1. Sources of finance available to fund the expansion plan

Write an essay on  the business plan for the Best Hotel Plc.

This business report will present the business plan for the Best Hotel Plc that is based in the London and wants to expand its business in other parts of the UK. In the first section, as a financial advisor of the best Hotel Plc, this report will discuss the different sources of financial that available fund for the business expansion. In the next chapter, I will evaluate the behavior cost and also explains the importance of cost-volume-profit analysis in the business expansion. In the last, I will define the prime pricing strategies that will be beneficial for Best Hotel Plcto get the maximum revenue with the minimum risk.  

Following are sources of finance that are effective for the expansion of the business of the Best Hotel Plc:

Issue of Equity Shares: The Best Hotel Plc. can raise finance from external sources through issue of ordinary equity shares. These shares represent the risk capital of the company and are valuable for the company as the company has the option to pay  or not to pay dividend. However, financing from this source is costly as it leads to dilution of control, there are many costs associated with it and profits have to be shared with the shareholders in the form of dividend which are non-tax deductible (Atrill, 2014).

Issue of Debentures: Another external source of finance for the company is raising capital through debentures. Debentures represent borrowings of the company that are financed by general public and usually carry a fixed interest rate and maturity date. The benefit of using this source is that theer is no dilution of control and profits, interest is tax deductible and the company can benefit from financial leverage. However, the interest has to be paid irrespective of the profits earned or loses incurred by the company (Atrill and McLaney, 2012).

Retained Profits or Reserves: It refers to the profits made the company that have been accumulated over a period of time. Reserves are a part of shareholder’s equity that have not been paid to them. The company can use its reserves for financing its expansion plans. The benefit of finacing through reserves is that there is no cost associated with it, no dilution of control and no monitoring from third party (Atrill, 2014).  Moreover, they are the quickest source of finance as they are already held by the company and can be used as and when required.

2. Cost Behaviour and CVP Analysis

Bank Loans: Bank loan and line of credit is another source of finance for the Best Hotel Plc. Bank offers the variety of modes to lend the money in order to support thegrowth of the business.These modes are installment loan, balloon loan, secured and unsecured loan, interim loan, and letter of credit.  It is stated that line of credit loan is effective for the Best Hotel Plcbecause it offers the short-term loan in order to extend the available fund. But, at the same time, theBest Hotel Plc needs to pay aninterest charge on the actual amount until the repayment of theloan (Bryman and Bell, 2015).

Theseloans are provided to the Best Hotel Plc in order to purchase the inventory and payment of operating expenses. Besides this, it also lends money to run the day to day activities and to complete the business cycle needs of the Best Hotel Plc.

Trade Credit: Another source is trade credit that is essential for financing growth and business expansion. Trade credit is defined as the comprehensivecredit in whichBest Hotel Plccan make the good relations with the suppliers. It is effectiveto convince them for paying late against thegoods and services purchased.Besides this, it can be interpreted that trade credit is useful to take delivery of resources, equipment,and other valuablematerials without paying cash on the spot. But, at the same time, one drawback of using trade credit is that it can be costly for theBest Hotel Plc (Hyman, 2014).

Cost behavior is defined as the sensitivity of costs in relation to the production and sales volume. Besides this, it is stated that if the range of output or sales is more than the cost behavior patterns, then it remains unchanged and it is known as the relevant range (Lepper and Greene, 2015).The following cost defined the behavior of cost:

Fixed costs: Fixed cost is the cost that remains same irrespective of changes in sales or production volumes. In context of Best Hotel Plc., the fixed costs may include the rent, insurance premiums, salaries, depreciation and property taxes etc.. In this way, it can be stated that when production increases, total fixed costs (TFC) stay the same within the relevant range (Goetsc and Davis, 2014).

Importance of CVP analysis

Variable costs

Variable costs differ in total cost with the volume of production, but it is constant per unit within the relevant range (Cummings and Worley, 2014). Variable cost in context of Best Hotel Plc. may include cost for foods and related services, labor costs, and some other overhead such as indirect labor, materials and some services.

Mixed costs

Mixed costs contain the both fixed and variable components i.e. it remains fixed upto certain units and then increases. For Best Hotel Plc., electricity costs, parking fees, valet services, etc. can be termed as mixed costs (Goetsc and Davis, 2014).

Cost-volume-profit (CVP) model is the vital financial model which represented the effects of volume changes on the costs, revenue and income of company. The company can extend this analysis to see the impact of profit changes in selling price, service fee, costs, income tax rates and the mix of products or services. Besides this, CVP analysis offers the detailed and objective ways that help managers to assess and predict the course of action for the company and their employees (Needles, et al., 2013).

This analysis is important in order to take the business decisions and to forecast the business spending and production. For example, when a manager knows the breakeven point, then they can reduce expenditure or increase production to raise the profitability. This tool is effective as it is based on statistical models which provides reliable and accurate data. Another advantage of CVP analysis is that their calculations are extremely simple because it uses a standard set of formulas that enable for all of the analysis methods. Therefore, organisations use this analysis as less time and efforts are involved (Braun, et al., 2013).

In context of Best Hotel Plc. CVP analysis can be used to identify minimum room occupancy so as to insure required level of profits. For instance, if fixed and variable cost for the hotel is £10,000 and £20 per unit, respectively and price per room is £100, then the company needs to sell atleast 125 rooms out of 200 rooms to cover its total cost. This is illustrated in the following graph:

3. Pricing Strategies

There are several pricing strategies but following are the prime pricing strategies that can be used by the hotels operating in travel and tourism industry:

Premium Pricing Strategy

In this strategy, the company establishes higher price of goods and services as compared to its competitors. It is an effective strategy that can be  used by the company when there is something unique about the product or service that provides it with distinct competitive advantage (Hillier, et al., 2011). Premium pricing strategies can be effectively used by Best Hotel Plc in order to enter the new market and to maximize their returns during early stages of the product lifecycle (Plc).

Penetration Pricing

In this strategy,the companyoffers low prices to expand their business hence there are many customers comes at the beginning. The main aim is to provide the wider responseof customer and increase the market share and competitiveness of the company. This is the effectively penetration strategy in which competition is high and intense.Under this strategy, the Hotel sets low prices of goods and services in order to increase their sales and market share. Besides this, once market share has been captured, then the Hotel increases their prices (Vanhove, 2011). Best Hotel can use this strategy if it opens its branch in area where other hotels already exist at close proximity.

Seasonal Pricing strategy

This strategy can be used by the Best Hotel Plc. all over the year in order to cover low, high, and shoulder seasons. This is a standard way for the tourism industry to provide the distinct levels demand depending on the time period.  In this, the company adjusts its prices as per the demand during the season (Xiang and Pan, 2011). For instance, the hotel can charge high rates during holiday season and keep the rates low during other seasons to attract customers.

Package Deals Strategy

In this strategy, the company develops packages to consider the competitors of the same area. The company focuses on the value added components in order to stimulate the customer’s demand without having to provide discount (Vanhove, 2011). The company can strike deals with their local businesses to provide a full package and share their business with each other.  Therefore, the company should be able to get additional services at bulk rate rather than purchase the separate goods in order to offer the better package price. This strategy is also used to target the niche markets such as golf weekend, food and wine tours, pampering packages etc. (Murphy, 2013). The Hotel can strike a deal with local travel agent to provide its customers with facilities like urget travel tickets, local tours, etc. Thus, it will be able to attract customers without lowering its prices. 

From the above report, it can be suggested that Best Hotel Plc should use the long-term bank loan, retained earnings and trade credit because there is no burden of immediate repayment. It is also stated that company should analysis the behavior cost for the growth of the business. Besides this, it can be recommended that Best Hotel Plc. should use the cost-volume-profit analysis in order to make the business plan. In addition to this, it can be suggested that Best Hotel Plc. should use the seasonal pricing and premium pricing strategy in order to expand its business.

Conclusion

From the above discussion, it can be summarized that Best Hotel Plc. can use different sources of finance to get funds for expansion of the business all over UK. Additionally, it can be concluded that Best Hotel Plc can use the behavior cost because it effective to represent their volume of changes in the total production unit cost.

Besides this, the Best Hotel Plc can use cost-volume-profit analysis to take the accurate business decision and to determine its minimum sales level. It is also vital for forecasting the business plan. From the business report, it can also be concluded that there are prime pricing strategies that can be used by the organisations operating in travel and tourism industry to attract customers, increase their market share and get competitive advantages.                  

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