The Management of Alba Holidays Limited - Case Study Example

ALBA ALBA Titus Rock Manickam Order No. 231795 13 July 2008 Table of Contents Introduction3 Full Costing of One Week Sunbronzer Holiday in a Studio in Balerica 4 Functional Budgets for the Aircraft, the Holiday Studios, and the Administration Functions for One Year 6 Budget for the Aircraft 6 Budget for the Holiday Studios 6 Budget for Administration Functions 7 Total Annual Budget 7 Cash Budget for Sunbronzer operations for the year based on credit assumptions made by the candidate 8 Consolidated Profit Statement for all Sunbronzer's operations 8 Capital Investment Appraisal on the Viability of Leasing the Aeroplane 9 Additional and Alternative Approaches to the Existing Practices Used in the Business to Generate Extra Profitability 10 Need for Budgetary Control within Sunbronzer 11 Sources 13 ALBA Introduction Alba Holidays Limited, based in the west of Scotland, is relocating its business as an agency for packaged holidays for other holiday providers to a full-fledged corporate having its own aircraft and holiday studios. Alba is set to acquire on lease its own aircraft, a second-hand 160 seat plane. Once a week, the plane will fly with holiday passengers to the island resort of Balerica where Alba is developing its own 80 holiday studios under its brand name, Sunbronzer. Obviously, each studio is meant for at least two passengers. Balerica is Alba's premium holiday package brand. The rest of the week, the plane will fly holiday passengers to lower priced holiday packages under the brand name of Prestair. There is no mention about how many flights Alba plans to operate on daily basis. However, there is the mention that the plane will take 1.5 hours to cover the 600 miles distance to Balerica. This means the plane will take 2 hours to cover the average 800 miles daily the rest of the week days. A return trip to these locations obvious will double the mileage and time to 3 hours and 4 hours respectively for Balerica and other destinations. Assuming the plane is rested 6 hours during the day of the week when it is flown to Balerica and 5 hours during each week day when it is flown to other lower priced holiday packages destinations, it is capable of making maximum 6 trips a week on the same day to Balerica and 5 trips daily to other destinations rest of the week. The plane expects to have 90% occupancy annually. This means it will have approximately 144 passengers on each flight. This translates to maximum 864 passengers (144 x 6) weekly to Balerica and 4320 passengers (144 x 5 x 6) during the rest of the week to other holiday destinations. Thus, the total number of passengers for Balerica and other holiday destinations work out to 5184 (864 + 4320) every week. The industry average prices for equivalent brands are 380 for Balerica, and 300 for other holiday destinations. Details regarding costing, finance and administration are given as follows. Full Costing of One Week Sunbronzer Holiday in a Studio in Balerica The figures available in the instructions have been used to arrive at the full costing. However, there are other costs that have not been mentioned in the instructions and hence have been included. These are the costs of advertisements, additional manpower in the form of tour guides, drivers, etc, which serve as the unique sales points (USO) in the holidays' business. As per information available in the instructions, the following expenses have been included to arrive at the full costing figure: One Week's Costing (Sunbronzer) Hangar fees (100,000 x 52/357) 14,566 Aircraft Servicing @ 2 per air mile travelled (600 x 2 x 2) 2,400 Fuel (600 x 8 x 2) 9,600 Aircraft Cabin Maintenance (600 x 0.40 x 2) 480 Depreciation - Land & Building (480,000/ 7) 68,571 Depreciation - Furniture & Fixtures (320,000) 45,714 Allowances for Breakages 200 Gardening, Maintenance & Maid Allowances 500 Transfer from Balerica Airport to Villas 300 Local Factor's Fees 615 Local Representative's Salary 193 Landing Cost at Balerica Airport 2,160 Green Taxes Levied by UK Government 1,440 Finance & Administration Costs (139983/ 7) 19,998 TOTAL 166,737 The full costing of one week Sunbronzer holiday in a studio in Balerica works out to 1158 (166,737/144) for one trip by the aircraft and 193 (166,737/ 864) for six trips approximately. The total weekly costs for aircraft servicing, finance and administration works out to UK 957,871 (See Functional Budget in the next sub-heading). The total expected revenue from Alba's Balerica holiday studios and other destinations are as follows: Total Weekly Holidays for Balerica (1 trip) 144 x 380 54,720 Total Weekly Holidays for other destinations 144x6x300 259,200 (1 trip) Total Income (1 trip) 313,920 Total Weekly Holidays for Balerica (6 trips) 864 x 380 328,320 Total Weekly Holidays for other destinations 144x5x6x300 1,296,000 (5 trips) Total Income (5/6 trips) 1,624,320 Functional Budgets for the Aircraft, the Holiday Studios, and the Administration Functions for One Year According to the information and figures available in the instruction, the following are the budgest for the Aircraft, the Holiday Studios and the Administration functions for one year: Budget for the Aircraft *Initial Investment on Lease of the Aircraft 30 million Annual Costs: Hangar fees 100,000 Fuel - Balerica (600 x 51 x 8 x 2) 489,600 -do- Other destinations (800 x 306 x 8 x 2) ... 3,929,600 Servicing - Balerica (600 x 51 x 2 x 2) 122,400 -do- Other destinations (800 x 301 x 2 x 2) 963,200 Maintenance - Balerica (600 x 0.40 x 51 x 2)... 24,480 -do- Other destinations(800 x 0.40 x 301 x2) 192,640 5,821,920 Budget for the Holiday Studios Total Initial Investment for 80 Holiday Studios 8 million Annual Costs: Depreciation: Land & Building (6% on reducing balance) 480,000 Furniture & Fixtures (20% straight line) 320,000 Allowances for Breakages (200/week) 10,400 Gardening, Maintenance & Maid Service 26,000 Transfer from Balerica Airport to Villas 15,300 Local Factor's Fees 320,000 Local Representative's Salary 10,000 1,817,700 Budget for Administration Functions Rental of Premises 180,000 Business Rates 25,000 Utilities (200 x 357) 71,400 Consumables (100 x 357) 35,700 Telephone & Communication Costs (280x357). 99,960 Finance Manager's Salary 40,000 One Full time Assistant Accountant 16,000 Two General Assistants (12000 x 2) 24,000 4 Call Centre Sales Advisors (4 x 30 x 7 x 52). 43,680 **4 Call Centre Sales Advisors' Commission. 25,200 560,940 (1008 x 25) Total Annual Budget 8,200,560 *The Lease of Aircraft @ 30 million for five years is eligible for Capital Allowance @ 25% reducing balance. However, this allowance does not impact the financial statements of the company's first year of operation as it has to be accounted for from the second year. ** The number of holidays commission is based on 90% occupancy of the aircraft for a single trip in a weekday. That is 1008 = (144 x 7). Cash Budget for Sunbronzer operations for the year based on credit assumptions made by the candidate The terms for credit sales are tuned with the creditworthiness of customers and it affects the cash flow of the company. Tie up with banks and other recognized lenders is necessary to service customers opting for credit schemes and maintain steady cash flow records of the company. An in-house credit scheme help customers avail of credit options without additional efforts of arranging loan separately, and decide faster on holidays booking. The credit assumptions can be gauged from the financial statement of existing competitors. Credit customers are important and sizable component in the customer base. Therefore, it is necessary to treat them with due courtesy although they may be made to pay higher amount in the ultimate analysis due to the interest factor. The normal cautions must be observed while managing credit sales so that the company cash flow continues on healthy note. (Richard Siedleck) Consolidated Profit Statement for all Sunbronzer's operations The Sunbronzer operation is expected to generate the following income, expenditure and profit margin. Annual Income (54,720 x 51) 2,790,720 Annual Expenditure 1,817,700 -------------- Gross Profit 973,020 -------------- However, this gross profit is not the true measure of profitability because other costs such as advertisement and other important manpower requirement such as tour guides and drivers are not included. (Mclean Scotland) It is necessary to know the volume of customer base Alba is expecting to attend to project a realistic profit statement. This depends on the number of flights Alba decides to operate, because the number of customers depends on the number of flights Alba ultimately operates. Also, the profitability of Alba Holidays' new venture depends on several factors crucial to the vibrant functioning of any business house. There is stiff competition in the travel and holidays industry making it an arena where only the fittest survive. Thus, it is important to understand and stick to the mantras right in the beginning to ensure continuous viability of the organization. Quality service, well-organized holiday packages, well-conceived advertisements including awareness of the very important word-of-mouth advertisement segment play important and critical roles in giving new ventures the right start. (Holiday packages by Caledonian Classic car hire) The annual budget of Sunbronzer and Prestair is estimated at 8,200,560. This figure increases by 5,000,000 to 13,200,560 if the annual aircraft lease liability is included. Even if Alba operates a single flight every day, its weekly income is 313,920, yielding an annual revenue of 16,009,920. Capital Investment Appraisal on the Viability of Leasing the Aeroplane Leasing of the aircraft is quite viable if other parameters such as marketing, advertisements, and administration of Alba's new operations are in place and treated with due importance. The aeroplane is leased for 5 years for 30 million. This means it costs Alba 5 million per year on lease alone. Alba has to ensure revenues to the order of 5 million plus another 8,200,560 each year to break even and earn profits. Alba's existing balance sheet and profit margin could throw some light on expected performance in its new identity. Alba is not actually a new player in the business, having gained the goodwill and clout that will enable it to face responsibilities and challenges with more resources and confidence than a fresh entity who is without any background in the area of operation. However, its huge liabilities following colossal investments in aircraft, purchase and rentals of land and properties, etc. will necessitate paradigm shift in nature of looking at core competence and dealing with contingencies that only experience and the preparedness to cope with destiny could capably handle. Alba has to concentrate on good marketing strategy to maintain its goodwill and secure business in order to ensure adequate cash flow to meet its revenue target which is going to be much higher due to colossal capital investments on the aeroplane, holiday studios, administrative premises rentals, cabin crew and other staff salaries, etc. Additional and Alternative Approaches to the Existing Practices Used in the Business to Generate Extra Profitability To begin with, Alba has made the right decision to lease an aircraft for five years as first step towards upgrading business. In the years to follow, Alba may expand operations with the experience gained with this stop. The holiday business enjoys global reach and acceptance. However, the magnitude of the scale and scope of operation of the new venture will reveal the strength, weakness, opportunities and threats (SWOT) of the company in its new form to the hilt. It will demand fresh insights and capabilities to deal with challenges and problems. New bottles will be required to distil new wines. The system must be integrated with modalities to economize and encourage innovation and profitability. As an existing travel agency, Alba has the clientele, connections and experience to effect the transition, but it has to pay attention to changes required in the organizational and hierarchal structures. Recruitment of additional experienced management and staff, promotion of existing and deserving staff members will set the new organization moving in the right direction. It is also critically important for Alba to have in place a section to deal with problem issues such as cancellations, price increase, change in plans, holidays overbooked, delays, diversions, etc. Alba must also have separate section to deal with older clients and the disabled. Alba must hold membership in reputed and recognized travel associations to augment better goodwill. (Problem with holidays) Need for Budgetary Control within Sunbronzer Budgetary controls are normally applied in businesses so that all activities within the organization are aligned with the policies, procedures, aims and objectives of the company. Budgetary controls within Sunbronze will ensure discipline in the rank and file and propel activities in the right direction. It will serve as ready reckoner of past performances and help in improving efficiency and cost cutting. Actually, budgetary control is the accounts department's forte. By virtue of its functions, the accounts department has the overview of all the financial transactions in the company. It is also completely tuned to the latest policy and procedure on financial and budgetary issues of the company. Hence, the accounts department plays a pivotal role in budgetary controls. The management of Alba Holidays Limited is not only tied up with the important issue of raising funds for its new venture, but also exercise controls over its spending without which the purpose and goals of the new venture could blur. It is said that sight plus insight equals foresight. By the same token, it could be said that clear sight plus clear insight equals clear foresight. Hard work, iron will, clear vision and strictest discipline create formidable individuals and corporations. There is no other magic! (Financial and budgetary control) Sources: Financial and budgetary control, Business Theory, The Times 100, http://www.thetimes100.co.uk/theory/theory--financial-budgetary-control--120.php. Holiday packages by Caledonian Classic car hire, Scotland, UK, http://www.caledonianclassics.co.uk/packages.htm. Mclean Scotland, Individually designed vacations, http://www.mcleanscotland.co.uk/default.asp. Problem with holidays, Travel in Scotland, Adviceguide, http://www.adviceguide.org.uk/scotland/your_world/travel_scotland/problems_with_holidays.htm. Richard Siedleck, Business Resource Center, M&T Bank, Small Business, http://www.mandtbank.com/smallbusiness/brc_finance_cfandborrowing.cfm. Study Centres and Study Holidays in Scotland, Destination Scotland.com, http://www.destinationscotland.com/activities/study_holidays.asp. Read More