By Dr. Antonia Neubauer, AdventureEDU Educator and President of Myths & Mountains; and Nicole Petrak, Education and Research Manager at ATTA
Travel companies are no strangers to the challenges of managing cash flow. In addition to balancing seasonal demand and shifting consumer trends, crises such as Ebola and political uprisings can wreak havoc on a small operator’s bottom line.
Toni Neubauer, CEO of Myths and Mountainsand an AdventureEDU Educator, states that the most important starting point is understanding the basic accounting concepts of cash and accrual. “In a small business, cash is king,” she says.
Imagine you own a tour company in a remote area that usually serves very small groups. You get a call one day to create a set of custom tours for different groups of employees from a very large, high-profile organization for a corporate incentive. The set of tours will require you to add on additional staff and increase your bookings with accommodations, caterers and other suppliers as well as add some additional tour experiences which will need to be paid for in advance. The client pays a ten percent deposit now and negotiates full payment for one month before the trip. Your team immediately starts planning the itineraries, and the time spent on this is immediately chipping away at the deposit.
Your projected revenue on the incentive tour is $100,000 and your target profit after suppliers, added tours and additional staff are paid will be almost $25,000. The day of expected payment arrives, and you have already mentally earmarked some of that $25,000 profit for projects to help you grow your business. The payment does not arrive and you call the client – they are very apologetic but due to an unforeseen issue, they cannot pay the remainder at this time, and want to give you half of the money as the trips depart and half after. You have spent much of your own cash reserves to book the additional tour experiences and necessary suppliers, and now have several weeks of wages due to permanent and temporary staff, not to mention other operating costs before this trip takes place. You can threaten to cancel the trip without payment but you have already invested significant sunk costs expecting the payout.
On an accrual basis, you are in great shape with revenue of $100,000, $75,000 in costs and a $25,000 profit. But on a cash basis, this situation could damage or even destroy your company. Cash is king!
To avoid situations like this, on the most basic level, Toni recommends having a carefully prepared budget for the year, getting at least three critical financial reports on a weekly or monthly basis, and instituting a well planned payment schedule for clients and operators. To be sure these reports and the budget are as accurate as possible, she suggests having an experienced accountant or bookkeeper to prepare regular financials for review.
1. Your budget: This should be grounded on a realistic appraisal of your fixed and variable expenses and your estimated income. Fixed expenses are rent, heat, telephone lines, and salaries. Variable expenses include hotel or operator costs, and airline costs, for example. With respect to expected income, this needs to be as closely based on fact as possible: What did the company earn last year? What does the company need to earn this year? Given your estimated expenses, what sort of gross margin on sales is needed to turn a profit at the end of the year?
2. Reports: At a minimum, tour operators need to look at three basic reports:
a) Budget vs. Actual and the deviance between the two: This report will show you by month how your actual earnings and expenses compare with what you put into your yearly budget, and what the deviance between your estimate and actual earnings are. This is your reality check. Does your budget make sense? Where did you overestimate or underestimate? Do you need to make mid-course corrections in your financial planning?
b) Monthly Cash Flow Projection: This can be run several months out or even for a year. The projection should include your available cash on hand at the moment in your checking or savings account, as well as what is available for borrowing, and your expenses. Additionally, it lists your expenses (ground service costs for the month, predicted overhead costs, any loan repayments) and the customer payments you expect to receive. The difference will give you your monthly cash flow projection. With this you can see several months out whether you will be in the red or the black.
c) Weekly Cash Requirement reports: We recommend you do this report looking 3-4 weeks into the future. It begins by showing the cash balance and then lists customer payments to be received. The sum shows the total cash available to spend for that particular week. Then itemize total vendor payments and other expenses (dues, salaries, staff) and sum them. The difference between the week’s income and required payments shows you where you will be week by week – how much cash is needed/expended. Often in the adventure travel business, there are some months where sales are light, but vendor payments are high. This Cash Requirement Report, combined with the longer term Cash Flow Projection, will help can help business owners manage cash far better and send up an alert about problems before they become unmanageable.
3. Create Financial Buffers to deal with tight cash flow situations. There are several ways to do this:
a) If possible, put aside money during good times to cover the moments when business is slow or when you have large projected payments to make.
b) Work with your bank to set up a line of credit that you can use in case of emergencies. You never know when this will become a vital lifeline for your business.
c) Stagger your payment schedule. At Myths and Mountains, Toni says they generally ask for a 25 percent deposit when a trip is booked, an additional 25 percent 120 days before departure, and final payment 60 days before departure. At the same time, they pay their vendors sixty days before departure. This schedule enables Myths and Mountains to manage its cash more effectively and avoid a problem such as the hypothetical one described above.
4. Diversification of product – At Myths and Mountains, which offers trips around the globe, Toni and her team assess each country’s itinerary performance monthly. Do the same with yours: compare the performance of long versus short trips, different destinations and regions, and trip themes. Try to notice shifts in consumer trends early. And create alternate products so external forces don’t leave you with a portfolio of un-sellable product after a world event. Perhaps that means cultivating local products and day trips to augment your profit when inbound demand falls seasonally, or adding new itinerary types for your existing customers.