Edexcel Applied Business A2 unit 11 finance task A Essay Example

necessitates reliable funding sources that align with these long-term goals.

Day-to-day finances needed for a business to survive, such as employee wages and current expenses, are known as revenue expenditure and fall under the category of finance. Short-term or medium-term sources of finance are typically used for quick returns. The specific sources of finance employed depend on the type of business. In the case of a public limited company like Thomas Cook Group Plc, rights issues may be used as they have publicly available shares.

Thomas Cook Group plc could consider using public shares as a source of finance, since they are only applicable for public limited companies. Utilizing shareholders' investments to fuel the business would be a suitable option, since these investments typically account for considerable amounts of money. This source of finance is particularly beneficial since the company does not need to pay interest. However, as a long term source of finance, shareholders expect a dividend return on their investment. Alternatively, Thomas Cook Group plc could also receive financing from bank loans.

This information suggests that public limited companies are a suitable option for banks to lend money to because they are larger and therefore present less risk for loan repayment. Conversely, other types of businesses such as partnerships may be too risky for banks to lend money to due to their limited sources of funds and unlimited liability. If a bank chooses to lend money to a smaller business, they may charge higher interest rates to ensure repayment. However, interest rates for loans given to public limited companies may be lower, though this depends on the lender. It's important to note that bank loans

are a medium to long-term source of finance and the duration of repayment agreed upon affects the level of risk involved.

Sale and leaseback is an internal financing option that can benefit companies by providing an upfront cash payment, improving their cash flow in the short term. However, this method comes with a potential drawback as the company will have to pay rent for leasing the asset that was previously owned, which could lower profits if used in the long term. Another viable financing option for Thomas Cook Group plc is retained profit. Given the size of the company, it is likely that they have accumulated a substantial amount of retained profit to allocate towards future investments.

The business can opt for a cost-effective and flexible source of finance through an overdraft which does not require interest payments. It allows the business to obtain the necessary funds as required. Overdrafts are short-term solutions that can be used for emergencies such as those that may be suitable for Thomas Cook. This source of finance is commonly used by public limited companies to manage their cash flow effectively. Overdrafts are less risky than taking out bank loans as they are short-term. Thomas Cook Group uses borrowings in the form of a short-term overdraft that needs to be repaid within a year.

Thomas Cook, being a seasonal business, requires financing during off-peak seasons when income is lower due to decreased demand for holidays. This allows them to meet expenses such as employee wages and advance bookings for hotels and flights for the upcoming summer season. An overdraft serves to facilitate cash flow. The balance sheet of Thomas Cook indicates a borrowing

increase from �17.5 million to �74 million since 2008.

In 2009, Thomas Cook experienced a significant increase in their borrowing, with the figure reaching 7 million. While this may be interpreted as a positive indication that the market has expanded and the company needs to borrow more for booking hotels and other services, if it becomes a long-term trend and is used to cover debts, it may have negative implications for the business. It is not uncommon for companies, especially those having seasonal peak times, to have an overdraft.

Due to its quick accessibility, an overdraft is a suitable option for Thomas Cook as they require swift access to funds for fulfilling business needs such as timely payment of salaries. However, there exist certain disadvantages associated with an overdraft, such as the bank's ability to recall it at any time. In the event that a bank faces financial difficulties and requires money, it may recall large business overdrafts, causing Thomas Cook to seek alternative sources of finance, such as loans, which can prove costly. Additionally, the daily interest charged on an overdraft can further increase the expenses incurred by Thomas Cook.

Thomas Cook's trade credit pertains to all items that are booked but not paid for until a later date, including Hotels, supplies, flights, and other payables. The company's responsibility includes timely booking of hotels to ensure proper reception of customers.

Thomas Cook uses trade credit to strategically book hotels for their customers. They book more rooms in March, ahead of the peak summer season in April and May when they can attract more customers. Conversely, they book fewer rooms in August and off-peak months like

November. By using trade credit, Thomas Cook is given a two-month grace period after booking to pay for the hotel rooms, allowing them time to generate customer revenue. Once customers pay their deposit, it can be used to cover the cost of the hotel room. This approach helps ease cash flow for the company.

Besides making travel arrangements, Thomas Cook is also involved in reserving flights and seats for their clients. They have the option to book seats through other travel companies, such as Thomson, but they typically have a longer time frame to make payment – sometimes even up to six months. This represents a benefit for Thomas Cook, as it allows them to acquire something without immediate payment. Trade credit is an ideal financing solution for Thomas Cook since it aligns with the company's needs. As per the balance sheet of Thomas Cook in 2009, their trade credit was notably higher in comparison to other current liabilities, amounting to �2.

As of October 31st, Thomas Cook's trade credit is at a substantial amount of 046.1 million due to their responsibility to book flights and hotels for their customers. It is important to note that this figure may fluctuate depending on the season and month as the business operates within seasons.

Despite its advantages, trade credit can also be disadvantageous, as it may be difficult for Thomas Cook to secure customers for hotels and flights, resulting in a loss of funds as they still have to pay the hotels later on. This factor can lead to the company facing cash flow issues. On the other hand, Thomas Cook gains assets via trade credit, but payment can

still cause difficulties in cases where there is no income from customers. As a result, the company receives revenue in advance from customers through deposits and sometimes full payments. This approach results in revenue being received before the customer goes on vacation. Additionally, if a customer books significantly in advance, it becomes Thomas Cook's obligation to book the hotels or flights.

Thomas Cook requires a substantial deposit to act as a safety measure for the company and to cover pre-paid expenses. If Thomas Cook reserves hotels for a client, and the client withdraws, the deposit covers the hotel costs if Thomas Cook can’t find another customer for it. Thus, acquiring a deposit from the client is crucial. However, this financing system poses a disadvantage as they must ensure they can provide the vacation to the client, which can be risky if the hotel or flight isn't already reserved. Hence, Thomas Cook must control this financing option.

Thomas Cook utilizes long term borrowings, which are a type of liabilities classified under 'Long term sources of finance' and 'Non current liabilities'. These borrowings comprise bank loans for mortgages, which are commonly used for repaying a house over an extended period. Thomas Cook employs mortgages to pay off fixed assets such as buildings and some of its hotels. Longer term borrowings are advantageous as they offer better interest rates compared to short term borrowings, owing to their longer repayment period.

Although there may be a possibility of increased interest rates, opting for a long-term borrowing is ideal for Thomas Cook as it enables them to pay off debts gradually over an extended period. Thomas Cook predominantly relies on obligations under finance

leases, which allows them to lease assets instead of purchasing them. This is a noteworthy source of long-term funding for the company, particularly in the travel industry due to the specific assets required. Leasing aircrafts is a frequent practice for Thomas Cook as it offers operational flexibility.

Leasing is a crucial aspect of Thomas Cook's operations, as it enables the company to access the latest aircraft to meet its requirements. The flexibility of leasing allows the company to adjust its fleet size based on customer demand and seasonal variations, minimizing the risk of tying up resources in unproductive assets. By doing so, Thomas Cook is able to increase its cost-effectiveness. According to the company's balance sheet, its spending on finance lease obligations was £515.3million - the same amount as in 2008.

Although Thomas Cook is still leasing the same amount of aircraft, this may indicate a stable market. However, in the future, leasing may cost Thomas Cook more compared to buying aircrafts. Despite this disadvantage, being asset light could outweigh the benefits as it allows for flexibility and more market and customer focus through aircraft leasing.

Thomas Cook's equity consists of the funds acquired from shareholders purchasing shares in the company. The called up share capital represents the amount of money raised through shares, with Thomas Cook having received �97.7 million and �303 million in 2009 and 2008, respectively. Shareholders are an integral source of finance for Thomas Cook.

The amount of 7 million is significantly greater than what it was in 2009, and despite receiving less financial support from shareholder Thomas Cook, the company now has increased control over its business operations. Thomas Cook acquired more

control by repurchasing shares during its merger with My Travel Group. As a result, Thomas Cook is authorized to offer 2 billion ordinary shares priced at 10 cents each, which has the potential to generate an original value of 200 million from shares. This also implies that Thomas Cook may opt to issue additional shares in the future, potentially serving as a source of financing for the company.

Thomas Cook must weigh the necessity of shares because a higher quantity of shares reduces the value of the business. To maintain a high value, Thomas Cook repurchased a significant amount of shares, reducing the number available. The company views called up share capital as an advantageous financing option because it doesn't require the payment of interest, and although shareholders expect to receive a dividend, the company isn't obligated to provide this. As a result, Thomas Cook has access to ready funds without incurring costs.

Retained earnings, defined as profit that is not distributed to shareholders, was reported as a surplus of �66.8 million for Thomas Cook in 2009. This strategic decision allows for a future source of finance, enabling reinvestment in the company. There may be plans for expanding into growing economy countries like China and India or enhancing long haul flight offerings. Conversely, in 2008 there was a deficit of (255) reflected in retained earnings.

2) It's likely that some of Thomas Cook's retained profit was distributed as a dividend to shareholders. While this isn't mandatory, offering dividends keeps shareholders invested and content. Without dividends, shareholders may lose interest or even sell their shares – which would negatively impact the company's income. Thomas Cook employs both short-term and

long-term financing options to meet their needs. In particular, they use short-term financing to manage fluctuations in seasonal demand.

Thomas Cook uses short-term finance to acquire assets paid through overdrafts, trade credit and prepayments to manage cash flow during off-peak and peak periods. Short-term finance is used for revenue expenditure, including employee salaries, and long-term finance is used to buy fixed liabilities like buildings and aircraft. The latter is suitable for large payments over extended periods to alleviate the burden of debt.

Utilizing Short-Term finance for this need is not recommended due to the implementation of high interest rates and the possibility of calling back finance sources such as overdrafts at any time. Thomas Cook employs both long and short-term finance. However, upon examining their balance sheet, it is noticeable that they mostly obtain their finance from short-term sources. The total amount of short-term finance sources for Thomas Cook in 2009 was �3190.5 million, while long-term finance was �866.8 million. This indicates that Thomas Cook primarily relies on short-term finance, specifically Trade and other payables which constitutes about �2.

Thomas Cook heavily relies on trade credit to operate their seasonal business of booking hotels and flights in advance. With a substantial amount of ?046.1 million coming from one source, they are able to book out a large number of hotels and flights, which increases their customer base and ultimately generates larger profits. However, this also poses a risk as the success of the business is dependent on their ability to receive the expected number of customers to pay off their finance.

Although Short-term finance is more commonly used by Thomas Cook, their primary source of long-term

finance is Finance Leasing, which amounts to �515.3million. This type of finance is particularly suited to the travel industry. While not as significant as trade credit finance, it still represents a potential risk for the company. Given that Thomas Cook leases aircraft on a long-term basis, this could prove costly and result in fewer fixed assets for the company.

Meanwhile, leasing a significant number of aircraft can offer Thomas Cook several advantages. If they were to purchase such assets, it would be more costly for the company, as they would consistently need to purchase up-to-date aircraft while rendering their older assets useless. As previously discussed, Thomas Cook may want to contemplate their future finance options given the growth of the travel industries in countries such as China and India. Expanding into these markets may necessitate alternative sources of finance. One potential option for Thomas Cook is to offer additional shares in the corporation since they have only sold less than half of their allotted amount. This would generate extra capital while avoiding any interest, though excessive share issuance may result in a loss of control for the company. Selling assets and then leasing them back may also provide financial benefit; as it stands, Thomas Cook already leases many of their assets, and disposing of their fixed assets could provide even greater benefits.

Thomas Cook can generate significant revenue from assets like buildings and certain aircraft, which will allow them to further reduce their assets and better accommodate the company's seasonal needs.