surplus is invested

in liquid assets (cash and marketablesecurities).

Strategy B: Long term financing is used tomeet fixed assets requirement, permanent

working capital requirement, and a portionR'tist@Tourism, 1919

C h M t


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Cash Management

cash

management,or treasurymanagement, isa marketing term for certainservices offeredprimarily to larger

businesscustomers.

It may be used to

describe all bank

Cash

managementservices generallyoffered

AccountReconcilementServices

Advanced WebServices

Armored CarServices (Cash

CollectionR'tist@Tourism, 2020


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Receivables ManagementManaging and collecting commercial receivables (unpaidreceivables between companies or organisations) is linked to thecredit insurance business and the information business.

reducing claims expenses by setting up efficient receivablesmanagement processes, developing excellent knowledge oflocal payment and collection regulations and practices,accurately predicting the commercial and financialbehaviour of buyers throughout the world and

closely monitoring changes in their behaviour.

You can benefit from our experience and recognition in thisfield:

- Better manage your amount of outstandings,

- Maintain your trading relationship with a valued customereither on domestic or international level- Be fully informed of progress,- Get liquidity and cash flow- Increase own company financial attractiveness

- Save personal resourcesR'tist@Tourism, 2121

nven ory anagemen an nven ory


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nven ory anagemen an nven oryControl

must be designed to meet thedictates of the marketplace andsupport the company's strategicplan. The many changes in marketdemand, new opportunities due to

worldwide marketing, global sourcing ofmaterials, and new manufacturingtechnology, means many companies

need to change their InventoryManagement approach and change theprocess for Inventory Control.

Despite the many changes thatR'tist@Tourism, 2222


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Fixed assets management Fixed assets management is

an accounting process that seeks totrack fixed assets for the purposesof financial accounting, preventive

maintenance, and theft deterrence.

Many organizations face a significant

challenge to track the location,quantity, condition, maintenanceand depreciation status of their fixedassets. A popular approach to trackingfixed assets utilizes serialR'tist@Tourism, 2323


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budgeting Capital budgeting decisions are of

paramount importance in financialdecision. So it needs special care onaccount of the following reasons:

1. Long-term Implications: A capitalbudgeting decision has its effect over along time span and inevitably affects thecompanys future cost structure and

growth. A wrong decision can provedisastrous for the long-term survival offirm. On the other hand, lack of investmentin asset would influence the competitive

position of the firm. So the capitalbud etin decisions determine the futureR'tist@Tourism, 2424

Kinds of capital budgeting


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Kinds of capital budgetingdecisions

Generally the business firms areconfronted with three types of capitalbudgeting decisions. (i) The accept-

reject decisions; (ii) mutuallyexclusive decisions; and (iii) capitalrationing decisions

1. Accept-reject decisions: Businessfirm is confronted with alternativeinvestment proposals. If the proposal isaccepted, the firm incur the investment

and not otherwise. Broadly, all thoseR'tist@Tourism, 2525


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Non-discountedtechniques

Pay back period Accounting rate of

return method

Discountedtechniques

Net present valuemethod

Internal rate ofreturn method

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Difference between capital and financial


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Difference between capital and financialstructures

In simple terms,

financial structureconsists of allassets, all liabilitiesand the capital.

The manner inwhich anorganizations

assets are financedis referred to as itsfinancial structure.

There is another

However, capital

structure needs tobe distinguishedfrom assetstructure that isthe sum total ofassetsrepresented by

fixed assets andcurrent assets.

This is the total

capital of theR'tist@Tourism, 2727


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In their seminal1958

paper, FrancoModigliani andMertonMiller initiated

the moderndiscussion of theamount of debt

corporationsshould use (bothreceived theNobel Prize forthis work and

Determinants offinancial Structure

Legal restrictions Liquidity

Access to the

capital market Restriction in loan

agreements

Control Investment

opportunities

InflationR'tist@Tourism, 2828

Fi i l l


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Financial leverage

Financialleverage is alsocalled trading onequity

We need tounderstanddebts and

interest on debts A company

finances its

projects through

Effective offinancialleverage onshare holders

To increase shareholders earnings

Earnings per

share increase Earnings per

share is also

called netR'tist@Tourism, 2929


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Dividend Policy Dividend Policy

refers to theexplicit or implicitdecision of the

Board of Directorsregarding theamount ofresidual earnings

(past or present)that should bedistributed to the

shareholders of

Types of

Dividends Dividends are a

permanent distribution ofresidual

earnings/property of thecorporation to its owners.

Dividends can be in theform of:

Cash

Additional Shares ofStock (stock dividend)

Property

If a firm is dissolved, atR'tist@Tourism, 3030


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Dividend Policy

Once a

company makesa

profit, manage

ment must decideon what to dowith those profits.

They could

continue to retainthe profits withinthe company, or

they could pay

Dividendpolicy is

concerned withtaking a decisionregardingpaying cash

dividend in thepresent or payingan increased

dividend at a laterstage. The firmcould also pay inthe form of stockdividends whichR'tist@Tourism, 3131


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Coming up with a dividend policy ischallenging for the directors and

financial managers of a company,because different investors havedifferent views on present cashdividends and future capital gains.

Another confusion that pops up isregarding the extent of effect ofdividends on the share price.

Due to this controversial nature of adividend policy it is often calledthe Dividend puzzle.



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Types of Dividend Policy:

a. Stable Dividend Policy

b. Fluctuating Dividend Policy

c. Small Constant Dividend per Shareplus Extra Dividend.

Forms of Dividend

Cash Dividend

Cash dividends(most common) are those paidout in the form of a cheque. Such dividendsare a form of investment income and areusually taxable to the recipient in the year

they are paid.R'tist@Tourism, 3333


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of IndiaThe

Government ofIndia had,pursuant to the

recommendations of theNationalCommittee on

Tourism vizYunus

Committee set

up under the

The Government ofIndia had, pursuant tothe recommendationsof the NationalCommittee on Tourism

viz Yunus Committeeset up under the aegisof Planning

Commission, decided in1988, to promote aseparate All-IndiaFinancial Institution for

rovidin financialR'tist@Tourism, 3434


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ObjectiveTFCI provides financial assistance to enterprises for setting up and/ordevelopment of tourism-related projects, facilities and services, such as:

Hotels, Restaurants, Holiday Resorts, Amusement Parks, Multiplexes andEntertainment Centers, Education and Sports, Safari Parks, Rope-ways, CulturalCenters, Convention Halls, Transport, Travel and Tour Operating Agencies, AirService, Tourism Emporia, Sports Facilities etc.

Forms of Financial AssistanceRupee Loan , Underwriting of public issues of shares/debentures and directsubscription to such securities, Guarantee of deferred payments and credit raisedabroad., Equipment Finance, Equipment Leasing, Assistance under Suppliers'

Credit. Working-Capital Financing, Takeover Financing, Advances Against Credit-Card Receivables

Eligibility for AssistanceTFCI provides financial assistance to projects withcapital cost of Rs. 3 crore and above. In respect of projects costing between Rs. 1crore and Rs. 3 crore, TFCI will consider financial assistance to the extent ofunavoidable gap, if any, remaining after taking into account assistance from

State Level Institutions/Banks. Unique projects, which are important from thetourism point of view and for which assistance from State Level institutions/Banks is not available, may be considered on exceptional basis even though theircapital cost is below Rs. 1 crore. Financial assistance is considered on similar linesfor heritage and restaurant projects. Projects with high capital cost may befinanced along with other All-India Financial/Investment Institutions. TFCIconsiders assistance even if the total cost is less than Rs. 3 crore for existingconcerns with satisfactory performance for renovation/upgradation etc.R'tist@Tourism, 3535


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Promoters' Contribution

The minimum promoters' contribution

for the projects is 30%. Relaxationmay, however, be allowed in respect oflarge projects involving capital cost

exceeding Rs. 50 crore.

Debt Equity Ratio

TFCI extends term-loan assistancebased on debt-equity ratio notexceeding 1.5:1. However, in case ofhotels in seasonal locations/

multiplexes/ entertainment centers,R'tist@Tourism, 3636


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Accounting



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Balancesheet indicat

es structure ofthe assetsbelonging tothe company

and financialmeans used tofinance these

assets at aparticular pointof time.

For example:

Incomestatement indicate

s income earned andexpenses incurred bythe company for aparticular period of

time.

For example: thisstatement for the

year 2006 indicated,what income wasearned and what

expenses wereR'tist@Tourism, 3838


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R'tist@Tourism,R'tist@Tourism, 3939

B l Sh t


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Balance Sheet

A financialstatement that summarizes a company'sassets,liabilitiesand sharehol

ders'equity at aspecific point

in time. R'tist@Tourism, 4040

C h fl t t t


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Cash flow statementThe statement of

cash flows is oneof the mainfinancialstatements. (Theother financialstatements arethe balance

sheet, incomestatement, andstatement of

stockholders'R'tist@Tourism, 4141

Fund flow statement


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Fund flow statement Financial

statements do notgive the completefinancialinformation.

These statementsgive theinformation of

funds on aparticular date.

The purpose of

preparation of

There are few

other reasons toprepare fund flowstatement:

It explains thefinancialconsequencesof business

operations: Fundflow statementgives answer tofollowing

conflictingR'tist@Tourism, 4242

Hotel accounting


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Hotel accounting Hotels follow the general principles of

accounting, but due to the unique natureof guest accounting, hotel accountingdepartments use terms that may not befamiliar to accountants in other

industries. Accounting terms related tothe management of guest payments,charges and disputes can be confusing to

outsiders, but they represent everydayconcepts in the hotel industry.

Folio

The record of all credits and debitsR'tist@Tourism, 4343


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Late Charge

A late charge occurs when a guest

signs for a room charge after checkingout of the hotel. Common late chargesinclude breakfast or minibar charges

and manual postings due to systemoutage. Since the guest had a creditcard on file, the front desk is able touse same card is used to pay for the

charge. If the credit card declines, aninvoice is mailed to the guest's addressof record.

Advance De ositR'tist@Tourism, 4444


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