Sale and leaseback is an internal source of finance and can allow companies to receive a cash payment which allows an improvement of it cash flow; however this is only short term as they have to pay rent for leasing the asset that was previously owned. Therefore it can be a drawback if it is used long term as it may lower their profits.
Another available and suitable source for Thomas Cook Group plc would be the retained profit. As Thomas Cook Group plc is a large company it would be likely for the company to have a large retained profit to use for future investments. This source of finance is cheap for the business as they do not need to pay back any interest and it is also flexible as they can use the correct amount of money needed.
An overdraft is a short term source of finance that would be suitable for Thomas cook in case of emergencies. Many plc use this source of finance as it allows companies to ease their cash flow. It may be more suitable then a bank loan as it is only short term therefore there will be lower risks for Thomas Cook Group.
Short – term sources of finance – current liabilities
Borrowings
Thomas Cook uses borrowings as a short term source of finance; this would be an overdraft that would have to be paid off within a year. This type of finance is appropriate for Thomas Cook as they are a seasonal business and therefore income to the business will be less in seasons such as autumn and winter as less people will want to go on holiday. Therefore Thomas Cook will need to borrow money in off peak seasons to enable them to pay employees wages and to book hotels and flights for the future summer season. Having an overdraft will also ease the cash flow of the business.
The Thomas Cook balance sheet shows that from 2008 the borrowings have risen from €17.5million to €74.7million in 2009. This is a big rise however it may be a good sign for the business as it could show that the market has increased as Thomas Cook will need to borrow more money to enable them to book more hotels etc. However if this is a source of income to meet debts and it becomes a long term trend it is not a good sign for Thomas Cook.
Having an overdraft is common for business especially those that have seasonal peak times. It is also quick and very accessible therefore it is appropriate for Thomas cook as they will need to access funds quickly in order to meet needs of the business such as paying employees on time. On the other hand having an overdraft has drawbacks as banks can recall the overdraft at anytime. If a bank is struggling and needs money it will decide to recall large business overdrafts and Thomas Cook will have to find a new source of finance such as a loan to pay them. This may be very expensive. Also the interest on an overdraft is on a daily basis and this can also make it very expensive for Thomas Cook.
Trade and Other Payables
Thomas Cook’s trade credit refers to trade credit, this means all the items that they book but do not have to pay for until a later date. This could be things such as Hotels, supplies, flights etc.
One of Thomas Cook’s roles is to book hotels which they then sell to their customers. This has to be done at the correct time period to ensure that they can receive the customers for it. For example Thomas Cook would be booking more hotel rooms in March as they can gain customers throughout April and May for the peak summer season. They would book a fewer amount of hotels in August as most people would have had their holiday and months such as November are off peak. Therefore trade credit is very appropriate for Thomas Cook as it allows them time to receive customer revenue. Thomas Cook’s Trade credit means that they are allowed two months after booking hotel rooms to pay for them. This eases cash flow as Thomas Cook will have time to find customers for these rooms. Customers will then pay a deposit for the hotel which can be used to pay off the hotel.
Thomas Cook’s other roles include booking flights and flight seats. They may book seats with other travel companies such as Thomson however they usually would have a longer time period to pay and could be up to 6months. This is a benefit as Thomas Cook gains something that is free for them until they can pay.
Trade credit is a good source of finance for Thomas Cook as it fits the needs of the company well. By looking at the balance sheet from Thomas Cook we can see that their trade credit in 2009 was rather high compared with other current liabilities at €2.046.1 million. However Thomas Cook has a role to provide customers with pre-booked flights and hotels, therefore they are bound to have a large trade credit. This figure comes from October the 31st and it is likely to change as it is a seasonal business and their trade credit may be higher or lower in different seasons and months.
However trade credit can have drawbacks as Thomas Cook may be unable to secure customers for the hotels and flights. This will mean that they will lose money as they still have to pay the hotels later on. Therefore although having trade credit is beneficial as the company gains assets when paying them back may cause difficulties if there is no income from customers and this can cause problems for the cash flow of the business.
Revenue received in advance
Thomas Cook receives revenue in advance from customers in the form of deposits and sometimes full payments made. This is revenue in advance as the company receives cash before the customer has been on holiday. Also if a customer is book a long time in advance then Thomas Cook may not have booked the hotels or flights yet, however it will be their obligation to do so.
Thomas Cook will want the deposit to be as big as possible as this acts as a safeguard for the company and covers things that are already paid for. If Thomas Cook books hotels for a customer, and then the customer cancels the holiday Thomas cook will still need the cash to pay for the hotels if they cannot gain another customer for it. Therefore receiving a deposit from the customer is very important.
This method of finance can be a drawback as they need to ensure that they can offer the holiday to the customer and this can be risky if the hotel or flight is not pre-booked. This means Thomas Cook needs to keep control of this type of finance.
Longer term sources of finance (liabilities) and (Non current liabilities)
Long term borrowings
Thomas Cook’s long term borrowings are things such as, bank loans for mortgages. Mortages is normally used as a loan for a house, so people can repay small amounts over a period of time. Thomas Cook will use a morage for any buildings that they own, and some hotels that they own, this allows them pay off a fixed asset over a period of time. Longer term borrowings can have a better interest rate rather then short term borrowing as it is paid over a longer period of time. However they may be risks of interest rates changing and may become higher. A long term borrowing is appropriate for Thomas Cook as it allows them to pay of debts over a long period of time.
Obligations under finance leases
Obligations under finance leases are where a company can lease certain things which may be easier then purchasing the asset. This is the biggest long term source of finance for Thomas Cook as it is unique to the travel industry because of the assets they require. Thomas Cook leases most of their aircraft as it makes them flexible in how they run. Leasing is very important for Thomas Cook as they can lease the most up to date aircraft to suit the companies’ needs. Leasing also makes the company more efficient as they can rent different numbers of aircraft depending on buyer behaviour and different seasons; therefore there is a lower risk of having money tied up in unproductive assets as they can decide how many aircrafts they need, this makes Thomas Cook more cost efficient.
Thomas Cook’s balance sheet shows that they spend €515.3million on obligations under finance leases this is the same amount as in 2008. This could suggest the market is stable as they are still leasing the same amount of aircraft.
However in the long run it will cost Thomas Cook more to lease rather then purchasing aircrafts. However weighing this drawback against the benefits of being asset light it may not be important. As Thomas cook can be flexible and more market orientated and customer focused by leasing aircrafts.
Equity
The equity Thomas Cook has is the money received from shareholders buying shares for the company.
Called up share capital
The called up share capital is the money has been raised in shares. In 2009 Thomas Cook received €97.7million in shares; this means that shareholders in Thomas Cook are very important as they provide a large source of finance. In 2008 Thomas Cook received €303.7million this is a much larger amount then 2009. Although they are receiving less money from shareholder Thomas Cook now has much more control over the business. Thomas Cook bought back shares when merging with My Travel Group as they would’ve wanted a higher control of the business.
Thomas Cook has the right to issue 2billion ordinary shares at 10cents each. This means they have the right to receive an original value of 200million from shares. Therefore Thomas Cook can issue further shares and this could be used as a future source of finance for the company. However they have to consider whether shares are needed as the more shares there are in the business the lower the value is. This may be the reason why Thomas Cook bought back a large amount of shares as by having less shares keeps the value high.
Called up share capital is a good source of finance for Thomas Cook because they do not need to pay interest, although shareholders hope to receive a dividend the company do not have to promise this. This means that it doesn’t cost Thomas Cook anything as they will have ready money at their hands.
Retained earnings – surplus/(deficit)
Retained earnings is the profit retained that is not given to the shareholders. In 2009 Thomas Cook had a surplus retained profit of €66.8million. This means they did not give shareholders the full amount of their profit as they held some back. This is a wise thing for Thomas Cook to do as it can act as a future source of finance which means they can re-invest in the company later. They may also have plans in the future of what they want the finance for such as, bigger plans for long haul flights or to expand into different countries such as china and India who are said to be growing economy’s
In 2008 the retained earnings are shown as a deficit of (255.2) this means that Thomas Cook lost some of their retained profit. This was probably given to shareholders as a dividend. Although Thomas Cook do not have to give shareholders a dividend it keeps them interested in the shares and happy, if they never gave them to shareholder they may lose interest as they will not be getting anything in return and therefore they may sell their shares. This would be bad for the company as they will have less income from shareholder.
Evaluation
Thomas Cook uses both short term and long term sources of finance; by using both these types of finance it can suit the appropriate needs of Thomas Cook. Thomas Cook uses short term finance in order to meet the seasonal demand of the company. The short term finance it uses allows Thomas cook to have assets which are not paid for yet by using overdrafts, trade credit and revenue received in advance. This eases the cash flow for Thomas Cook and this is vital for seasonal business as they will have off peak and on peak times during the year where the cash flow can dramatically change. Short term finance is suitable for revenue expenditure, and is used for the day to day running of the business such as wages for employees.
Thomas Cook needs to use long term sources of finance in order to purchase fixed liabilities such as aircrafts and buildings. Long term finance is suitable for this as large payments can be paid over a longer period time and this will ease the value of debts Thomas Cook will have. Short-Term finance would not be beneficial for this need as high interest rates would be put in place and also sources of finance such as overdrafts can be called back at anytime.
Thomas Cook use large amounts of both long and short term finance, however by looking at the balance sheet we can see that they gain most of there finance from short term sources. The total amount of short term sources of finance for Thomas Cook in 2009 was: €3190.5 million whereas the long term finance for Thomas Cook in 2009: €866.8 million. This means Thomas Cook mainly rely on short term finance; in fact Trade and other payables are used mostly as this takes up €2.046.1 million of Thomas Cook’s short term finance. This is such a large amount as trade credit is vital for seasonal businesses such a Thomas Cook as their main business role is booking hotels flights etc in advance and trade credit allows them to do this. Having such a large amount finance coming from one source can be risky as Thomas Cook has to receive this finance in order to have a substantial amount of money coming into the business. However by having this type of finance (trade credit) as a large amount means that Thomas Cook are booking out a lot of hotels and flights and therefore this means they will receive a large amount of customers, which will earn them a larger profit. On the other hand, Thomas Cook has to ensure that they can receive these customers otherwise the source of finance will be difficult to pay off.
Although Short-term finance is used more for Thomas Cook, the majority of long-term finance is Finance Leasing, which is €515.3million. Finance Leasing is mostly used in travel companies as it suits this industry well. Although this is not as large as the trade credit finance it could still be risky for Thomas Cook. It is a long-Term source of finance as Thomas Cook is always going to lease aircraft this could be more expensive for Thomas Cook and it also means that they will have fewer fixed assets. On the other hand leasing large amounts of aircraft is very advantageous as it would be more expensive for Thomas Cook if they had to purchase these assets and keep purchasing new up to date assets and having no use for old assets.
Thomas Cook may want to consider what type of finance they will use in the future as discussed above; china and India are both growing countries in the travel industries. Thomas Cook may want to expand into these different areas and they may need some new sources of finance. One opportunity that Thomas Cook has is to sell more shares in the company as they have only issued just under half of their allowed amount. This would create a lot more finance in the business and with the benefit of no interest, however they may lose more control if they issue too many shares. Finance could also be gained by selling assets and leasing them back; Thomas Cook already lease many of their assets and by selling their fixed assets may give them even more benefits. Assets such as buildings and some aircraft will create large amounts of finance for Thomas Cook and they will be able to become even more asset light and would suit to the seasonal demand of Thomas Cook.
