Tourism Finance Management

Tourism Finance Mgt

©Ramakrishna Kongalla

R'tist@Tourism, Pondicherry University 2

Meaning of Financial Management• Financial Management means planning, organizing, directing and

controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.

Scope/Elements• Investment decisions includes investment in fixed assets (called as

capital budgeting). Investment in current assets are also a part of investment decisions called as working capital decisions.

• Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby.

• Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two:– Dividend for shareholders- Dividend and the rate of it has to be decided.– Retained profits- Amount of retained profits has to be finalized which will

depend upon expansion and diversification plans of the enterprise.


• There are three key elements to the process of financial management:

(1) Financial Planning• Management need to ensure that enough funding is available at the right time to meet

the needs of the business. In the short term, funding may be needed to invest in equipment and stocks, pay employees and fund sales made on credit.

• In the medium and long term, funding may be required for significant additions to the productive capacity of the business or to make acquisitions.

(2) Financial Control• Financial control is a critically important activity to help the business ensure that the

business is meeting its objectives. Financial control addresses questions such as:– Are assets being used efficiently?– Are the businesses assets secure?– Do management act in the best interest of shareholders and in accordance with business rules?

(3) Financial Decision-making• The key aspects of financial decision-making relate to investment, financing and

dividends:– Investments must be financed in some way – however there are always financing alternatives

that can be considered. For example it is possible to raise finance from selling new shares, borrowing from banks or taking credit from suppliers

– A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders via dividends. If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits further.


Functions of Financial Management

Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise.

Determination of capital composition: Once the estimation have been made, the capital structure have to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties.

Choice of sources of funds: For additional funds to be procured, a company has many choices like-– Issue of shares and debentures– Loans to be taken from banks and financial institutions– Public deposits to be drawn like in form of bonds.

• Choice of factor will depend on relative merits and demerits of each source and period of financing.Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there

is safety on investment and regular returns is possible.Disposal of surplus: The net profits decision have to be made by the finance manager. This can be done in two

ways:– Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.– Retained profits - The volume has to be decided which will depend upon expansional, innovational, diversification

plans of the company.

Management of cash: Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintainance of enough stock, purchase of raw materials, etc.

Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.


Importance

• (i) success of Promotion Depends on Financial Administration. One of the most important reasons of failures of business promotions is a defective financial plan. If the plan adopted fails to provide sufficient capital to meet the requirement of fixed and fluctuating capital an particularly, the latter, or it fails to assume the obligations by the corporations without establishing earning power, the business cannot be carried on successfully. Hence sound financial plan is very necessary for the success of business enterprise.

• (ii) Smooth Running of an Enterprise. Sound Financial planning is necessary for the smooth running of an enterprise. Money is to an enterprise, what oil is to an engine. As, Finance is required at each stage f an enterprise, i.e., promotion, incorporation, development, expansion and administration of day-to-day working etc., proper administration of finance is very necessary. Proper financial administration means the study, analysis and evaluation of all financial problems to be faced by the management and to take proper decision with reference to the present circumstances in regard to the procurement and utilisation of funds.

• (iii) Financial Administration Co-ordinates Various Functional Activities. Financial administration provides complete co-ordination between various functional areas such as marketing, production etc. to achieve the organisational goals. If financial management is defective, the efficiency of all other departments can, in no way, be maintained. For example, it is very necessary for the finance-department to provide finance for the purchase of raw materials and meting the other day-to-day expenses for the smooth running of the production unit. If financial department fails in its obligations, the Production and the sales will suffer and consequently, the income of the concern and the rate of profit on investment will also suffer. Thus Financial administration occupies a central place in the business organisation which controls and co-ordinates all other activities in the concern.

• (iv) Focal Point of Decision Making. Almost, every decision in the business is take in the light of its profitability. Financial administration provides scientific analysis of all facts and figures through various financial tools, such as different financial statements, budgets etc., which help in evaluating the profitability of the plan in the given circumstances, so that a proper decision can be taken to minimise the risk involved in the plan.


• (v) Determinant of Business Success. It has been recognised, even in India that the financial manger splay a very important role in the success of business organisation by advising the top management the solutions of the various financial problems as experts. They present important facts and figures regarding financial position an the performance of various functions of the company in a given period before the top management in such a way so as to make it easier for the top management to evaluate the progress of the company to amend suitably the principles and policies of the company. The financial manges assist the top management in its decision making process by suggesting the best possible alternative out of the various alternatives of the problem available. Hence, financial management helps the management at different level in taking financial decisions.

(vi) Measure of Performance. The performance of the firm can be measured by its financial results, i.e, by its size of earnings Riskiness and profitability are two major factors which jointly determine the value of the concern. Financial decisions which increase risks will decrease the value of the firm and on the to the hand, financial decisions which increase the profitability will increase value of the firm. Risk an profitability are two essential ingredients of a business concern.

• importance of financial management can be summarized as follows:

• It brings economic growth and development through investments , financing, dividend and risk management decision which help companies to undertake better projects.

• When there is good growth and development of the economy it will ultimately improve the standard of living of all people.

• Improved standard of living will lead to good health and financial stress will reduce considerably.

• It enables the individual to take better financial decision which will reduce poverty, reduce debts and increase savings and investments.

• Better financial ability will lead to profitability which will create new jobs and in turn lead to more development , expansion and will promote efficiency.


Types of Finance

• OverdraftA popular form of finance because it has the advantages of availability, convenience and flexibility. However, because interest rates are high, it should only be used for short-term requirements such as funding working capital. Find out more about Overdraft.

Bank term loansThese provide fixed-term finance for longer periods. They are often secured by a charge against company assets and require you to sign legally binding covenants. Find out more about our Loans and Finance products

Asset-based financeThis describes financing an asset over its estimated life span using the asset as security for the loan. It can be structured so that the borrower has the sole right to use the asset and ownership transfers to the borrower at the end of the loan period. Find out more about our Asset Finance products

Receivables FinanceThis form of finance uses outstanding customer invoices as security. Find out more about Receivables Finance.

• Invoice discountingSimilar to Receivables Finance, this is usually only offered to larger companies with strong credit management systems.

Angel fundingAn individual invests in a company in return for shares in the company.

Venture capitalThere are organisations that specialise in investing in unquoted companies which they believe will offer high returns to investors. There is strong competition for this type of finance and you should only consider it after assessing all the alternatives.

Personal resourcesThese include personal savings, money borrowed from family and friends, or profits generated by the business.


Financial goals of organisation

• Financial Goals of Organization• The two important financial goals of organization

can be – profit maximization and – wealth maximization.

• Out of this wealth maximization is most important because it is based on cash flows of the organizations.

• On the other profit maximization can be vague as there can be multiple interpretations of profits.

• Moreover profits do not take care of time value of money and ignore risk attached to the returns.

• Also profit maximization focus on short term profitability which may not lead to long term wealth creation.

• Hence financial management is concerned with value maximization.

• Management's efforts are for increasing the value of the company for the shareholders.

• This requires investing in projects that are likely to provide positive returns to the company.

• Hence wealth maximization accounts for the timing and risk of the expected benefits.

• Earnings are valued by deducting the total costs from total income.

• Hence Net Earnings = Total Income - Total costs.• Cash flows will only take cash inflows and cash

outflows.• Increase in cash flows can lead to improvement in

wealth maximization. • Management decisions affect the stockholder

wealth greatly. They can affect the wealth by following decisions: – Present and future earnings per share – Investment decision: This is related to deciding about

the composition of fixed assets – Financing decision: This is deciding about the mix of

sources of funds – Working capital managements – Profit allocation decisions

• We must understand that the firms' primary objective is maximizing the welfare of owners, but, in operational terms, they focus on the satisfaction of its customers through the production of goods and services needed by them.

• Firms state their vision, mission and values in broad terms. Wealth maximization is more appropriately a decision criterion, rather than an objective or a goal.


Financial Forecasting• Financial Forecasting describes the process by which firms think about and prepare

for the future. The forecasting process provides the means for a firm to express its goals and priorities and to ensure that they are internally consistent. It also assists the firm in identifying the asset requirements and needs for external financing.

• For example, the principal driver of the forecasting process is generally the sales forecast. Since most Balance Sheet and Income Statement accounts are related to sales, the forecasting process can help the firm assess the increase in Current and Fixed Assets which will be needed to support the forecasted sales level. Similarly, the external financing which will be needed to pay for the forecasted increase in assets can be determined.

• Firms also have goals related to Capital Structure (the mix of debt and equity used to finance the firms assets), Dividend Policy, and Working Capital Management. Therefore, the forecasting process allows the firm to determine if its forecasted sales growth rate is consistent with its desired Capital Structure and Dividend Policy.

• The forecasting approach presented in this section is the Percentage of Sales method. It forecasts the Balance Sheet and Income Statement by assuming that most accounts maintain a fixed proportion of Sales. This approach, although fairly simple, illustrates many of the issues related to forecasting and can readily be extended to allow for a more flexible technique, such as forecasting items on an individual basis.


Financial plan

• a financial plan is a series of steps which are carried out, or goals that are accomplished, which relate to an individual's or a business's financial affairs.

• This often includes a budget which organizes an individual's finances and sometimes includes a series of steps or specific goals for spending and saving future income.

• This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings.

• A financial plan sometimes refers to an investment plan, which allocates savings to various assets or projects expected to produce future income, such as a new business or product line, shares in an existing business, or real estate.

• In business, a financial plan can refer to the three primary financial statements (balance sheet, income statement, and cash flow statement) created within a business plan.

• Financial forecast or financial plan can also refer to an annual projection of income and expenses for a company, division or department.

• A financial plan can also be an estimation of cash needs and a decision on how to raise the cash, such as through borrowing or issuing additional shares in a company.


Break Even analysis

• Break-even analysis is a technique widely used by production management and management accountants. It is based on categorising production costs between those which are "variable" (costs that change when the production output changes) and those that are "fixed" (costs not directly related to the volume of production).

• Total variable and fixed costs are compared with sales revenue in order to determine the level of sales volume, sales value or production at which the business makes neither a profit nor a loss (the "break-even point").

• The Break-Even Chart• In its simplest form, the break-even

chart is a graphical representation of costs at various levels of activity shown on the same chart as the variation of income (or sales, revenue) with the same variation in activity. The point at which neither profit nor loss is made is known as the "break-even point“

• the line OA represents the variation of income at varying levels of production activity ("output"). OB represents the total fixed costs in the business. As output increases, variable costs are incurred, meaning that total costs (fixed + variable) also increase. At low levels of output, Costs are greater than Income. At the point of intersection, P, costs are exactly equal to income, and hence neither profit nor loss is made.


• Fixed Costs• Fixed costs are those business costs

that are not directly related to the level of production or output. In other words, even if the business has a zero output or high output, the level of fixed costs will remain broadly the same. In the long term fixed costs can alter - perhaps as a result of investment in production capacity (e.g. adding a new factory unit) or through the growth in overheads required to support a larger, more complex business.

• Examples of fixed costs:- Rent and rates- Depreciation- Research and development- Marketing costs (non- revenue related)- Administration costs


• 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 costs such as commission.

• A distinction is often made between "Direct" variable costs and "Indirect" variable costs.• Direct variable costs are those which can be directly attributable to the production of a

particular product or service and allocated to a particular cost centre. Raw materials and the wages those working on the production line are good examples.

• Indirect variable costs cannot be directly attributable to production but they do vary with output. These include depreciation (where it is calculated related to output - e.g. machine hours), maintenance and certain labour costs.

• Semi-Variable Costs• Whilst the distinction between fixed and variable costs is a convenient way of

categorising business costs, in reality there are some costs which are fixed in nature but which increase when output reaches certain levels. These are largely related to the overall "scale" and/or complexity of the business. For example, when a business has relatively low levels of output or sales, it may not require costs associated with functions such as human resource management or a fully-resourced finance department. However, as the scale of the business grows (e.g. output, number people employed, number and complexity of transactions) then more resources are required. If production rises suddenly then some short-term increase in warehousing and/or transport may be required. In these circumstances, we say that part of the cost is variable and part fixed.

Break-Even Analysis

• Study of interrelationships among a firm’s sales, costs, and operating profit at various levels of output

• Break-even point is the Q where TR = TC (Q1 to Q2 on graph)

TR

TC

Q

$’s

Profit

Q1 Q2

14R'tist@Tourism, Pondicherry University

Management of current Assets

• Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity.

• Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital.

• Net working capital is calculated as current assets minus current liabilities.

• It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows).

• If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.

• Net Working Capital = Current Assets − Current Liabilities

• Net Operating Working Capital = Current Assets − Non Interest-bearing Current Liabilities

• Equity Working Capital = Current Assets − Current Liabilities − Long-term Debt

• A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash.

• Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses.

• The management of working capital involves managing inventories, accounts receivable and payable, and cash.R'tist@Tourism, Pondicherry University 15


Calculation• Current assets and current liabilities include three accounts which are of special

importance. These accounts represent the areas of the business where managers 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 represents a short-term claim to current assets and is often secured by long term assets. Common types of short-term debt are bank loans and lines of credit.

• An increase in working capital indicates that the business has either increased current assets (that is has increased its receivables, or other current assets) or has decreased current liabilities, for example has paid off some short-term creditors.

• Implications on M&A: The common commercial definition of working capital for the purpose of a working capital adjustment in an M&A transaction (i.e. for a working capital adjustment mechanism in a sale and purchase agreement) is equal to:– Current Assets – Current Liabilities excluding deferred tax assets/liabilities, excess cash,

surplus assets and/or deposit balances.– Cash balance items often attract a one-for-one purchase price adjustment.


Management of working capital

• Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital.

• These policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable.– Cash management. Identify the cash balance which allows for the business to meet

day to day expenses, but reduces cash holding costs.– Inventory management. Identify the level of inventory which allows for

uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow. Besides this, the lead times in production should be lowered to reduce Work in Progress (WIP) and similarly, the Finished Goods should be kept on as low level as possible to avoid over production

– Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa);

– Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".


• Characteristics of Working Capital• Needs that are Short Term: Working capital

is being utilized in acquiring current assets which will be converted to cash for a short period only.

• Circular Movement: Working capital is being converted to cash constantly which will just be turned as a working capital all over again.

• Permanency: Although it is just a kind of short term capital, working capital is needed by a business forever and always.

• Fluctuation: Working still fluctuates every now and then even it is something permanent.

• Liquidity: It is very liquid for it can be converted as cash any time without losing anything.

• Less Risky: Investments in current assets such as working capital comes with less risk for it is just for short term.

• No Need for Special Accounting System: Since working capital is a short term asset that will last for a year only, there will be no need for adoption of a special accounting system.

• Sources of Working Capital– Operational funds– Sales of assets that are non-current– Long term investments’ sales– Physical fixed assets’ sales– Intangible fixed assets’ sales– Financing for longer term– Borrowings that are long term– Issuance of preference and equity

shares

Operating cycle and cash cycle:• The investment in working capital

is influenced by four key events in the production and sales cycle of the firm:– 1. Purchase of raw materials

2. Payment of raw materials3. Sale of finished goods4. Collection of cash for sales


• Several strategies are available to a firm for financing its capital requirements. Three strategies are illustrated by lines A,B, and C below.– Strategy A: Long term financing is used to meet fixed asset

requirement as well as peak working capital requirement. When the working capital requirement is less than its peak level, the surplus is invested in liquid assets (cash and marketable securities).

– Strategy B: Long term financing is used to meet fixed assets requirement, permanent working capital requirement, and a portion of fluctuating working capital requirement. During seasonal swings, short-term financing is used during seasonal down swing surplus is invested in liquid assets.

– Strategy C: Long term financing is used to meet fixed asset requirement and permanent working capital requirement. Short term financing is used to meet fluctuating working capital requirement.


Cash Management

• cash management, or treasury management, is a marketing term for certain services offered primarily to larger business customers.

• It may be used to describe all bank accounts (such as checking accounts) provided to businesses of a certain size, but it is more often used to describe specific services such as cash concentration, zero balance accounting, and automated clearing house facilities.

• Sometimes, private banking customers are given cash management services.

• Cash management services generally offered– Account Reconcilement Services– Advanced Web Services– Armored Car Services (Cash

Collection Services)– Automated Clearing House– Balance Reporting Services– Cash Concentration Services– Lockbox – Retail– Lockbox – Wholesale– Positive Pay– Reverse Positive Pay– Sweep accounts– Zero Balance Accounting– Wire Transfer– Controlled Disbursement


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

• reducing claims expenses by setting up efficient receivables management processes, developing excellent knowledge of local payment and collection regulations and practices, accurately predicting the commercial and financial behaviour of buyers throughout the world and closely monitoring changes in their behaviour.

• You can benefit from our experience and recognition in this field:• - Better manage your amount of outstandings,

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


Inventory Management and Inventory Control• must be designed to meet the dictates of the marketplace and support the company's strategic

plan. The many changes in market demand, new opportunities due to worldwide marketing, global sourcing of materials, and new manufacturing technology, means many companies need to change their Inventory Management approach and change the process for Inventory Control.

• Despite the many changes that companies go through, the basic principles of Inventory Management and Inventory Control remain the same. Some of the new approaches and techniques are wrapped in new terminology, but the underlying principles for accomplishing good Inventory Management and Inventory activities have not changed.

• The Inventory Management system and the Inventory Control Process provides information to efficiently manage the flow of materials, effectively utilize people and equipment, coordinate internal activities, and communicate with customers. Inventory Management and the activities of Inventory Control do not make decisions or manage operations; they provide the information to Managers who makemore accurate and timely decisions to manage their operations.

• The basic building blocks for the Inventory Management system and Inventory Control activities are: Sales Forecasting or Demand Management Sales and Operations Planning Production Planning Material Requirements Planning Inventory Reduction

• The emphases on each area will vary depending on the company and how it operates, and what requirements are placed on it due to market demands. Each of the areas above will need to be addressed in some form or another to have a successful program of Inventory Management and Inventory Control.


Fixed assets management• Fixed assets management is an accounting process that seeks to

track fixed assets for the purposes of financial accounting, preventive maintenance, and theft deterrence.

•Many organizations face a significant challenge to track the location, quantity, condition, maintenance and depreciation status of their fixed assets. A popular approach to tracking fixed assets utilizes serial numbered Asset Tags, often with bar codes for easy and accurate reading. Periodically, the owner of the assets can take inventory with a mobile barcode reader and then produce a report.

• Off-the-shelf software packages for fixed asset management are marketed to businesses small and large. Some Enterprise Resource Planning systems are available with fixed assets modules.

• Some tracking methods automate the process, such as by using fixed scanners to read bar codes on railway freight cars or by attaching a radio-frequency identification(RFID) tag to an asset.


Importance of capital budgeting• Capital budgeting decisions are of paramount importance in financial decision. So it

needs special care on account of the following reasons:– 1. Long-term Implications: A capital budgeting decision has its effect over a long time span

and inevitably affects the company’s future cost structure and growth. A wrong decision can prove disastrous for the long-term survival of firm. On the other hand, lack of investment in asset would influence the competitive position of the firm. So the capital budgeting decisions determine the future destiny of the company.

– 2. Involvement of large amount of funds: Capital budgeting decisions need substantial amount of capital outlay. This underlines the need for thoughtful, wise and correct decisions as an incorrect decision would not only result in losses but also prevent the firm from earning profit from other investments which could not be undertaken.

– 3. Irreversible decisions: Capital budgeting decisions in most of the cases are irreversible because it is difficult to find a market for such assets. The only way out will be scrap the capital assets so acquired and incur heavy losses.

– 4. Risk and uncertainty: Capital budgeting decision is surrounded by great number of uncertainties. Investment is present and investment is future. The future is uncertain and full of risks. Longer the period of project, greater may be the risk and uncertainty. The estimates about cost, revenues and profits may not come true.

– 5. Difficult to make: Capital budgeting decision making is a difficult and complicated exercise for the management. These decisions require an over all assessment of future events which are uncertain. It is really a marathon job to estimate the future benefits and cost correctly in quantitative terms subject to the uncertainties caused by economic-political social and technological factors.


Kinds of capital budgeting decisions•

Generally the business firms are confronted with three types of capital budgeting decisions. (i) The accept-reject decisions; (ii) mutually exclusive decisions; and (iii) capital rationing decisions– 1. Accept-reject decisions: Business firm is confronted with alternative investment

proposals. If the proposal is accepted, the firm incur the investment and not otherwise. Broadly, all those investment proposals which yield a rate of return greater than cost of capital are accepted and the others are rejected. Under this criterion, all the independent proposals are accepted.

– 2. Mutually exclusive decisions: It includes all those projects which compete with each other in a way that acceptance of one precludes the acceptance of other or others. Thus, some technique has to be used for selecting the best among all and eliminates other alternatives.

– 3. Capital rationing decisions: Capital budgeting decision is a simple process in those firms where fund is not the constraint, but in majority of the cases, firms have fixed capital budget. So large amount of projects compete for these limited budgets. So the firm rations them in a manner so as to maximize the long run returns. Thus, capital rationing refers to the situations where the firm has more acceptable investment requiring greater amount of finance than is available with the firm. It is concerned with the selection of a group of investment out of many investment proposals ranked in the descending order of the rate or return.


• Non-discounted techniques– Pay back period– Accounting rate of return

method

• Discounted techniques– Net present value method– Internal rate of return

method


Difference between capital and financial structures• In simple terms, financial structure consists of

all assets, all liabilities and the capital. The manner in which an organization’s assets are financed is referred to as its financial structure. There is another term called capital structure that confuses many. There are some similarities between capital structure and financial structure. However, there are many differences also that will be highlighted in this article.

• If you take a look at the balance sheet of a company, the entire left hand side which includes liabilities plus equity is called the financial structure of the company. It contains all the long term and short term sources of capital. On the other hand, capital structure is the sum total of all long term sources of capital and thus is a part of the financial structure. It includes debentures, long term debt, preference share capital, equity share capital and retained earnings. In the simplest of terms, capital structure of a company is that part of financial structure that reflects long term sources of capital.

• However, capital structure needs to be distinguished from asset structure that is the sum total of assets represented by fixed assets and current assets. This is the total capital of the business that is contained in the right hand side of the balance sheet. The composition of a firm’s liabilities is therefore referred to as its capital structure. If a firm has a capital that is 30% equity financed and 70% debt financed, , the leverage of the firm is only 70%.

• Capital Structure vs Financial Structure– Capital structure of a company is long term

financing which includes long term debt, common stock and preferred stock and retained earnings.

– Financial structure on the other hands also includes short term debt and accounts payable.

– Capital structure is thus a subset of financial structure of a company.


• In their seminal 1958 paper, FRANCO MODIGLIANI and MERTON MILLER initiated the modern discussion of the amount of debt corporations should use (both received the Nobel Prize for this work and other contributions to economic research). The paper is so well known that, for more than thirty years, financial economists have referred to their theory as “the M&M theory.”

• Financial economists have singled out three additional factors that limit the amount of debt financing:– personal taxes, – BANKRUPTCY costs, and – agency costs.

• Corporations trade off the benefits of government-subsidized debt against the costs of these three factors. This model of corporate financial structure is therefore called the trade-off theory.

• Determinants of financial Structure– Legal restrictions– Liquidity– Access to the capital

market– Restriction in loan

agreements– Control– Investment

opportunities– Inflation– Share holders

expectations– Financial needs of the

company


Financial leverage

• Financial leverage is also called trading on equity

• We need to understand debts and interest on debts

• A company finances its projects through various sources, thee sources are debts.

• Preference share capital, common share capital, reserves and surplus are part of these sources

• A company is legally bound to pay interest on debts

• The rate of dividend to be paid on preference share capital is also fixed

• Dividend or preference share is paid only when the company earns profit

• The earnings after deducting taxes, interest and preference dividend belong to equity share holders

• Effective of financial leverage on share holders– To increase share

holders earnings– Earnings per share

increase

• Earnings per share is also called net income

• It is obtained by dividing the earnings after interest and taxes

• EPS = (X-R) (1-t)/N


Dividend Policy

• Dividend Policy refers to the explicit or implicit decision of the Board of Directors regarding the amount of residual earnings (past or present) that should be distributed to the shareholders of the corporation.– This decision is considered a

financing decision because the profits of the corporation are an important source of financing available to the firm.

• Types of Dividends• Dividends are a permanent

distribution of residual earnings/property of the corporation to its owners.

• Dividends can be in the form of:– Cash– Additional Shares of Stock

(stock dividend)– Property

• If a firm is dissolved, at the end of the process, a final dividend of any residual amount is made to the shareholders – this is known as a liquidating dividend.


• Dividend Policy• Once a company makes a

profit, management must decide on what to do with those profits. They could continue to retain the profits within the company, or they could pay out the profits to the owners of the firm in the form of dividends.

• Once the company decides on whether to pay dividends they may establish a somewhat permanent dividend policy, which may in turn impact on investors and perceptions of the company in the financial markets. What they decide depends on the situation of the company now and in the future. It also depends on the preferences of investors and potential investors.

• Dividend policy is concerned with taking a decision regarding paying cash dividend in the present or paying an increased dividend at a later stage. The firm could also pay in the form of stock dividends which unlike cash dividends do not provide liquidity to the investors, however, it ensures capital gains to the stockholders. The expectations of dividends by shareholders helps them determine the share value, therefore, dividend policy is a significant decision taken by the financial managers of any company.


• Coming up with a dividend policy is challenging for the directors and financial managers of a company, because different investors have different views on present cash dividends and future capital gains.

• Another confusion that pops up is regarding the extent of effect of dividends on the share price.

• Due to this controversial nature of a dividend policy it is often called the Dividend puzzle.

• Various models have been developed to help firms analyse and evaluate the perfect dividend policy.

• There is no agreement between these schools of thought over the relationship between dividends and the value of the share or the wealth of the shareholders in other words.

• One school comprises of people like James E. Walter and Myron J. Gordon (see Gordon model), who believe that current cash dividends are less risky than future capital gains. Thus, they say that investors prefer those firms which pay regular dividends and such dividends affect the market price of the share. Another school linked to Modigliani and Miller holds that investors don't really choose between future gains and cash dividends.


• Types of Dividend Policy:– a. Stable Dividend Policy– b. Fluctuating Dividend Policy– c. Small Constant Dividend per Share plus Extra Dividend.

• Forms of Dividend– Cash Dividend

• Cash dividends(most common) are those paid out in the form of a cheque. Such dividends are a form of investment income and are usually taxable to the recipient in the year they are paid.

• This is the most common method of sharing corporate profits with the shareholders of the company. For each share owned, a declared amount of money is distributed. Thus, if a person owns 100 shares and the cash dividend is $0.50 per share, the person will be issued a cheque for 50 dollars.

– Stock Dividend– Stock or scrip dividends are those paid out in form of additional stock

shares of the issuing corporation, or other corporation (such as its subsidiary corporation).

– They are usually issued in proportion to shares owned (for example, for every 100 shares of stock owned, 5% stock dividend will yield 5 extra shares). If this payment involves the issue of new shares, this is very similar to a stock split in that it increases the total number of shares while lowering the price of each share and does not change the market capitalization or the total value of the shares held.


Tourism Finance corporation of India

• The Government of India had, pursuant to the recommendations of the National Committee on Tourism viz Yunus Committee set up under the aegis of Planning Commission, decided in 1988, to promote a separate All-India Financial Institution for providing financial assistance to tourism-related activities/projects. In accordance with the above decision, the IFCI Ltd. along with other All-India Financial/Investment Institutions and Nationalised Banks promoted a Public Limited Company under the name of "Tourism Finance Corporation of India Ltd. (TFCI)" to function as a specialised All-India Development Financial Institution to cater to the financial needs of tourism industry.

• The Government of India had, pursuant to the recommendations of the National Committee on Tourism viz Yunus Committee set up under the aegis of Planning Commission, decided in 1988, to promote a separate All-India Financial Institution for providing financial assistance to tourism-related activities/projects. In accordance with the above decision, the IFCI Ltd. along with other All-India Financial/Investment Institutions and Nationalised Banks promoted a Public Limited Company under the name of "Tourism Finance Corporation of India Ltd. (TFCI)" to function as a specialised All-India Development Financial Institution to cater to the financial needs of tourism industry. TFCI was incorporated as a Public Limited Company under the Companies Act, 1956 on 27th January 1989 and became operational with effect from 1st February 1989 on receipt of Certificate of the Commencement of Business from the Registrar of Companies. TFCI has been notified as a Public Financial Institution under section 4A of the Companies Act, 1956, vide Notification No S.O 7(E) dated the 3rd January 1990 issued by the Ministry of Industry, Department of Company Affairs. TFCI's Registered office is situated at 13th Floor, IFCI Tower, 61, Nehru Place, New Delhi - 110 019.


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

• Hotels, Restaurants, Holiday Resorts, Amusement Parks, Multiplexes and Entertainment Centers, Education and Sports, Safari Parks, Rope-ways, Cultural Centers, Convention Halls, Transport, Travel and Tour Operating Agencies, Air Service, Tourism Emporia, Sports Facilities etc.

• Forms of Financial AssistanceRupee Loan , Underwriting of public issues of shares/debentures and direct subscription to such securities, Guarantee of deferred payments and credit raised abroad., 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 with capital cost of Rs. 3 crore and above. In respect of projects costing between Rs. 1 crore and Rs. 3 crore, TFCI will consider financial assistance to the extent of unavoidable gap, if any, remaining after taking into account assistance from State Level Institutions/Banks. Unique projects, which are important from the tourism point of view and for which assistance from State Level institutions/ Banks is not available, may be considered on exceptional basis even though their capital cost is below Rs. 1 crore. Financial assistance is considered on similar lines for heritage and restaurant projects. Projects with high capital cost may be financed along with other All-India Financial/Investment Institutions. TFCI considers assistance even if the total cost is less than Rs. 3 crore for existing concerns with satisfactory performance for renovation/upgradation etc. track record of atleast 3 years and assisted concerns of TFCI with satisfactory credit record. The working capital limit would be calculated based on the turnover method as may be considered appropriate.


• Promoters' Contribution• The minimum promoters' contribution for the projects is 30%. Relaxation may, however, be allowed in respect of large

projects involving capital cost exceeding Rs. 50 crore.

Debt Equity Ratio• TFCI extends term-loan assistance based on debt-equity ratio not exceeding 1.5:1. However, in case of hotels in

seasonal locations/ multiplexes/ entertainment centers, amusement parks and other tourism-related projects, the debt-equity ratio would be stipulated in the range of 1:1 to 1.25:1. Rate of Interest

• Interest on loan is flexible and linked to the PLR of TFCI which is presently 12.5% p.a. (since 1st August 2008). TFCI, while considering loans to the borrowers, evaluates each concern individually on various parameters such as Industry/ Business Risk, Environmental Risk, Project Risk, Management Risk, Security available, Income value to TFCI, etc. and accords rating ranging from AAA to B category. Loan is priced according to the prevalent PLR and the rating so achieved by the individual client within a spread ranging from PLR to PLR+1.5% per annum. High Risk Projects are charged interest at PLR+3% per annum. Interest is levied on monthly rests. In case of consortium/ multiple funding, if higher rate is charged by any other institution than the same rate is applicable to TFCI loan also. Besides, TFCI also charges appraisal-cum- up front fee @ 1% of the loan amount sanctioned as one time charge.Security

• First charge on movable and immovable fixed assets. Personal Guarantees of the Promoters and Corporate guarantee of the group concern, if necessary. Pledge of promoters' share-holding.Repayment Schedule

• This would depend on the period required for completion of the project and stabilisation of operations as also the projected cash-flows available for debt-servicing. The general norm of repayment is 8 years allowing moratorium of 2 years after full commercial operations. In case of multiplexes/ entertainment centers the cash-flows in the initial years are satisfactory; as such, the repayment of the loans to this sector could be made in 6-7 years allowing moratorium of 1-1½ years after full commercial operations. Norms for Takeover Financing

• TFCI may consider financing well-established, assisted concerns having over 3 years' satisfactory track record for takeover of tourism-related project/company. Norms for Working-Capital Financing

• The Working Capital assistance would be provided to concerns in the tourism sector with proven


Accounting


• Balance sheet indicates structure of the assets belonging to the company and financial means used to finance these assets at a particular point of time.

• For example: this statement as of December 31, 2006 indicated structure of the assets and how they are finances on December 31, 2006.

• This statement is made on the basis of accounting equation, i.e. assets are equal to the sum of liabilities and owners’ equity.

• The assets side includes current and long-term assets.

• Liabilities and owners’ equity side includes current and long-term liabilities, owners’ equity consisting of share capital, retained earnings, i.e. net profit earned and retained in the business.

• Income statement indicates income earned and expenses incurred by the company for a particular period of time.

• For example: this statement for the year 2006 indicated, what income was earned and what expenses were incurred by the company during the year 2006. Difference between all income and all expenses is called net profit for the year.

• Starting point of preparing financial statements is adjusted trial balance, which includes list of all general ledger accounts with the balances in those accounts.

• Worth to notice several important points: – 1. Accumulated depreciation account has a credit

balance.

• As it was explained earlier this account is contrary to the fixed assets account, in Alfa’s case Equipment account.

• In the financial statements on the assets’ side difference between cost of fixed assets and accumulated depreciation, called net book value, is indicated – 2. Balances of income and expenses are included into the

income statement 3. Net profit retained in the business (5883$) from income statement is transferred to the balance sheet under owners’ equity part



Balance Sheet

• A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.

The balance sheet must follow the following formula:

Assets = Liabilities + Shareholders' Equity


Cash flow statement

• The statement of cash flows is one of the main financial statements. (The other financial statements are the balance sheet, income statement, and statement of stockholders' equity.)

• The cash flow statement reports the cash generated and used during the time interval specified in its heading.

• The period of time that the statement covers is chosen by the company. For example, the heading may state "For the Three Months Ended December 31, 2010" or "The Fiscal Year Ended September 30, 2010".

• The cash flow statement organizes and reports the cash generated and used in the following categories:– 1.Operating activities–converts the items reported on

the income statement from the accrual basis of accounting to cash.

– 2.Investing activities–reports the purchase and sale of long-term investments and property, plant and equipment.

– 3.Financing activities–reports the issuance and repurchase of the company's own bonds and stock and the payment of dividends.

– 4.Supplemental information–reports the exchange of significant items that did not involve cash and reports the amount of income taxes paid and interest paid.


Fund flow statement

• Financial statements do not give the complete financial information. These statements give the information of funds on a particular date. The purpose of preparation of fund flow statements is to know about from where funds are coming and where being invested. The funds flow statements is generally prepared from the data identifiable and profit and loss account and balance sheets. Fund flow statement is also called as sources and application of funds. It shows the detail of funds business received from sources and the amount of funds the business used for different purposes in the year.

• Acc. To FOURLKE,” A statement of sources and application of funds, is a technical advice designed to highlight the changes in financial position of business enterprise between two dates.”

• There are few other reasons to prepare fund flow statement:– It explains the financial consequences

of business operations: Fund flow statement gives answer to following conflicting situations.• How the business could have good

liquid position in spite of business making loses or acquisition of fixed assets?

• Where have the profits gone?• How a business can earn more and

more profits.

– It answers intricate queries:• How much fund is generated from

normal business operations?• What are the sources of repayment of

loans?• How to utilize the funds up to optimum

level?

– It acts as an instrument for allocation of resources.

– It is a test of effectiveness in use of working capital.


Hotel accounting• Hotels follow the general principles of accounting, but due to the unique nature of guest accounting, hotel accounting

departments use terms that may not be familiar to accountants in other industries. Accounting terms related to the management of guest payments, charges and disputes can be confusing to outsiders, but they represent everyday concepts in the hotel industry.

Folio• The record of all credits and debits associated with a guest or group is called an account and an account can be organized

by sections, or folios. Common folio divisions include one each for room charges, food and beverage charges and miscellaneous charges. Multiple folios are often used with convention guest accounts, as the hotel room rate may be paid by the group while the individuals are responsible for their additional, or incidental charges.

• Separation of folios allows printing options, which is useful for blind rates--when the group room rate must remain unknown to the guest. At checkout, a convention guest can present payment for incidental charges and receive a printed receipt for only the folios that contain the charges for which she paid. The balance from the room charges folio remains blind to the guest and is transferred to the group account for later billing.

Room Charge• Guests that have a credit card on file for an account are eligible to sign for charges to guest rooms. At the point of sale,

guests sign a receipt authorizing the charge be paid by the method of payment on the account. The charge is then posted to the appropriate folio for the charge type.

• The alternative to a room charge is using another method of payment for services, such as cash or credit. Guests without credit cards on file are considered cash-only guests and do not have room charging privileges.

Posting• Any charges posted to a guest account are posted, either manually or through the hotel's computer system. Computer-

posted charges are known as interface postings and these are common from hotel outlets that use a cash register and point of sale system, such as a restaurant or gift shop.

• When room charge is designated as the payment type, the cashier enters the guest room number and the point of sale system interfaces with the property management system to post the charge. Manual charges are posted by a hotel employee, usually front desk or accounting. These charges might come from outlets without a point of sale system but are most commonly interface postings that did not go through due to system outage or incorrect room information.


Late Charge• A late charge occurs when a guest signs for a room charge after checking out of

the hotel. Common late charges include breakfast or minibar charges and manual postings due to system outage. Since the guest had a credit card on file, the front desk is able to use same card is used to pay for the charge. If the credit card declines, an invoice is mailed to the guest's address of record.

Advance Deposit• Advance deposits are prepayments for guest rooms or other hotel services.

These deposits are commonly used to secure reservations for weddings or conventions held at the hotel. In most catering or group events, the advance deposit is required 72 hours before the event occurs. The deposit is posted to the group account and charges are posted against the account as they occur.

Allowance• An allowance is a reversal of a posting. Allowances can occur due to duplicate

posting, disputes or bad debt. Although a voided payment through the point of sale system can create a negative interface posting, this is a correction instead of an allowance because revenue is not reduced. Allowances are always manual posts, and department managers generally review and research large allowances that would seriously impact revenue prior to authorizing posting.


Thank You…

Tourism Finance Management

Education

financial decisions

financial resources

financial activities

financial controls

finance manager

adefective financial

investment of funds

capital decisions