Introduction
Travel and tourism is an important industry in the economic growth of most countries. The UK considers travel and tourism critical to the country’s economy. Therefore, the UK government is extremely focused on promoting the tour and travel industry. A study conducted by BMI Research in 2016 reveals that the sector has provided employment opportunities to over 3 million people in the UK (BMI Research 2016). The sector is considerably large and is ranked 7th amongst the export industries in the UK about size. Visit Britain (2017) projects that the sector accounts for approximately £ 126.9 billion of Britain’s Gross Domestic Product. Even though the travel and tourism industry might be affected by the UK’s exit from the European Union, the report by BMI Research (2016) projects that the industry will continue to be strong. Due to its large size and resilience to economic changes, the opportunity for tour and travel companies to achieve growth is considerably high. Thus, there is a substantial business opportunity for travel and tour companies operating in the industry to attain their desired profit margin. Nonetheless, to successfully exploit the economic profit inherent in the industry, entrepreneurs/firms in the industry must formulate effective strategies. Formulation of business-level strategies, for example, growth and expansion, comprises an essential business-level strategy via which investors in the industry can achieve profit maximization. Nevertheless, achieving market expansion and subsequently profitability cannot be attained in the absence of effective financing decisions. Investors must also develop expertise on how to formulate effective decisions on costs, profit, and the volume of produce. Such knowledge is indispensable in making decisions on pricing strategies.
This essay involves a discussion on the appropriate sources of finance that Trafalgar Tours, which operates in the global travel and tourism industry, amongst them the UK, should consider in its effort to expand its operations in Britain in pursuit of a high market share. The paper further involves an evaluation of the behavior of costs and the importance of Cost-Volume-Profit [CVP] analysis as a decision-making tool. Additionally, a discussion of pricing approaches or strategies that Trafalgar should consider is also evaluated. A proposal on the pricing strategy/strategies that Trafalgar should employ in the quest to maximize profit is also provided.
Brief history of Trafalgar Tours
Trafalgar Tours, a private tour and travel company, has been in operation in the global tours and travel industry since its inception in 1947 (LinkedIn 2017). The firm mainly specializes in providing guided tours and travel services. The firm takes tourists to over 230 different destinations located in South America, Europe, Asia, South, North, and Central America, New Zealand and Australia (Trafalgar 2017). Trafalgar’s success in the global travel and tourism industry is centered on its ability to innovate. One aspect of innovation that Trafalgar has taken into account includes venturing into new travel destinations. Through this aspect, Trafalgar can achieve market expansion.
Financing
Financial management is crucial in the long-run sustainability of all business entities irrespective of their sector of operation (Evans et al. 2012). Sourcing or raising the finances requisite for business operation constitutes a vital aspect of financial management. Finance encompasses an important internal resource. Similar to land, finance is scarce, and obtaining it involves the incurrence of a price/cost. Moreover, Ryan (2007) argues that there competing uses for finance. Therefore, managers must ensure that it is optimally sourced and utilized. Concerning sourcing, managers focus on reducing the cost of sourcing finance (Tan 2012). Examples of sources of funds that Trafalgar Tours should consider in financing its market expansion decision are examined herein.
Internal sources of finance
Issuance of shares
Expanding its market share in the UK might require Trafalgar to invest a sizable amount of finance. Thus, Trafalgar should obtain finance or capital from the stock market. Currently, the firm is privately owned, which means that its stocks are not listed in the stock market (Gowrthorpe 2011). The firm should thus consider issuing shares as an alternative to sourcing the required funds. The rationalization of the issuance of shares is that Trafalgar will not only succeed in gathering the required amount but will also enable the firm to undertake long-term market expansion projects. Individuals who purchase the shares issued under the initial public offer will become Trafalgar Tours shareholders. Trafalgar Tours will benefit significantly from the issuance of stocks because it will be required to repay the equity received from shareholders in the form of dividends, which will be issued over time. This source of finance will significantly enhance Trafalgar’s capacity to undertake long-term expansion (Stimpson & Smith 2015).
Retained earnings
To reduce the cost of sourcing finance, Trafalgar Tours should consider obtaining the required finance from its retained earnings. Obtaining capital from retained earnings will enable Trafalgar to bypass the cost that might be incurred in the issuance of stocks (Atrill, McLaney & Harvey 2014). Unlike the issuance of shares, Trafalgar Tours will not lose control of its operation compared to sourcing the requisite funds from the issuance of shares.
Sale of assets
Trafalgar Tours may also source finance for expansion purposes from the sale /disposal of assets. However, Trafalgar Tours should ensure that effective identification of assets for disposal is undertaken. Amongst the criteria that Trafalgar Tours should consider in selecting the assets to dispose of entail the evaluation of the need for upgrading some assets (Brumfitt 2001). The firm should take caution to limit the likelihood of negative outcomes from the disposal of the identified assets. The assets disposed of should not amount to a negative effect on the firm’s operations.
External sources
Bank Overdraft
Trafalgar Tours should also consider bank overdraft as another viable source of finance. The firm’s Board of Directors should rely on Trafalgar’s record about repayment of previous loan/s in applying for a bank overdraft. Therefore, Trafalgar Tour should exploit the reputation that it has established regarding the extent of creditworthiness (Atrill, McLaney & Harvey 2014). The applicability of bank overdraft as a source of finance is underlined by the fact that Trafalgar Tours intends to generate a strong stream of cash flow over time hence successfully repaying the bank overdraft.
Leasing
The firm should consider entering into a business contract with well-established business companies operating in the UK. The contract between Trafalgar Tours and the finance company should specifically involve ensuring that Trafalgar is effective in establishing the infrastructure and network that will enhance the firm’s market expansion. Through such an agreement, Trafalgar Tours will be obliged to submit periodic repayment during the period within which the lease contract is applicable. Nevertheless, the firm should take caution to ensure that the finance company does not lease infrastructure or network that might not enable the firm to recoup the finance issued in the long run. Through leasing, Trafalgar Tours will achieve rapid market expansion at a relatively lower cost. The firm will not be required to purchase the required asset from the onset of its market expansion (Stimpson & Smith 2015).
Loan
Trafalgar’s Board of Directors should consider bank loans as another potential source of funds. The firm should specifically apply for a long-term bank loan. In deciding on a long-term loan, the Board of Directors should assess the interest on loans applicable from different banks to make an informed decision on the most appropriate bank to source the loan from. In sourcing bank loans, Trafalgar has the requisite collateral that might be requested by the bank before issuance of the bank loan (Smithpson & Smith 2015).
Cost is an indispensable element in the operation of firms. Thus, Trafalgar Tours' operations are characterized by different costs. Ineffective management of costs might lead to business failure. Amongst the core aspects of managing cost is understanding their behavior. Singh (2016) categorizes the behavior of cost into; (a) variable, (b) semi-variable and, (c.) fixed as evaluated here.
Fixed costs; under this category, the cost incurred in a business's course of operation is constant irrespective of a business’ volume of production. However, Singh (2016) cautions that fixed costs remain so in the short run. Therefore, if Trafalgar Tours is required to increase its production capability, the firm will experience an increase in the level of fixed cost. Drury (2009) emphasizes that fixed cost is inversely correlated to the volume of production. As a result of this feature, fixed costs are reduced with an increase in the level of output. Fixed costs may entail different cost elements such as employee salaries, the cost of audit, and rent.
Variable cost; under this category, the cost that a firm incurs in its operation changes or varies in line with the level/volume of output or level of activity. Variable costs are thus directly correlated to the level of production, which means that an increase in the level of output translates into an equitable increase in production cost and vice versa (Singh 2016). Variable costs may arise from different operational aspects such as the cost of energy, and the purchase of raw materials. Graph 1 below depicts the difference between fixed and variable costs. From the graph, it is evident that the fixed cost does not change despite the change in volume of production while variable cost increases proportionately.
Cost volume and profit (CVP) analysis
The CVP constitutes an important model that businesses should consider entrenching in businesses decision-making process. Its relevance can be explained by three main issues as examined herein.
Determination of the sales level; the CVP analysis enables a business to decide on the volume of sales that should be generated in order to enable the firm to cover the cost incurred in the course of operation. Consequently, the firm can determine the point at which its operations will reach the break-even point.
Production volume; CVP analysis further constitutes an important tool in deciding on the volume of units that should be produced or service that should be sold to attain the projected operating profit.
Marketing decisions; The CVP analysis model is also valuable in the process of businesses making a determination on the size or amount of spending on different marketing functions such as advertising to increase the volume of units sold.
Pricing strategies
Decisions on product pricing are critical in businesses’ efforts to maximize profitability. For example, pricing influences consumers' purchase decisions, and hence the prospect of an entity generating sales revenue. Therefore, to achieve market expansion, Trafalgar Tours should formulate optimal pricing strategies that will optimize the level of profit. In the course of its market expansion, Trafalgar Tours should consider employing the most appropriate pricing strategies that will not only enhance its operation but also enable the firm to generate profit. Trafalgar should consider the following pricing strategies.
Cost-plus pricing
Trafalgar Tours intends to offer customers unique travel and tour experience by expanding its market destinations. Despite this objective, Trafalgar Tours should ensure that the price point of the travel services set enables the firm to cover both the cost that might be incurred in the production processes and attain the intended markup (Heisinger 2008). Thus, Trafalgar should entrench a cost-plus pricing strategy. Under this strategy, Trafalgar Tours should determine the cost of production and include the desired markup (Weygandt, Kieso & Kimmel 2010).
Premium pricing
Trafalgar Tours has established a broad product portfolio providing travel and tour services across the world, which is evidenced by the establishment of over 230 travel destinations. To benefit from the broad product portfolio, Travel Tours should entrench a premium pricing strategy. However, the firm should specifically target high-end clients who associate a price premium with the value of the product or service. An example of travel service that the firm should set a premium price on includes providing clients with travel services to attend global business conferences. The appropriateness of premium pricing strategy is that the firm will be able to meet the travel and tour demands of diverse customer groups; viz. the high-end customer groups (Rao 2009). Through premium pricing, Trafalgar Tours will succeed in venturing into a new market niche previously dominated by competitors.
Conclusion
The analysis reveals that the integration of effective managerial accounting tools and techniques is critical in enhancing a firm’s long-term and future success. In making decisions on market expansion, businesses must take into account effective decisions on different aspects such as financing, pricing, and volume of production. The analysis depicts that Trafalgar Tours can achieve the intended market expansion by taking into account the aspects recommended herein about pricing, financing, and volume of production.
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