FINANCIAL PLANNING...Reasons to Have a Financial Plan 2 Why Accounting Matters to a Financial Plan 4...

FINANCIAL PLANNING

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© Board of Trustees of The Travel Institute, 2014

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical photocopying, recording, or otherwise, without the prior written permission of The Travel Institute.

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Table of ContentsIntroduction v

Overview v

Learning Outcomes v

Reader’s Guide vi

Pre-Test vii

Unit 1: The Importance of Financial Planning and Accounting 1

What Is Financial Planning? 2

Reasons to Have a Financial Plan 2

Why Accounting Matters to a Financial Plan 4

Unit 2: The Nuts and Bolts of Accounting 5

General-Purpose Accounting Software 5

Travel-Specific Accounting Software 6

Should You Hire a Bookkeeper? 8

Customer Relationship Management 10

Unit 3: Financial Statements 13

Balance Sheet 13

Income Statement 16

Statement of Cash Flow 19

Notes 19

Internal Financial Reporting 20

Unit 4: Analyzing a Business 23

Current Ratio 23

Top Line (Service Fee Plus Commission) Percentage 23

Labor Cost Percentage and Revenue Generated per Employee 24

Productivity 24

Table of Contents

Unit 5: Managing Cash Flow 29

Cash versus Profits 29

Ways to Improve Cash Flow 30

Unit 6: Using Financial Planning to Improve the Business 35

Performance versus Budget (Variance Analysis) 35

Productivity by Employee 35

Product Line Profitability 37

New Products and Product Lines 38

Cash Flow Forecast 40

Summary 43

Application Activity 45

Post-Test 49

Glossary 51

Answer Key 53

Supplemental Reading 59

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FINANCIAL PLANNING

Introduction

IntroductionOverviewFinancial planning is crucial for any business. The first step in running a successful business is to develop a sound business plan and strategy. Equally important is the second step, which is to finance the strategy and then manage the money earned by the business.

In this course, you will learn why accounting, bookkeeping, and financial planning are crucial to the success of your business. The information generated from a proper accounting system can help you improve your business plan, manage your cash flow, save on taxes and professional fees, and save time researching Airline Reporting Corporation’s (ARC) or client’s questions.

Learning OutcomesAfter completing the readings and activities in Financial Planning, you will be able to:

Explain the primary purposes of financial planning and accounting;

9 Choose an accounting software program to automate your accounting tasks;

9 Determine whether you should hire a bookkeeper;

9 Define the link between customer relationship management (CRM) and accounting;

9 Identify the components of external financial statements;

9 Describe the importance and functions of internal financial reporting;

9 Analyze the relative financial strength of your business;

9 Improve your cash flow;

9 Use several different strategies to analyze the performance of your busi-ness.

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Reader’s GuideScattered liberally throughout this course are activities and exercises to help you understand how various concepts relate to you and your workplace. Pay attention to the following features as you read through the course.

� Case to Consider: These scenarios apply concepts in the course material to real-life situations.

� Practice Session: Practice sessions are brief exercises that allow you to try your skill by practicing what you’ve learned.

� Did You Know?: These helpful bits of information enhance the course material and your learning process.

� Key Word: Key words are highlighted in bold italic throughout the text and are defined in the Glossary.

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Pre-TestThis pre-test will help you assess your current understanding of financial planning, which is the subject of this course. Please answer all the questions to the best of your ability; then proceed directly to Unit 1: The Importance of Financial Planning and Accounting. The correct answer to each question will become evident as you work through the readings and activities in this course. At the end of the course, you will have an opportunity to take this test again. Comparing your pre- and post-test results will help you measure your understanding of financial planning.

True or False

True False 1. A business is making money if the balance in the busi-ness checking account goes up.

True False 2. The current ratio is one way to quickly use a balance sheet to check the health of a business.

True False 3. An income statement shows revenues, expenses, and the resulting net profit or loss.

True False 4. A company’s balance sheet shows the profitability of the business.

True False 5. A travel agency’s labor cost (salaries, benefits, and taxes) should be less than 50 percent of revenues.

Circle the best answer.

6. Which of the following is not part of the typical package of financial statements?A. bank statementB. income statementC. balance sheetD. notes

7. Which of the following would not be considered a current asset? A. cash in a bank account B. accounts receivable C. office furniture D. petty cash

Pre-Test

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8. Which of the following will decrease current cash flow? A. reducing accounts receivable B. delaying the payment of bills C. borrowing money D. encouraging credit card sales for tours and cruises

9. Which of the following is a good reason to hire a bookkeeper? A. You will have poorer-quality information on which to make decisions. B. You will have less feel for the day-to-day operations of the business. C. You will have higher salary expenses. D. You will have more time to spend on business management.

10. One advantage of using a travel-specific accounting software program is that it

A. can interface directly with a global distribution system (GDS). B. is well known by accountants and bookkeepers. C. must be manipulated to do travel-specific transactions. D. is well supported because of the huge user base.

Unit 1: The Importance of Financial Planning and Accounting

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Can you answer the following questions about your business?

1. What was the average gross profit percentage last year?

2. What percentage of your sales is cash, and what percentage is credit?

3. What percentage of your accounts receivable/commissions receivable went uncollected last year?

4. What percentage of your total business comes from your top 10 accounts?

5. Who were your top salespeople in total dollar volume and in gross profit generated?

6. Did any of your employees steal cash from the business?

7. What was the average balance in your primary checking account month by month?

8. Is your business meeting its goals?

9. Do you have a budget and are you meeting that?

10. Are you selling your preferred suppliers over non-preferred suppliers?

11. How much money do you have in outstanding commissions from suppliers?

12. What percentage of your business is service fees?

If you answered these questions quickly, you probably plan your financial structure well and have a good accounting system in place. However, if you had trouble answering these questions, you probably need to improve your financial planning system. Being able to answer questions such as these is vital to running a successful business. But in today’s marketplace, being able to answer those questions about your own business is not enough. You must also answer such fundamental questions about your competitors and delve a level deeper into your own business.

It’s one thing to know your overall average gross profit percentage, but in the post-commission era, you must also know which of your individual

UNIT

1The Importance of Financial Planning and Accounting

commercial accounts or leisure customers is profitable and be able to react to those who are actually costing you money. Whether a corporate account is not meeting the transaction volume on which you based your management or transaction fee or leisure customers produce a sales revenue that is out of balance with the amount of research (and associated costs) they drive, you must be able to ascertain which transactions are profitable and which are not. And you must have a plan to address unprofitable situations before they cost you too much money.

What Is Financial Planning?Financial planning involves managing and controlling the flow of financial resources (keeping track of all the money coming in and going out of a business) to ensure that a business achieves profitable growth. The goals of financial planning include:

� Ensuring that the business has enough money to operate and to imple-ment its business plan;

� Managing the assets efficiently so that the maximum amount of income is generated;

� Ensuring that the efforts of the organization are directed in the appro-priate areas;

� Planning for both predictable sales cycles and their associated pat-terns and also for unpredictable events that may affect your business;

� Defining realistic, measurable goals for the business plan.

Reasons to Have a Financial PlanFor internal and external reasons, it is important for every travel agency to have a financial plan.

Internal reasons pertaining to the running of the business itself include:

� Efficient decision making. With better financial information, you can develop better business plans. Knowing employee productivity and product line profitability can lead to improved efficiencies and better sales.

In down times, knowing your business at this level of detail can help you avoid unprofitable activities and costly miscalculations. You must gather information and prepare contingency plans when things are going well so you can weather the difficult times.

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In Business Week magazine, the National Association of Corporate Directors was quoted on one of its key recommendations for understanding the condition of a business: “Every business director should know how to read a balance sheet, an income statement, and a cash flow statement, and they should understand the use of financial ratios and other indices for evaluating company performance.”

Did You Know?

� Cost savings. A company that has good financial information and good control over its finances can save money in accounting and legal fees. An agency also can improve the efficiency of the office by hav-ing data easily accessible for answering staff member’s or client’s questions.

� Financial control. With the large volume of money processed by most travel businesses, it is essential that you be able to account for every dollar. Some aspects of your overall business strategy can facilitate financial control, such as emphasizing credit card payments rather than cash or accounts receivable.

External reasons pertaining to business dealings with outside entities, such as tax authorities and lending agencies, include:

� Tax issues. Because all businesses must file tax returns with state and federal governments, you must keep accurate accounting records to fill out those returns and to provide any other requested information. In case of an audit, your accounting information, systems, and con-trols will be your defense.

� Sources of capital. If your business seeks additional financing, your accounting information will be the basis for a lender’s decision. If you want to sell the business, your financial statements will be the starting point for setting a price. Also, a well-constructed accounting system and financial plan will indicate to a lender or a buyer that your business is well-run and well-managed.

The financial plan is just that—a plan. It is a guideline and a benchmark, not a concrete, fixed, and unchanging document. Deviations from the plan are to be expected, and their presence signals that attention is needed. Not all deviations are bad; your projections may have been too conservative or something may have changed in the market (such as a competitor going out of business).

Other deviations may indicate that the market is changing and that you must alter your business, marketing, and financial strategies to accommodate those changes. Too often, business owners expect downturns to end by themselves, or owners wrongly attribute true changes in the market to the normal business cycle.

A good financial plan can alert you to the presence of those changes so you can adjust your strategies accordingly.

Unit 1: The Importance of Financial Planning and Accounting


Why Accounting Matters to a Financial PlanAccounting is the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results. It is an exacting system and records transactions that are only actual events.

It is important to understand that accounting is not only for tax purposes, but accounting information is the basis for all financial planning decisions. Implementing a good accounting system will not make a fundamentally poor business suddenly successful. However, a good accounting system can provide data that can help you make better business decisions.

QUICK CHECKThis concludes Unit 1: The Importance of Financial Planning and Accounting. You should now be able to:

9 Give several reasons why it is crucial for a business to have a finan-cial plan;

9 Explain the purpose of accounting and its importance for every busi-ness.

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Unit 2: The Nuts and Bolts of Accounting


The Nuts and Bolts of Accounting

Accounting is a very detail-oriented activity. Every dollar that comes into or goes out of a business must be recorded. If even the smallest transactions are not properly captured, the accuracy and trustworthiness of the accounting information will be compromised. In addition, your ability to make sound business decisions will be weakened. The time you spend setting up and using a back-office system is not trivial and should be seen as an investment in the business.

Because of the volume of data required and the desire to minimize workloads, most accounting is conducted using computer-based systems. Small businesses with few transactions can do their accounting manually on ledger sheets, but with the prevalence of easy-to-use computerized accounting software, there really is no reason to use manual accounting.

There are two types of accounting software programs available: general-purpose and travel-specific.

General-Purpose Accounting SoftwareAlthough many different general-purpose accounting software packages are available for small businesses, some of the most common generic programs that are used by any type of business include QuickBooks, Peachtree, and Sage BusinessWorks. A number of vendors also offer wholly online versions of their software.

Advantages of general-purpose software programs include:

� Lower initial cost. Most of these programs cost less than $500 (some cost less than $200), a price range that even small businesses can afford.

� Support. The software publishers can offer extensive technical sup-port because of their vast user base.

� Flexibility. These software programs have to accommodate a variety of business types, so most of them can be easily customized.

� Familiarity. Experienced bookkeepers probably have worked with one or more of these programs, so there’s little or no learning curve.

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2

Office supply stores sell almost everything you’ll need to start your accounting system, including detailed forms and software. Take a look at the preprinted forms they sell; that may give you some good ideas for your operation.

Did You Know?

Disadvantages of general-purpose software programs include:

� No travel-specific support. While support or help desks may be included in your package, their experience with the travel industry is generally quite limited and most are unfamiliar with the day-to-day activities of a travel agent (including ticketing, commission tracking both from suppliers and tracking and paying agent commissions and ARC/BSP reporting).

� Possible “work-arounds.” Because of their generic nature, these soft-ware programs may have to be manipulated to do travel-specific transactions. While they are flexible and customizable, as noted above, the customization may be an added expense that increases the total cost of the product significantly.

� Extra work. First, these programs do not interface with the global distribution system (GDS), or industry online booking engines, so the bookkeeper may have to enter customer and invoice information rather than pulling that information directly from a passenger name record (PNR) or a travel-specific invoicing system.

Second, the bookkeeper may have to make multiple entries for one transaction. For example, if a sale is made by an outside salesperson, the bookkeeper may have to make one entry for the sale and another entry to set up the commission payable to the salesperson. A travel-specific program would handle both parts of the transaction with a single entry.

Travel-Specific Accounting SoftwareSome accounting software has been designed specifically for the travel industry. The GDSs offer software that interfaces with their systems. Independent software publishers also offer packages that interface with multiple systems. These include Trams Back Office, TRAVCOM, and Global Matrix.

All of these software programs have similar advantages.

� They minimize data entry. Each package can interface with the GDS. Each time an invoice is created, the information is also sent to the accounting system. This information includes data about the cus-tomer, the products sold, the amount of the sale, the commission, the form of payment, and the sales agent, as well as other information that the agency wants to collect. All of this information would have to be manually entered into a generic software program.

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� They are geared to travel agencies. These programs are able to rec-ognize the difference between an Airline Reporting Corporation (ARC/BSP) sale and a cruise sale, so they can prepare a weekly ARC/BSP report automatically. They can immediately identify a sale by an outside sales representative, so they can create a commission payable for each sale. All of these features save time.

� They can create management reports specific to travel. In addition to producing the typical accounting reports that any business needs, these programs can generate reports of volume by specific airline, cruise, tour company, hotel and car supplier; commission by product line by agent; commissions generated by outside sales agents; and volume and commissions by customer.

PRACTICE SESSION

In the space below, write the accounting software program that your business uses, and then list its advantages and disadvantages. If you’re not sure, ask a knowledgeable business owner or manager for assistance.

Your Accounting Software Program

Advantages

Disadvantages

For retail travel agencies that do more than 100 transactions (invoices) per week, a travel-specific accounting package is invaluable for gathering management information and for saving time and effort. However, the bottom line on any accounting software is that you must enter everything. If you want an accounting program to work to its full capability, you must enter all of the following:

� Invoices (including those with zero commission)



� Incoming commission checks

� Outgoing checks

� Cash receipts

� ARC electronic transfers

� Bank charges

� Bills to be paid

In the end, the amount of work required to do the data entry will be more than made up for by the value of the information. Again, the time you put into designing and using your back-office system, for every transaction, is an investment in the business. That investment will pay off in terms of better information available for business decisions.

ARC has invested heavily in the Interactive Agent Reporting (IAR) system. This system essentially empowers frontline agents to handle some of the basic ARC-related functions that used to require a back-office agent or a bookkeeper. When front-office agents are responsible for the transaction from initial contact through reporting to ARC, they are able to ensure accuracy and completeness of data.

Should You Hire a Bookkeeper?There are a number of pros and cons to hiring a bookkeeper. In order to make that decision, you should ask yourself the following questions:

� Do I have the experience and education to do the bookkeeping?

� How much time do I spend each week on bookkeeping?

� What would I do with the time if I didn’t do the bookkeeping? For example, would I generate more sales?

� Do I trust someone else to do the bookkeeping?

There are several advantages to having a bookkeeper.

� You’ll have an expert to handle the information.

� You’ll have more time to actually run your business.

� You may save money on accountant fees as a result of the organiza-tion of your accounting information.

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You must balance the advantages of having a bookkeeper against certain disadvantages.

� You must pay the bookkeeper for his or her services, increasing your salary costs.

� You could lose some of your “feel” for the business if you don’t review every invoice, receipt, and expenditure.

� You might lose some control over the accounting function. To protect yourself, you need to institute stringent standards for handling cash and writing checks and put in place a system of checks and balances.

Examples of checks and balances include account reconciliation, especially the cash accounts, and accounts receivable and commissions receivable analyses. Cash account reconciliation involves comparing the general ledger balance to the bank statement balance and explaining any variance.

Once the decision has been made to hire a bookkeeper, make an appointment with an accountant to help set up your business with a chart of accounts.

This is a useful and quite economical method to check on the way you currently manage your books. Once this is established, then hire a bookkeeper and have the accountant audit the books monthly, if needed.

Consider the following characteristics when hiring a bookkeeper:

� Previous basic bookkeeping experience (mandatory)

� Proficient relevant computer skills (general-purpose spreadsheet, database, and word processing applications and, as appropriate, reporting programs and other data analysis tools)

� Knowledge of Trams Back Office or other travel-specific back-office system

� Experience with ARC and IAR

� Organized and detail-oriented

� Good follow-up skills

� Good filing system

� Good communication skills



Customer Relationship ManagementThe worlds of accounting (back-office) and sales and marketing (front-office) converge in an area known as customer relationship management (CRM). The goal of CRM is to take all of the information your business has about its customers and aggregate it in a timely, useful, and profitable manner.

This melds the input from the front-office system with the financial and sales data stored in the back-office system and compiles the relevant data, permitting the agency to use it in future sales and marketing efforts.

The specifics of CRM are outside the scope of this course, but it is important to understand that the fuel of the CRM system includes accounting data. The accounting system, from the GDS interface to the chart of accounts, needs to be designed with the CRM implications in mind. Some illustrative examples may help clarify the connection between back-office data and a CRM system:

� A corporate sales agent gleans information about a client’s vacation travel preferences and includes this information in the client’s profile, which facilitates the agency’s target marketing efforts.

� A leisure agent sells a nonpreferred cruise or tour supplier to a client whose transaction history shows a propensity to book and cancel a number of times before finally settling on a package. By identifying this booking and combining it with what is known about the cus-tomer, we can redirect the client to a preferred vendor.

� Your meeting planner regularly solicits e-mail addresses for all attendees, even those who did not book through your agency. This facilitates follow-up contact, which can be nurtured into future sales opportunities. Managing this valuable source of customer contact information requires discipline and organization.

� An account manager reviews a customer’s booking pattern before a quarterly meeting and notices a dramatic drop in car and hotel book-ings. Knowing that the client’s booking pattern calls for overnight travel, the account manager may determine that either car and hotel bookings are not being properly entered in the GDS (possibly increas-ing GDS fees) or the client is self-booking those vendors.

Without complete, accurate, and precise information, both the back-office and CRM efforts will suffer.

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An increasing number of vendors provide online versions of both back-office and CRM systems. These systems allow you to begin using the tools with a minimum of investment in additional computers and without the need to install software. As your business grows, you can migrate to an in-house system with more complexity and customization.

Did You Know?

QUICK CHECKThis concludes Unit 2: The Nuts and Bolts of Accounting. You should now be able to:

9 Identify the advantages and disadvantages of different accounting software programs;

9 Decide whether to hire a bookkeeper;

9 Explain the value of accounting information in sales and marketing efforts.



Unit 3: Financial Statements


Financial Statements

Once you have accurate accounting information, how can you use it to judge the financial status of your business? Merely looking at sales figures or the bank balance can give you a distorted impression of the business. Reviewing financial statements—a set of documents that captures the financial standing of a business—provides you with a much better picture of the health of your business.

In this unit, we will look at the four basic parts of external financial statements: the balance sheet, income statement, statement of cash flow, and notes. We’ll also briefly explore the importance of internal financial reports.

Balance SheetA balance sheet is a statement of the financial condition of a business at a given date and can change dramatically from one day to the next. It includes a list of the business’s assets and liabilities, and it shows the net worth of the business. Each balance sheet is clearly labeled “as of month/day/year” to indicate the point in time. Take note of events that can dramatically alter the balance sheet from one moment to the next. These include refinancing current debt or arranging new debt, acquiring or selling assets, and selling stock in the business. Figure 3.1 shows simplified balance sheets for two businesses, “Agency 1” and “Agency 2.”

Assets are listed first. Assets are the resources of the business, including cash, accounts receivable, furniture, and equipment—in other words, those items that add positive value to the companyand are items that are owned by the organization.

Tangible assets are assets that can be precisely identified. Tangible assets are divided into current assets and fixed assets. Current assets are any assets that are liquid (cash or cash equivalents) or that will be paid to the company within a year (such as accounts receivable). Fixed assets give the company benefits over the longer term, such as investments in equipment or furniture.

Intangible assets are those assets of the company that cannot be directly seen or measured. One example of intangible assets is “goodwill,” which is the cost of acquiring a business above the book value of its tangible assets.

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3

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Agency 1: Mostly Leisure Travel Agency 2: Small Corporate TravelAssets

Current Assets

cash $ 10,000 $ 20,000

accounts receivable $ 12,000 $ 9,000

prepaid expenses $ 1,000 $ 1,000

total current assets $ 23,000 $ 30,000

Long-Term Assets

tangible assets estimated useful life (for depreciation calculation)

furniture and fixtures $ 7,000 10 years $ 7,000

equipment $ 8,000 5 years $ 7,000

automobiles $ 5,000 5 years $ 5,000

total tangible assets $ 20,000 $ 19,000

intangible assets

goodwill $ 6,000 3 years $ 1,000

leasehold improvements $ 3,000 $ 2,000

total intangible assets $ 9,000 $ 3,000

Total Assets $ 52,000 $ 52,000

Liabilities and Capital

Current Liabilities

accounts payable/ARC $ 4,000 $ 8,000

accounts payable/other $ 3,000 $ 1,000

advance client deposits $ 2,000 —

total current liabilities $ 9,000 $ 9,000

Long-Term Liabilities

notes payable $ 11,000 $ 11,000

total long-term liabilities $ 11,000 $ 11,000

Capital

invested capital $ 27,000 $ 27,000

retained earnings $ 5,000 $ 5,000

total capital $ 32,000 $ 32,000

Total Liabilities and Capital $ 52,000 $ 52,000

FIGURE 3.1Simplified Balance Sheets as of December 31, 2xxx

Cash is any money received in a form that can be deposited in a bank, such as currency, checks, money orders, or traveler’s checks. A cash equivalent is any investment that can be readily used to pay bills without penalty, including money market investments or other short-term liquid investments. Accounts receivable (A/R) are money owed to the business, usually by customers.

After the assets, the balance sheet lists the liabilities and net worth, or capital. Liabilities are the debts of a business, including accounts payable and loans payable to lenders. Current liabilities are debts that must be paid off within one year. The most typical current liabilities are accounts payable (A/P), the money owed by the business to creditors. Long-term liabilities, such as bank loans and equipment leases, are debts outstanding for more than one year.

The net worth, also called equity or capital, is the value of the business defined as assets minus liabilities. The current value of the business is what you have (assets) minus what you owe (liabilities). The net worth of a business is not necessarily the same as its market value, which is what someone would pay for the assets of the business on the open market.

Note that the balance sheet does not indicate the profitability of the business. It simply presents information about the business condition at a given date.

PRACTICE SESSION EXERCISE 3.1

Refer to the sample balance sheets in Figure 3.1 to answer the following questions. Check your answers with those provided in the Answer Key at the end of this course.

1. The balance sheet shown in Figure 3.1 is a snapshot for what point in time?

2. What is the net worth of each agency in Figure 3.1 at this point in time?

3. Can you tell from the balance sheet whether or not the agencies are profitable?



Income StatementAn income statement is a financial analysis of the business showing the details of revenues, costs, expenses, losses, and profits for a given period of time. Usually income statements will be calculated for a month, quarter, or year.

Depending on the sophistication of your back-office system, you may also be able to calculate income statements for various components of the business, such as by agent, by department, or even by customer. Naturally, these additional reports require assumptions about how costs are allocated through the business.

The income statement is sometimes called a profit and loss statement because it shows the profit or loss for a business for a given period of time. A typical income statement lists the revenues (income), followed by expenses (costs of operating a business), and the resulting net profit or loss.

There are two widely accepted accounting methods in travel: 1) sales/cost of sales and 2) commission income. Figures 3.2 and 3.3 show that either method can be used for any agency—large or small, leisure or corporate—depending on the needs and desires of the management or ownership.

An income statement using the sales/cost of sales method, such as the example in Figure 3.2, starts with gross sales, or product revenues which are then reduced by the cost of sales, or product cost of sales, to get to the gross profit. Cost of sales is defined as the agency’s cost to make the product available to the consumer.

An income statement using the commission income method, such as the example in Figure 3.3, begins with commissions received. The revenues are broken down by major category of revenues, either by product line or by type of revenue. For example, a retail travel agency’s statement may list separately the revenues for air, car, hotel, insurance, cruises, and service fees.

The rest of the expenses are then deducted from the gross profit. These include all expenses not related to the product itself: rent, salaries, advertising, and so on. Note that expenses are not the same as cash outlays because some expenses are of value to the business over multiple years.

For example, because of accounting rules, depreciation on equipment is an expense taken over time even though all of the cash may have been paid out at the beginning to buy the equipment. After totaling these expenses, you can calculate the net profit by subtracting the expenses from the gross profit.

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Agency 1 Agency 2 January 1-December 31, 2xxx Mostly Leisure Travel Small Corporate TravelIncomeProduct Revenues Air Revenues $ 880,000 $ 825,000 Cruise Revenues $ 439,795 $ 80,523 Tour Revenues $ 291,030 $ 3,300 Hotel Revenues $ 102,725 $ 153,756 Car Rental Revenues $ 63,325 $ 57,856 Insurance Revenues $ 18,238 $ 2,200Total Product Revenues $ 1,795,113 $ 1,122,635Product Cost of Sales Air Cost of Sales $ 867,750 $ 813,516 Cruise Cost of Sales $ 404,500 $ 74,000 Tour Cost of Sales $ 261,000 $ 3,000 Hotel Cost of Sales $ 92,000 $ 135,000 Car Rental Cost of Sales $ 56,500 $ 45,500 Insurance Cost of Sales $ 9,948 $ 1,200Total Product Cost of Sales $1,691,698 $ 1,072,216Net Commissions* ($ 103,415) ($ 50,419)

Air Commissions $ 12,250 $ 12,250 Cruise Commissions $ 35,295 $ 6,523 Tour Commissions $ 30,030 $ 300 Hotel Commissions $ 10,725 $ 18,756 Car Rental Commissions $ 6,825 $ 12,356 Insurance Commissions $ 8,290 $ 1,000Total Commissions $ 103,415 $ 51,185Other Income Service Charges $ 64,000 $ 30,000 Management Fees $ 84,000 Interest $ 585 $ 585 Total Income $ 168,000 $ 165,770 Expenses Salaries $ 94,575 $ 94,575 Automation $ 4,995 $ 6,995 Advertising $ 9,700 $ 7,700 Education $ 3,900 $ 3,900 Supplies/Printing $ 7,995 $ 5,995 Postage/Delivery $ 2,655 $ 2,655 Rent/Utilities $ 12,675 $ 12,675 Telephone $ 7,800 $ 7,800 Insurance $ 2,340 $ 2,340 Miscellaneous $ 16,695 $ 16,695 Total Expenses $ 163,330 $ 161,330 Net Profit (or Loss) $ 4,670 $ 4,440 *Product revenues less product cost of sales

FIGURE 3 .2Simplified Income Statements: Sales/Cost of Sales Method

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January 1-December 31, 2xxx

Agency 1 Agency 2 Mostly Leisure Travel Small Corporate Travel

Commission Revenue

Service Charges $ 64,000 Service Charges $ 30,000

Air Commissions/ Air Commissions/ Overrides $ 12,250 Overrides $ 12,250

Cruise Commissions 35,295 Cruise Commissions 6,523

Management Fees 84,000

Tour Commissions 30,030 Tour Commissions 300

Hotel Commissions 10,725 Hotel Commissions 18,756

Car Rental Commissions 6,825 Car Rental Commissions 12,356

Insurance Commissions 8,290 Insurance Commissions 1,000

Interest 585 Interest 585

Total Commission Revenue $ 168,000 $ 165,770

Expenses

Salaries $ 94,575 Salaries $ 94,575

Automation 4,995 Automation 6,995

Advertising 9,700 Advertising 7,700

Education 3,900 Education 3,900

Supplies/Printing 7,995 Supplies/Printing 5,995

Postage/Delivery 2,655 Postage/Delivery 2,655

Rent/Utilities 12,675 Rent/Utilities 12,675

Telephone 7,800 Telephone 7,800

Insurance 2,340 Insurance 2,340

Miscellaneous 16,695 Miscellaneous 16,695

Total Expenses $ 163,330 $ 161,330

Net Profit (or Loss) $ 4,670 $ 4,440

FIGURE 3.3Simplified Income Statements: Commission Income Method

The income statement then lists any nonoperating income or expenses, such as interest or dividends on bank accounts. After this adjustment is made to the net profit, the result is the net profit or loss of the company after interest and taxes.

Statement of Cash FlowCash flow is a measure of an organization’s liquidity over a given period of time. It usually consists of net income after taxes plus noncash charges, such as depreciation, against income. The statement of cash flow shows how much actual cash was generated by the business and how that cash was used.

The statement of cash flow shows the starting cash position, how much cash was earned from operations (net income), how much cash was spent on new assets, including the value of newly-purchased fixed assets, or borrowed from lenders, and how much cash was left at the end of the year.

In Figure 3.4, notice that the small corporate agency (Agency 2) has more cash in the bank on roughly the same net income as the agency that is mostly leisure (Agency 1). How did Agency 2 do that? They decreased A/R (customers who owe them) and A/P (vendors to whom they owe money). They also borrowed $3,000 more than the mostly leisure agency, and the owner put in $10,000 more capital.

Because the balance sheets (Figure 3.1) show that both businesses have the same owner’s capital as of December 31, this means that there was a difference in the timing of the investment (Agency 1 in a prior year, Agency 2 this year).

The main point is that no single aspect of the financial documents is enough to assess the health or value of a business. All the financials, plus what is known about the local marketplace, the economy in general, and the industry must be taken into account when assessing the business.

NotesThe notes (sometimes called footnotes) are among the most important, but most overlooked, parts of a financial statement. Notes will be found only in statements prepared by a certified public accountant (CPA).

The notes, usually labeled “Notes to Financial Statements,” follow the financial statements. These notes include all of the comments about how the financial statements were created and important details about the operations of the business as well as how fixed assets are depreciated and the values. by year, of lease commitments.




For the following questions, use the examples of financial statements shown in this unit. Check your answers with thise provided in the Answer Key at the end of this course.

1. Can you tell from the income statements in figures 3.2 and 3.3 how much cash the agencies have?

2. According to the income statement in Figure 3.3, approximately what percentage of the Small Corporate Travel agency's (Agency 2) commission revenues comes from air commissions/overrides?

3. If the agencies weren't labeled in Figure 3.3, could you tell from the financial data whether the agencies are primarily leisure or corporate? If so, how?

4. According to Figure 3.4, how much of a long term loan did the Small Corporate Travel agebcy (Agency 2) take out this year?

Internal Financial ReportingInternal financial reports provide a different perspective on the business. Instead of an external audience that dictates the nature and content of the document, internal reports can be tailored to fit the needs of the individual business. Using the same information foundation as external reports but augmented with data unique to the specific business, internal reports can act as a scorecard for the business’s performance.

� Sales and back-office productivity measures can be combined with data from the telephone system and payroll system to give a variety of productivity metrics.

� Factors other than raw transactional data (such as “invoice amount”) can be included in an overall performance review for employees.

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These factors can include error rate or dollar amount of errors and conversion ratio (the ratio of incoming calls to sales transactions).

� Raw booking data can be analyzed to show the percentage of sales to preferred vendors so that agents with lower rates can be trained to understand the importance of the agency’s preferred vendor program.



January 1–December 31, 2xxx Agency 1 Agency 2 Mostly Small Leisure Travel Corporate Travel

Cash from Operations

net income $ 4,670 $ 4,440

depreciation $ 4,500 $ 3,300

net income plus depreciation $ 9,170 $ 7,740

change in short-term assets and liabilities

accounts receivable $ 2,000 $ 1,000

prepaid expenses $ (1,000) $ 1,000

accounts payable $ 1,500 $ 1,200

total changes $ 2,500 $ 3,200

total cash from operations $ 11,670 $ 10,940

total cash from investments $ 1,200 $ 1,200

purchase of fixed assets $ (2,000) $ (2,000)

cash from financing

increase in long-term debt $ 2,000 $ 5,000

cash from (to) owner $ – $ 10,000

total cash from other than operations $ 1,200 $ 14,200

net change in cash $ 12,870 $ 25,140

cash at start of year $ 2,870 $ 5,140

current cash $ 10,000 $ 20,000

FIGURE 3.4Simplified Statements of Cash Flow

No general course, business book, or casual business analysis can provide the business owner or manager with the magic ingredients for internal reporting. Owners or managers need to look at all the data available and decide for themselves, given the competitive landscape, which metrics will be valuable for their businesses.

One of the most important internal reports is the budget. A budget includes projections for both revenues and expenses over time and permits a bird’s-eye view of a variety of metrics for the business. Many small-business owners do not spend enough time either crafting or adjusting their budgets and, as a result, may be surprised by the results reported on external financial statements.

Budgets typically include financial metrics, as well they should, but can also include targets and actual values for other customer service measurements such as call hold time, sick days per employee, number of tickets refunded, sales mix (domestic/international, corporate/leisure/meeting, and so forth), and the results of customer satisfaction surveys.

A noticeable increase in call hold times may be the very first indicator that sales volume is increasing beyond the level that can be managed by the current staff. The answer may be additional staff, but it may also be retraining staff to shorten call times, cross-training nonsales staff to answer phones and provide a human touch, or designing an effective automated phone answering system.

Other potential solutions may include providing incentives to customers to communicate with you using nontraditional channels, such as online forms that solicit all information required for the sale, thus reducing call time. E-mail, fax, and dedicated phone lines for special customers are other nontraditional communication options. In any case, the increase in hold time is the bellwether that allows you to react before losing sales.

QUICK CHECKThis concludes Unit 3: Financial Statements. You should now be able to:

9 Name and describe the four basic parts of an external financial state-ment;

9 Derive a company’s net profit or loss;

9 Explain the importance and uses of internal management reporting.

FINANCIAL PLANNING


Unit 4: Analyzing a Business


Analyzing a Business

Financial statements can be used to help analyze a business. The analysis can be compared to established industry standards or similar businesses.

Some common measures used in analyzing a business and determining the relative financial strength of a business are the following:

� Current ratio

� Top line (service fee plus commission) percentage

� Labor cost percentage

� Revenue generated per employee

� Productivity

Current RatioWhen determining the financial status of a business, the most common ratio to look at is the current ratio, which is defined as the ratio of current assets to current liabilities. As we mentioned in the previous unit, current assets are cash, cash equivalents, and accounts receivable. Current liabilities are debts that must be paid within a year.

A current ratio greater than 1.0 (current assets are higher than current liabilities) is a good sign. This means the business should be able to pay its current obligations. The higher the ratio, the better. However, if a substantial part of the current assets is composed of accounts receivable, there may be a problem. It is possible that the business is not collecting in a timely fashion or that some of the receivables will become uncollectible.

Top Line (Service Fee Plus Commission) PercentageIn the travel industry, the overall commission percentage (total commission income divided by total gross product revenues) is one way to look at how revenues are generated. But in the age of service fees, you must also add other revenue-generating activity to get a full picture for this metric. Service fees are part of the “top line” of your income statement (i.e., revenue). Agencies should have a top line percentage at or greater than 10 percent. A low top line percentage can indicate certain problems.

UNIT

4

� Your sales mix is too heavily weighted toward sales of low-commis-sion domestic airline tickets rather than higher-commission items (tours, cruises, insurance). Or, perhaps, not all service fees are being appropriately collected or accounted for in your point-of-sale system.

� The agency may not be using preferred suppliers, which would increase override commissions.

� The agency may not be selling high-margin add-ons such as travel insur-ance.

Labor Cost Percentage and Revenue Generated per EmployeeLabor cost percentage is defined as the total cost of labor (including salaries, benefits, and payroll taxes) divided by total top line income. Because labor is typically the single highest cost of a retail travel agency, it is vital to control that cost as much as possible.

Another way to look at the labor cost is to calculate the revenue generated per employee. This figure will be dramatically different for a corporate agency (usually more than $1 million per agent) compared with a leisure agency (around $500,000 per agent), but it offers a good perspective on the productivity of the sales force. Such calculations allow you to compare your agency, at a point in time, to other agencies. More important for the long-term management strategy of your own business is to track how these figures change over time.

ProductivityMeasuring productivity over time (on a per-employee, per-square-foot-of-your-facility, per-dollar-of-rent, and per-hour basis) can help you spot potential trouble areas early. Productivity can be thought of as profit brought in divided by the expenses incurred to generate that profit.

By varying the unit of measure—by employee, square foot of your business, dollar of rent, and so forth—you can track, over time, whether this metric changes significantly. It is this type of analysis that will signal to you that you have too many (or too few) employees or that your facility is too large or too expensive.

While revenue or top line measurements are important and useful, a productivity metric brings in the costs associated with producing that revenue. Provided you have a way of allocating sales to specific individuals, you can also do this analysis for specific individuals and even

FINANCIAL PLANNING





Answer the following questions using the sample financial statements in the previous unit. Check your answers with those provided in the Answer Key at the end of this course.

1. Using the balance sheets in Figure 3.1 and the income statements in Figure 3.3 (both in Unit 3), as well as the ratio analysis figures below, which of the businesses appears to be healthier? Why?

Ratio analysis (using balance sheets in Figure 3.1):

Agency 1 Agency 2Current Ratio 2.56 3.33 Annual Credit Sales $ 72,000 $ 36,000Average Collection Period 60 90Percent of Annual Sales That Are A/R 43% 22%Long-Term Debt to Equity (Total Capital) 34% 34%Total Debt to Total Capital 63% 63%

The healthier business is

Because

2. Using the income statements in Figure 3.2 (in Unit 3), determine the top line (service fee plus commission) percentages for each agency.

Top Line (Service Fee Plus Commission) Percentages

Cost of Sales Agency 1 Agency 2

Air _____________________ _____________________ Cruise _____________________ _____________________ Tour _____________________ _____________________Hotel _____________________ _____________________Car Rental _____________________ _____________________Insurance _____________________ _____________________

3. According to the income statements in Figure 3.2 (in Unit 3), what is the labor cost percentage for each agency?

Agency 1 Agency 2

Labor Cost Percentage ______________ _______________

4. What conclusions can you draw from these analyses?

for specific product lines (airline tickets, cruise sales and other big-ticket items, car rental income, among others). This type of targeted analysis certainly takes more time (and relies on more data from your back-office system), but the extra time will be worth it.

Once you have specific measures of productivity, you’ll be able to set targets for your business. Because the productivity measure takes into account not only the revenue generated but also the expenses involved, and because in business “you get what you measure,” the productivity measurement will help you control expenses and measure sales. It can help you identify top sellers in your agency and also weak spots.

CASE TO CONSIDER

Nirvana Travel has two agents for whom it has gathered productivity data. Both are cruise specialists and have roughly the same denominator in the productivity ratio (i.e they both incur roughly the same amount of expenses), but one has a much higher numerator (the top line component of the ratio). They even have the same number of transactions (cruise sales). What could explain the difference in productivity?

The owner of Nirvana Travel decides to conduct an analysis to quantitatively identify the star performer. It indicates that the star performer sells more high margin add-ons such as shore excursions, pre- and post-trip packages, insurance, and cabin upgrades. The owner uses this productivity data to reward the star performer and give her the opportunity to coach the other agent.

PRACTICE SESSION: EXERCISE 4.2

Using Figure 4.1, look at the series of productivity metrics and answer the following questions. Check your answers with those provided in the Answer Key at the end of this course.

1. Does either agency need to add an additional employee?

2. Which agency has the most productive employees?

3. Employees of which agency have an opportunity to improve their “big ticket” sales?

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Agency 1 Agency 2

average ticket price $ 220.00 $ 275.00

number of tickets per year 4000 3000(excluding car/hotel/tour/insurance sales)

average service fee $ 16.00 $ 64,000.00 $ 10.00 $ 30,000.00

gross revenue $ 880,000.00 $ 825,000.00

management fee 7 units, $ 1,000.00 $84,000.00 at monthly rate

tickets per day 16 12

sales per FTE $ 372,191.38 productivity metrics $ 348,929.42

number of Full Time 2.36 2.36 Equivalents (FTE)

tickets per day per FTE 6.77 5.08

FTE salary (average) $ 40,000.00 $ 40,000.00

FIGURE 4.1Productivity Metrics

An analysis of productivity by square foot may highlight the fact that your office is too large and has excess capacity, which you can sublet to another business. Or, if you have multiple offices, the rent on one may be much higher than all the others in terms of its impact on productivity as well as revenue. As a business owner or manager, you have a finite amount of time with which to research, make, and implement decisions. Analyses such as those described in this section will allow you to quickly highlight which areas of your business merit your attention.

QUICK CHECKThis concludes Unit 4: Analyzing a Business. You should now be able to:

9 Determine the financial strength of a business using different measures, including current ratio, top line (service fee plus commission) percent-age, labor cost percentage, and revenue generated per employee;

9 Analyze specific measures of productivity to help you control expenses and measure sales.

Unit 5: Managing Cash Flow


Managing Cash Flow

Cash versus ProfitsSmall-business owners have a habit of determining success by looking at their bank balance. While that is good in the long term, it can be very dangerous in the short term. A successful business will continue to generate more and more cash, but its current bank account balance may not necessarily reflect that success.

For example, let’s assume you are taking deposits for a group trip a year in advance. The tour company requires a $100-per-person deposit, but you ask clients for $250 per person. You take in the $250 per person and send $100 per person to the tour company to hold the space. However, you still have $150 per person in your account, which you may not have to send in for another nine months.

Ideally, you should have an escrow account to hold deposits separate from other funds, but most small-business owners unfortunately don’t do that. Therefore, your bank balance is artificially inflated because you haven’t really earned the money in your account. Although you have taken in $250 per person and paid $100 per person to the tour company, you also owe $150 per person to the tour company. You won’t actually earn any income until the travel takes place (or at least until the travelers are past their cancellation period).

Here is another common scenario among retail travel agencies. The agency has very high sales in November but finds that it is running out of cash in December. How can this situation occur? November sales were in tours and cruises that will be taken during the months of February, March, and April of the following year (a peak period due to school vacations). However, most clients only make a down payment. If the client uses a credit card and the agency is not a credit card merchant, the agency cannot collect money until after the client travels. Requiring a higher down payment or full payment does not necessarily solve the cash flow problem either because payments to tour and cruise companies are still due in January for those first-quarter packages.

A quarterly budget will help you map out these patterns of cash inflows and outflows. A similar map of revenue and expenses will also help, as you can identify certain times of the year when you need to either stimulate sales or modify some expenses.

Going bankrupt doesn’t mean that the company isn’t making a profit; it means the company doesn’t have the cash to pay its bills. Even though a business may make a profit in the long run, it’s better have some cash in the short run so it can make it to the long run.

UNIT

5

Did You Know?

After you have been in business for a while, you can start managing your cash flow very efficiently. A good exercise is to take your bank statements for the past few years and chart the total deposits and the total expenditures for each month and quarter and the net balance in your bank account at each month’s end. You can then use this information to forecast your cash requirements for each month.

The message is important: Don’t confuse “sales” or “profits” with “cash.” In the short run, cash is king. After all, if you can’t pay your bills, you won’t be in business for the long run. In the long run, with proper financial and managerial controls, however, profits and cash flow will catch up to one another.

Ways to Improve Cash FlowThere are a number of ways you can improve your cash flow.

� Sell more. Higher sales will lead to better cash flow. That is easier said than done, but you can run special programs to generate sales that will provide cash flow when you need it. During a month when cash flow is typically poor, you might consider running cruise nights or other creative programs with preferred vendors. Try to resist offer-ing to sell airline tickets without a service fee or offering fee-waive coupons, as your clients will soon come to expect that and will likely change the timing of their purchases to take advantage of such dis-counting.

� Minimize accounts receivable. Ideally, in the travel industry, accounts receivable should be zero. Very few, if any, clients should be allowed to buy on credit. If you are still invoicing some corporate accounts, prepare a presentation for them outlining the advantages of using a corporate credit card for airline purchases: Clients will have longer to pay for the ticket, will have protection if the airline has a problem, and can earn frequent-flyer points for charges.

� Reduce the accounts receivable terms of payment. Accounts receiv-able collected sooner are better than accounts receivable collected later. If you do have some receivables, try to minimize the amount of time that you give clients to settle the account. Ideally, for ARC sales, this should be within a week. You can also provide a small discount (or perhaps a reduction in service fees) for early payment. Alternatively, as market conditions permit, consider charging interest for open invoices older than 30 days. If your travel agency performs the func-tion of a financial institution, such as a bank, then you need to be paid for those services.

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In a recent survey, Wall Street analysts overwhelmingly stated that cash flow from operations was the most important indicator that they look for in determining a business’s health and market value.

Did You Know?

� Delay payment of payables. An account payable paid on the invoice due date is better than account payable paid when the invoice is received. Take the maximum amount of time (within reason) to pay your bills, especially during periods of low cash flow. Make ARC and other supplier payments on time, but try to extend terms on other expenses, such as rent, telephone, and advertising. You may be able to negotiate longer terms with some vendors during certain times of the year, but make sure when you stretch payments out that you are not incurring late fees.

� Encourage payment by cash or check. Unless you are a credit card merchant, payment by cash or check will increase your cash flow. Encourage your clients to pay by cash or check by offering them a small cash discount or some other item, such as a shipboard credit.

� Become a credit card merchant. The business of processing credit card sales has been simplified in recent years and no longer entails as much up-front investment, or risk, as it did in the past. This strategy may also help your business take direct payment for other services you provide to your clients.

� Borrow. Based on your cash requirement forecasts, you may identify times of the year when you will need some extra cash. Borrowing for that time period may be an option. To meet your cash needs on a temporary basis, ask your bank about business lines of credit. Borrowing should be used only as a last resort because continual reli-ance on external financing may signal to you, or your creditors, that the business is not generating enough cash from its operations to cover all its expenses.

� Use sweep accounts. By law, banks are not permitted to pay interest on business checking accounts. However, most banks have programs that will sweep excess money from a checking account (over a base amount needed for daily transactions) into an interest-bearing account tempo-rarily.

� Cut expenses. If you’ve mapped out your cash inflows and outflows, you’ll have an idea when you need to keep controllable expenses to an absolute minimum. The months in which you know that cash will be tight will be the months to offer your employees part-time work or leaves of absence without pay, minimize expenditures on items such as office supplies, and consider creative financing options with sup-pliers and creditors. These creative options can include negotiating a “rent holiday” with your landlord or partnering with vendors to have



Sweep accounts serve a dual role as a checking and investment account. At the end of every day, this type of account automatically sweeps everything over a specified balance into one or more money market funds. You’ll be able to earn interest on money that would otherwise sit in your checking account. When you discuss sweep accounts with your banker, ask about both the fees charged and the interest rate earned. If the interest earned will be higher than the fees, a sweep account may make sense for your business.

Did You Know?

them pay for, and exercise proportional control over, advertising in your lean months. Your company will still be featured but perhaps not as prominently as in months where you take a larger share of the advertising expense.

� Charge for all the services you provide. Just as professionals such as attorneys charge for all expenses related to a case, travel profession-als must pass along all appropriate expenses to clients. Examples of expenses incurred by travel agencies, but not always recouped from clients, include charges for photocopying, faxing, delivery of docu-ments, and research. That last item is worth emphasizing: Travel professionals provide information to clients that would otherwise cost the clients time, money, or both. Just as paralegals who do research for an attorney or tax professionals who research the tax code for a client charge an hourly rate for their professional services, so should travel professionals.

� Reevaluate your sales mix and business model. The travel agency can-not, and should not, be all things to all people. The successful agency will find an appropriate niche in the marketplace and fill it. That may mean focusing in a geographic or travel specialty, such as travel to Africa, Central America, cruises, or adventure travel. It certainly means selecting a list of preferred vendors and focusing all sales efforts on those select vendors. Travel agency consortium membership may facilitate the selection of preferred vendors, but, in any case, agencies need to have a list of preferred vendors for all genres of travel they wish to sell (air, land, hotel, cruise, car, tour, and so forth), and agents must be trained to sell only those vendors (barring a spe-cific client request). This process approximates the dealership model used by the automotive industry.

� Ensure that the agency explores all high-margin valued-added prod-ucts available in the chosen specialty. No leisure sale is complete without suggesting upgrades to the purchased package and travel insurance. Similarly, no corporate travel management agreement is complete without a report package for which the agency is fairly compensated. For leisure-oriented businesses, all sales must include an offer of travel insurance, maps, foreign currency, and entertain-ment tickets at the destination. For corporate, group, or incentive travel, high-margin products include reporting on past and currently booked travel activity, credit card reconciliation, travel warning and security updates, foreign currency sales, and group leader or escorted tour services.

FINANCIAL PLANNING


PRACTICE SESSION

Review the income statement and two balance sheets below, and answer the following questions. Check your answers with those provided in the Answer Key at the end of this course.

1. What was the agency’s operating cash flow from January through March?

2. How do you think the agency is doing on a cash flow basis?

3. What changes would you recommend to the business owner?

Simplified Income Statement: January 1, 2xxx, through March 31, 2xxxCommission Income $ 50,000

Depreciation Expense $ 5,000

Salaries and Taxes $ 30,000

Other Expenses $ 10,000

Total Expenses $ 45,000

Net Income $ 5,000

Comparative Balance Sheets January 1, 2xxx March 31, 2xxxAssetsFurniture and Equipment $ 40,000 $ 35,000

Accounts Receivable $ 5,000 $ 20,000

Cash $ 20,000 $ 20,000

Total Assets $ 65,000 $ 75,000

LiabilitiesAccounts Payable $ 5,000 $ 5,000

Loan from Owner $ 5,000 $ 10,000

Total Liabilities $ 10,000 $ 15,000



FINANCIAL PLANNING


QUICK CHECKThis concludes Unit 5: Managing Cash Flow. You should now be able to:

9 Analyze your cash flow;

9 Improve your cash flow by employing several different strategies.

Unit 6: Using Financial Planning to Improve the Business


Using Financial Planning to Improve the Business

With the proper accounting information in place, you now have the opportunity to improve business results.

When analyzing the performance of your business, you can use several different strategies.

1. Performance versus budget (variance analysis)

2. Productivity by employee

3. Product line profitability

4. New products and product lines

5. Cash flow forecast

Performance versus Budget (Variance Analysis)You should have a budget for every line item on your income statement. That will force you to consider all of your company’s costs, and it will give you an early warning as to what is happening in your business. By comparing the actual performance to the budget (the predicted performance), you can adjust your expenditures to bring results back in line.

Therefore, budgets should be prepared at least for each month, quarter, and year to provide an early warning system for the business. A variance analysis should be prepared monthly (see Figure 6.1). Any variances can be acted on quickly if necessary.

Productivity by EmployeeWith the proper accounting information, you can now identify the level of profit generated by each employee. In fact, you can create an “employee profit and loss statement.” This statement should start with the amount of commission and other income generated by each employee, followed by all of the direct costs associated with that employee, including salary, benefits, and payroll taxes.

UNIT

6

Allocate a percentage of all of the office’s fixed costs, such as rent, computer systems, advertising, and supervision costs, to each employee. Fixed costs can be allocated based on square footage (for rent, utilities, and so forth), workstations (computer expenses), revenue (advertising, marketing), and “head count” (supervision, human resources). This will give you a good picture of each employee’s performance as you create an employee-level income statement (profit and loss statement).

Similarly, in many instances you can also create customer-level income statements. Allocate the direct and indirect costs you incur by servicing various commercial accounts to ensure that they, too, remain profitable for your business.

You can also use this tool to improve an employee’s performance (see Figure 6.2). For example, you can identify weaknesses in an employee’s sales mix. Perhaps one employee isn’t selling as much insurance as other employees. That can be brought to the employee’s attention, and any improvement can be tracked and rewarded in the future.

Now that you have accurate information about the profit generated by each employee, the next step is to institute an incentive-based compensation system. Not only will employees have the information required to improve their performance, but they will also have the incentive to change.

FINANCIAL PLANNING


Category Budget Actual Variance

Net Revenues $ 20,000 $ 21,000 $ 1,000

Salaries $ 10,500 $ 10,700 ($ 200)

Rent/Utilities $ 1,000 $ 1,050 ($ 50)

Telephone $ 350 $ 300 $ 50

Automation $ 500 $ 450 $ 50

Advertising $ 750 $ 850 ($ 100)

Net Income $ 6,900 $ 7,650 $ 750

Note: Variances that reduce net income are in parentheses.

FIGURE 6.1Performance vs. Budget for Month Ending March 31, 2xxx

Product Line ProfitabilityWith detailed accounting information, you should be able to separate the revenues and expenses for each component of your business and for each vendor. For example, you should be able to identify the revenues and commissions generated from the cruise segment of your business or from a particular vendor. You can then allocate costs from each part of the business to calculate your profit from each product line and supplier.

FIGURE 6.2 Employee Profitability Statement

For Employee: Amy Agent

For Period: Full Year, 2xxx

Commissions Generated Air $ 18,000 Cruise $ 8,000 Tour $ 7,000 Other $ 3,000

Total Revenues $ 36,000

Direct Costs Salary $ 18,000 Payroll Taxes $ 1,500 Benefits $ 750 (Health)

Total Direct Costs $ 20,250

Indirect CostsRent/Utilities $ 3,000Telephone $ 500Advertising $ 2,000Automation $ 1,000Printing/Supplies $ 500Managerial Time $ 5,000Service Fees $ 1,000

Total Indirect Costs $ 13,000

Total Costs for Employee $ 33,250

Net Profit for Employee $ 2,750



As discussed in Unit 5, preferred vendor relationships are vital to the profitability of your business. As such, you must strongly gear all programs (trade show appearances, familiarization trips, incentive-based compensation) to supporting those preferred vendors.

An agent who continually sells nonpreferred vendors should not be compensated the same way that an agent who supports those preferred vendors is compensated. While a sale to either category of vendor contributes equally to the top line of the income statement, they do not contribute equally to the bottom line. The compensation program must be profit driven, not revenue driven.

As with employee-level analysis, commercial account analysis also needs to address the bottom line, as opposed to the top line. A high-revenue account that makes unrealistic demands for services on your agency may ultimately be costing you money. There is rarely value in simply being able to list an account as a customer, especially if your analysis shows that you are losing money on that account.

With product line profitability information, you can make a variety of decisions. For example:

� What level of service fees should be charged for each type of sale? Or each commercial account?

� What mix of leisure and corporate sales would be most profitable?

� What incentives should be offered to agents to sell certain products?

� What financial arrangements are reasonable for commercial accounts?

New Products and Product LinesThe dramatic changes that the travel industry has undergone since the introduction of commission caps in 1995 and the terrorist attacks of September 11, 2001, have necessitated equally dramatic responses by business owners.

Travel agencies have responded in a wide variety of ways, ranging from augmenting traditional travel product sales with retail sales of travel-related products (clothing, luggage, and cameras, for example) to subleasing parts of their property, and everything in between. Additionally, many successful agencies have become more specialized niche players and have established valued relationships with their customers.

Be creative when examining your business model (see Figure 6.3).

FINANCIAL PLANNING


� Does it make sense, in your market, to team with an insurance agent and share customer information and even share workspace?

� Does it make sense to close the storefront and operate wholly online or from your home?

� Does it make sense to expand by acquisition (and not necessarily just by acquiring other travel agencies)?

� Does your agency’s brand carry a good reputation upon which you can capitalize by expanding to new lines of business?

Some of these questions may appear overly dramatic. But the magnitude of changes that the industry has undergone, and the continued financial ramifications facing suppliers at all levels, cannot be overstated.

The landscape of the industry, from the retail and supplier perspective, is likely to change, and only businesses that have considered dramatic options will survive.

FIGURE 6.3 Product Line Profitability

Product Revenue Cost of Sales Net Commission % Commission

Air (Leisure) $ 600,000 $ 558,000 $ 42,000 7

Air (Corp.) $ 400,000 $ 368,000 $ 32,000 8

Cruise $ 350,000 $ 304,500 $ 45,500 13

Tour $ 300,000 $ 267,700 $ 32,300 11

Rail $ 150,000 $ 125,000 $ 25,000 17

Hotel $ 100,000 $ 92,000 $ 8,000 8

Car Rental $ 60,000 $ 56,500 $ 3,500 6

Insurance $ 40,000 $ 29,600 $ 10,400 26

Total $2,000,000 $1,801,300 $ 198,700 10



Did you know you can do an analysis similar to that in Figures 6.2 and 6.3 on commercial accounts as well?

Did You Know?

Cash Flow ForecastWith quality accounting data, you can forecast your expected cash flow (see Figure 6.4). You should have a good estimate of your expenses because many of them are fairly steady and predictable throughout the year: rent, salaries, computer fees, and so on. The more difficult part is estimating cash inflows.

You should forecast revenues on a month-by-month basis, determine the percentage of both cash sales and credit sales, and finally, determine when any accounts receivable will be paid.

FIGURE 6.4 Cash Flow Forecast

January February March April

Cash Outflows

Salaries $14,000 $14,000 $14,000 $14,000

Rent 700 700 700 700

Computer Fees 300 300 300 300

Total Cash Outflows 15,000 15,000 15,000 15,000

Cash Inflows

ARC Commissions* 6,500 7,500 8,500 8,000

Other Cash Sales** 2,500 3,500 3,000 2,500

Cash from Other

Credit Card Sales** 4,000 7,000 4,500 6,000

Total Cash Inflows 13,000 18,000 16,000 16,500

Net Cash Inflow ($2,000) $3,000 $1,000 $1,500 (Outflow)

*ARC commissions are received almost immediately, regardless of whether the sale is cash or credit.

**Other cash sales (e.g., cruises, tours, insurance) provide immediate cash flow; credit card sales provide cash only at the time of travel (when commissions are received) unless the agency is a credit card merchant.

FINANCIAL PLANNING


PRACTICE SESSION

Using figures in this unit, answer the following questions. Check your answers with those provided in the Answer Key at the end of this course.

1. Using Figure 6.1 (Performance versus Budget), analyze what you think happened in the business during March 2xxx. What actions might the business owner take based on the variances seen during the month?

2. Using Figure 6.2 (Employee Profitability Statement), analyze the performance of Amy Agent. Describe a good course of action for Amy to improve her performance.

3. Using Figure 6.3 (Product Line Profitability), analyze the commission levels earned by each product and the product sales mix. What are some implications for future agency profitability?

4. Using Figure 6.4 (Cash Flow Forecast), what conclusions can you draw about how the agency can plan its cash levels better?




QUICK CHECKThis concludes Unit 6: Using Financial Planning to Improve the Business. You should now be able to:

9 Use a variety of strategies to analyze the performance of your busi-ness, including performance versus budget (variance analysis), pro-ductivity by employee, product line profitability, new products and product lines, and cash flow forecast;

9 Forecast your expected cash flow.

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Summary

SummaryFinancial planning is crucial to the success of any business. Although strategic planning and marketing are the first steps in creating a successful business, financial planning allows the business to continue to prosper.

The goals of financial planning are 1) to ensure that a business has enough money to operate and to implement its business plan and 2) to manage the money efficiently so that the maximum amount of income is generated. Accounting is the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results.

Both general-purpose and travel-specific software programs are available that will automate various accounting tasks. Depending on your particular business, it may be advantageous to hire a bookkeeper to handle the accounting.

Regardless of how you handle accounting tasks, it is important to understand that accounting data are the fuel of the CRM system, which takes all of the information your business has about its customers and aggregates it in a timely, useful, and profitable manner.

External financial statements are composed of 1) a balance sheet, which is a statement of the financial condition of a business at a given date; 2) an income statement, which shows the profit or loss for a business over a given period of time; 3) a statement of cash flow, which shows how much cash was generated by the business and how that cash was used; and 4) notes.

Internal financial reports use the same information as external reports but are augmented with data unique to the specific business. One of the most important internal reports is the budget, which includes projections for both revenues and expenses over time and permits a bird’s eye view of a variety of metrics for the business.

We looked at several methods to analyze the relative financial strength of a business: current ratio, top line (service fee plus commission) percentage, labor cost percentage, revenue generated per employee, and productivity.

In order to have cash available when you need it, you must be able to manage cash flow. There are a variety of ways to improve your cash flow, including selling more, minimizing accounts receivable, delaying payment

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of payables, encouraging payment by cash or check, becoming a credit card merchant, borrowing, and using sweep accounts, as well as other methods.

When analyzing the performance of your business, you can use several measures: performance versus budget (variance analysis), productivity by employee, product line profitability, new products and product lines, and cash flow forecasts.

While financial planning cannot guarantee the success of a business, it will certainly increase the chances of success.

Application Activity


Application ActivityThe following activity will help you put into practice what you have learned about financial planning. Also, it will test your understanding of how effective financial planning is to you in your role as a travel professional. Suggested responses based on the concepts covered in this course are provided in the Answer Key. It will be more helpful for you if you complete the activity to the best of your ability before you consult the sample responses. If you have any trouble completing the exercises, refer to the material contained in this course.

Directions

1. Review the financial statements on two pages 47 and 48 from Nirvana Travel:

� Balance sheet

� Income statement

2. Analyze the current status of the business by answering the following questions.

1. In which areas could Nirvana Travel have done a better job selling, thereby increasing its revenues?

2. In which of the following categories could Nirvana Travel have done a better job controlling or decreasing expenses? Should any expenses be increased?

Salaries Supplies/Printing Insurance

Automation Postage/Delivery Miscellaneous

Advertising Rent/Utilities

Education Telephone

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3. Is Nirvana’s cash balance at the proper level?

4. Do you think Nirvana is a well-run agency based on the financial statements? Would you be happy if you were the owner of this business? Why or why not?

Application Activity


Categories Nirvana Travel

Current Assets

cash $ 10,000

accounts receivable $ 12,000

prepaid expenses $ 1,000

total current assets $ 23,000

Long-Term Assets

tangible assets

furniture and fixtures $ 7,000

equipment $ 8,000

automobiles $ 5,000

total tangible assets $ 20,000

intangible assets

goodwill $ 6,000

leasehold improvements $ 3,000

total intangible assets $ 9,000

Total Assets $ 52,000

Liabilities and Capital

Current Liabilities

accounts payable/ARC $ 4,000

accounts payable/other $ 3,000

advance client deposits $ 2,000

total current liabilities $ 9,000

Long-Term Liabilities

notes payable $ 11,000

total long-term liabilities $ 11,000

Capital

invested capital $ 27,000

retained earnings $ 5,000

total capital $ 32,000

Total Liabilities and Capital $ 52,000

Sample Balance Sheet as of December 31, 2xxx

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Categories Nirvana Travel

Income Product Revenues Air Revenues $ 880,000 Cruise Revenues $ 439,795 Tour Revenues $ 291,030 Hotel Revenues $ 102,725 Car Rental Revenues $ 63,325 Insurance Revenues $ 18,238 Total Product Revenues $ 1,795,113 Product Cost of Sales Air Cost of Sales $ 867,750 Cruise Cost of Sales $ 404,500 Tour Cost of Sales $ 261,000 Hotel Cost of Sales $ 92,000 Car Rental Cost of Sales $ 56,500 Insurance Cost of Sales $ 9,948 Total Product Cost of Sales $ 1,691,698 Net Commissions* ($ 103,415) Air Commissions $ 12,250 Cruise Commissions $ 35,295 Tour Commissions $ 30,030 Hotel Commissions $ 10,725 Car Rental Commissions $ 6,825 Insurance Commissions $ 8,290 Total Commissions $ 103,415 Other Income Service Charges $ 64,000 Interest $ 585 Total Income $ 168,000 Expenses Salaries $ 94,575 Automation $ 4,995 Advertising $ 9,700 Education $ 3,900 Supplies/Printing $ 7,995 Postage/Delivery $ 2,655 Rent/Utilities $ 12,675 Telephone $ 7,800 Insurance $ 2,340 Miscellaneous $ 16,695 Total Expenses $ 163,330 Net Profit (or Loss) $ 4,670 *Product revenues less product cost of sales

Sample Income Statement January 1–December 31, 2xxx

Post-Test


Post-TestDirections: Once you have completed the readings and activities for this course, try to answer the following questions without checking back through the material. When you have finished, confirm the correct answer to each question by consulting the Answer Key. Compare your answers from the post-test with those of your pre-test for a realistic assessment of what you have learned.

True or False

True False 1. A business is making money if the balance in the busi-ness checking account goes up.

True False 2. The current ratio is one way to quickly use a balance sheet to check the health of a business.

True False 3. An income statement shows revenues, expenses, and the resulting net profit or loss.

True False 4. A company’s balance sheet shows the profitability of the business.

True False 5. A travel agency’s labor cost (salaries, benefits, and taxes) should be less than 50 percent of revenues.

Circle the best answer.

6. Which of the following is not part of the typical package of financial statements?A. bank statementB. income statementC. balance sheetD. notes

7. Which of the following would not be considered a current asset? A. cash in a bank account B. accounts receivable C. office furniture D. petty cash

8. Which of the following will decrease current cash flow? A. reducing accounts receivable B. delaying the payment of bills C. borrowing money D. encouraging credit card sales for tours and cruises

9. Which of the following is a good reason to hire a bookkeeper? A. You will have poorer-quality information on which to make decisions. B. You will have less feel for the day-to-day operations of the business. C. You will have higher salary expenses. D. You will have more time to spend on business management.

10. One advantage of using a travel-specific accounting software program is that it

A. can interface directly with a global distribution system (GDS). B. is well known by accountants and bookkeepers. C. must be manipulated to do travel-specific transactions. D. is well supported because of the huge user base.

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Glossary � Accounting: The system of recording and summarizing business and

financial transactions and analyzing, verifying, and reporting the results.

� Accounts payable (A/P): The money owed by the business to credi-tors.

� Accounts receivable (A/R): The money owed to the business, usually by customers.

� Assets: Resources of the business, including cash, accounts receiv-able, furniture, and equipment.

� Balance sheet: A statement of the financial condition of a business at a given date.

� Budget: Includes projections for both revenues and expenses over time and permits a bird’s-eye view of a variety of metrics for the busi-ness.

� Cash: Any money received in a form that can be deposited in a bank, such as currency, checks, money orders, or traveler’s checks.

� Cash equivalent: Any investment that can be readily used to pay bills without penalty, including money market investments or other short-term liquid investments.

� Cash flow: A measure of an organization’s liquidity over a given period of time.

� Current ratio: The ratio of current assets to current liabilities.

� Customer relationship management (CRM): Taking all of the infor-mation your business has about its customers and aggregating it in a timely, useful, and profitable manner.

� Expenses: Costs of operating a business.

� Financial planning: Managing and controlling the flow of financial resources to ensure that a business achieves profitable growth.

Glossary


� Financial statements: A set of documents that captures the financial standing of a business.

� Income statement: Also called profit and loss statement; a financial analysis of the business showing the details of revenues, costs, expenses, losses, and profits for a given period of time. It includes revenues and expenses in detail and the resulting net income.

� Interactive Agent Reporting (IAR): Electronic system that essen-tially empowers frontline agents to handle some of the basic ARC-related functions that used to require a back-office agent or a book-keeper.

� Liabilities: The debts of a business, including accounts payable and loans payable to lenders.

� Net worth: Also called equity or capital, the value of the business defined as assets minus liabilities.

� Notes: Also called footnotes, comments found only in statements prepared by a certified public accountant (CPA) that describe how the financial statements were created and important details about the operations of the business.

� Productivity: The profit brought in divided by the expenses incurred to generate that profit.

� Profit and loss statement: Also called income statement; a financial analysis of the business showing the details of revenues, costs, expenses, losses, and profits for a given period of time. It includes revenues and expenses in detail and the resulting net income.

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Answer KeyPre- /Post-Test1. F 6. a

2. T 7. c

3. T 8. d

4. F 9. d

5. T 10. a

Unit 3: Practice Sessions

Exercise 3.11. December 31, 2xxx

2. $32,000.00 (assets minus liabilities equals total capital, also known as equity or net worth)

3. No

Exercise 3.21. No

2. 7% ($12,250 divided by $165,770)

3. Yes. An agency with more tour and cruise revenues is probably a leisure agency, and an agency with substantial income from management fees would more likely be a corporate agency.

4. $5,000.00 (increase in long-term debt)

Answer Key


Unit 4: Practice Sessions

Exercise 4.11. The healthier business is . . . Agency 2.

Because . . . the average collection period for the small corporate agency may appear alarming (90 days), but given the relatively small annual volume of credit sales, it is workable. As a percentage of total sales (see Figure 3.3), the volume of credit sales for the small leisure agency is a cause for concern. It has a travel agency storefront but is operating as a bank. Its manager needs to consider charging interest for accounts older than 30 days and/or giving incentives for cash payments and also for credit card sales.

We cannot look at just one aspect of a financial statement or even one statement without the others. It may be acceptable to have 43 percent of sales as A/R if the collection period is less than 30 days. Similarly, while a 90-day collection period, as shown in the ratio analysis, is not desirable, it is tolerable given the relatively low percent of annual sales that are A/R. Additionally, the small corporate agency should insist that all commercial transactions are paid by credit card and that only incremental leisure sales to commercial accounts are extended credit. This strategic use of credit, as opposed to making a 90-day payment period the norm, is a reasonable use of the business’s funds.

Some ratios, especially those that look at debt, are not very valuable for one given period. We need some historical context and additional years of data to determine whether or not the percentages are in line. For example, a balance sheet prepared right before the owner removes capital from the business (such as withdrawing $10,000) could take the total debt to total equity ratio to more than 90 percent.

2. Top Line (Commission Plus Service Fee) Percentage

Cost of Sales Agency 1 Agency 2

Air 1.39% 1.39%

Cruise 8.03% 8.10%

Tour 10.32% 9.09%

Hotel 10.44% 12.20%

Car Rental 10.78% 21.36%

Insurance 45.45% 45.45%

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3. Labor Cost Percentage

Agency 1 Agency 2

Salaries (Percent of Income) 56% 57%

Agency 1: $94,575 salaries divided by $168,000 total income

Agency 2: $94,575 salaries divided by $165,777 total income

4. Conclusions . . .

� Agencies will not make it on vendor commissions alone.

� Service fees (and, where appropriate, monthly management fees) are necessary components of the agency business model.

� The difference between profit and loss for a given period may very well be incremental sales of nontraditional products (insurance, ser-vice fees, cross-selling of leisure products to commercial clients, among other things).

� Controlling expenses is more important than ever, and it is possible that monthly reports of expenses are no longer sufficient. Any devia-tion of expenses, as they relate to the sales gained as a result of those expenses, must be addressed immediately.

Exercise 4.21. It’s difficult to answer this question without more information, but

based solely on the information provided, neither agency really needs to add staff. Both staffs are productive in terms of tickets per day per FTE and in terms of gross revenue.

2. As with so many things in business, this answer depends on what you measure. If the main metric is average ticket price, then Agency 2 appears to have the most productive employees. If tickets per FTE or gross revenue is the metric, then employees of Agency 1 appear to be more productive. The bottom line is that each individual business owner must take all of the available information into account when making business decisions.

3. Agency 2 has a higher average ticket price but fewer transactions. Agency 1 has more overall revenue but has to do 25 percent more transactions to get that revenue. If Agency 2 did more transactions and Agency 1 increased its average ticket price, both would improve their financial situations.

Answer Key


Unit 5: Practice Session1. The agency’s operating cash flow from January through March is a

negative $5,000:

Operating Cash Flow = Net Income ($5,000)

+ Depreciation ($5,000, a noncash expense)

– Increase in Accounts Receivable ($15,000)

Note that the cash balance remained the same, so some people may think that the cash flow was zero. However, the owner must have put in $5,000 of his or her own money to cover the negative cash flow from operations.

2. A cash flow problem exists because the agency is extending too much credit to its customers (A/R increased from $5,000 to $20,000).

3. This business owner should reduce the number of customers who have credit or ensure that those bills are paid quickly.

Unit 6: Practice Session1. The business did better than budgeted, primarily because sales and net

commissions were higher than expected. This may have been because the business spent $100 above budget on advertising. The additional business probably required the increase in salary expense for incentives or overtime to handle the extra business. Automation costs were also down, probably due to the additional airline/car/hotel segments booked as part of the extra business. The owner may want to consider increasing the advertising budget in the future to track whether the extra promotional efforts result in higher profits over the long run.

2. Most importantly, Amy generates income in excess of her costs. However, she could generate even more. Half of her profits come from airline tickets, which are low item commissions. She should try to increase total revenues by increasing other revenues: car, hotel, and insurance. The owner may want to put Amy on an incentive plan, show her these numbers, and share any improvements with her, or perhaps give her 20 percent of any increase in her profitability.

3. Leisure air business is a low 7 percent commission generated by the agency. Therefore, the agency may want to implement service fees for leisure air tickets. That would be especially appropriate for tickets

FINANCIAL PLANNING


booked without an associated car or hotel reservation. With overrides from preferred suppliers or a consortium, the cruise percentage could be higher than 13 percent.

4. Clearly, the agency can forecast its expenses fairly well. They remain constant over the time period. Therefore, most of the focus of the agency needs to be on forecasting the ARC sales and the cash/credit mix month by month. Based on the history shown in this figure, the agency needs to be prepared for a net cash outflow in January. That is probably because of the number of people making final payment for tours and cruises for February and beyond with a credit card. The agency owner needs to make sure there is enough cash in the business in January to cover expenses with either a personal loan to the business, a bank loan, or a delay in paying accounts payable until February or later.

Application ActivityNote: These answers are provided merely as one possible solution to the Application Activity. You may develop different solutions based on your own experience. The most important part of the activity is to practice using financial statements to analyze a business.

In which areas could Nirvana Travel have done a better job selling, thereby increasing its revenues?

About 1 percent of revenue comes from insurance sales, but those products account for a little less than 5 percent of income. No customer should conclude a transaction without being offered insurance at least twice. Similarly, car and hotel sales account for less than 10 percent of revenues but contribute more than 10 percent to the bottom line. It is the sales of these ancillary products, which most consumers will purchase anyway, that can make a big difference in the profitability of an agency.

In which categories could Nirvana Travel have done a better job controlling or decreasing expenses? Should any expenses be increased?

Not surprisingly, labor is the largest component of expenses. As long as any increase in absolute dollars spent on labor is offset by a commensurate increase in net income (i.e., the percentage of net income spent on labor does not increase), the agency can continue to grow. In that light, the agency should consider spending more on advertising. Given competition in the marketplace, the business may be in a position to successfully negotiate a lower rate for rent and telephone service. Agency consortia or buying collectives may also improve the business’s negotiating position.

Answer Key


Is Nirvana’s cash balance at the proper level?

The agency has enough cash to cover short-term liabilities and contribute to long-term liabilities. Unless there are remarkable investment opportunities, the amount of working cash on hand is reasonable.

Do you think Nirvana is a well-run agency based on the financial statements? Would you be happy if you were the owner of this business? Why or why not?

The agency makes a profit. In the current economic and business climate, there is a great deal to be said for making a profit.

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By Dr. Robert W. Joselyn, CTC Peter Drucker, a noted management guru, once observed that, “if you don’t know where you want to go, any path will take you there.” What Drucker implied was that, for success not to be a random event, some sort of plan is highly recommended. When it comes to the travel industry, “highly recommended” isn’t nearly strong enough. The travel industry is too competitive, volatile and low-margined to plunge ahead without some sort of reasoned business approach.

This is not to suggest that a formal business plan will automatically lead to success, but that it helps to improve the odds. In this day and age, that’s about as good as you can expect. So what are the key issues that travel agencies face and how should they be in your business plan?

When it comes to formal business planning, I suspect that most of us agree with Drucker, if only grudgingly. The actual process of developing a business plan, however, is frequently approached with a significant level of procrastination. Experience suggests that reservations about the development of formal business plans are rooted less in philosophical disagreement with the concept than in a less-than-enthusiastic anticipation of the effort that might be involved. We

know we should do it, but often we don’t. Why don’t more travel agencies have a formal business plan for an upcoming time period? There are three main reasons:

1. Many agency managers don’t know how to start building a formal business plan, and/or how to continue if they do. It isn’t a question of intelligence, just a reflection that they might never have done one.

2. There is a vague suspicion that developing a formal business plan is flanked by rocket science and microscopic brain surgery in the Graduate School Catalog for Stanford University.

3. There is absolute certainty that developing a formal business plan will take only slightly less time than building a full-scale, working model of a Boeing 777.

After consulting with thousands of travel agencies over the last 30 years, it became obvious that real people working in real businesses with real time constraints needed an approach to developing and maintaining a formal business plan that is complete, easily understood, and time efficient.

If you are already operating with a formal business plan and are content with your approach, there is no need to consider changing anything. On the other hand, if you don’t have a business plan for your agency, have one but can’t

remember where it is, find that it takes too much time to prepare, or that it doesn’t seem worth the effort, you may wish to think about an approach to planning I developed a number of years ago: The Joselyn “Low Sweat Business Plan©.”

Note that the approach is “low sweat” versus “no-sweat.” The effort you put into this or any other approach is ultimately up to you. You determine the time, and degree of detail you are willing to accept. You will find this approach to developing a formal business plan far easier than any you have encountered before.

Start with Existing Financial Statements For the following text it will help to refer to the Exhibit (next page).

The Historical Budget

The “low sweat” approach to developing a formal business plan for your agency begins with your existing financial statements. Let’s set aside the current balance sheet for a moment and concentrate on your agency income statement. Column I represents a hypothetical and simplified Annual Income Statement for a travel agency doing $4.0 million in supplier sales. Column I is the easy part. It is simply your financial data for the agency’s most recent financial period comparable to the planning

The Joselyn “Low Sweat Business Plan©”

Supplemental Reading


JTA Travel

Income Column I Column II Column III Column IVStatement Historical Projected Prospective ActionItem

RevenueDomestic Air (50) $78,000 $66,875.25 $66,875.25 $0Int’l Air (15) $42,000 $37,054.03 $44,464.84 $7,411Tours (15) $66,000 $64,518.30 $77,421.96 $12,904Cruises (10) $60,000 $65,386.13 $78,463.35 $13,077Hotels (05) $10,000 $9,500.00 $11,400.00 $1,900.00Rental Cars (01) $7,500 $7,125.00 $9,500.00 $2,375.00Overrides $10,000 $9,500.00 $16,000.00 $6,500Service Fees $68,000 $64,600.00 $80,000.00 $15,400Other $7,500 $7,125.00 $9,000.00 $1,875Total Revenue $349,000 $331,684.00 $393,125.00 $63,317

ExpensesAdver./Promotion $20,000 $20,400 $25,000 $4,600Amortization & Depreciation $6,000 $5,600 $5,600 $0Auto $6,800 $7,200 $7,200 $0Bad Debt Expense $240 $240 $0 ($240)Donations $0 $0 $0 $0Dues/Subscriptions $5,200 $5,280 $5,280 $0Equipment(inc. Automation) $16,000 $16,800 $16,800 $0Insurance $20,000 $20,480 $20,480 $0Office Expense $32,000 $33,600 $28,000 ($5,600)Taxes $24,000 $15,250 $15,250 $0Professional Fees $8,000 $8,800 $8,800 $0Rent $28,000 $28,000 $28,000 $0Salaries $200,000 $210,000 $210,000 $0Telephone $20,000 $20,640 $15,000 $5,640Travel/Entertainment $8,000 $8,000 $5,000 ($3,000)

Total Expenses $394,240 $400,290 $390,410 ($9,880)

Profit (Loss) ($45,240) ($68,606) $2,715 $71,322

period to be covered by the business plan now being created. We will call this the “historical” budget.

Given that the focus here is your upcoming year Business Plan, Column I should contain actual financial data from your previous financial year, or if final data are not yet available, your best prediction of what that data will look like. You’ll note that this agency is showing a loss for previous financial year. Unfortunately, while perhaps not typical, this is also not a rare situation for an agency of this size.

The Projected Budget

Column II in the Exhibit is where the work begins. It estimates what every line item in Column I would be, assuming no alteration in agency actions in the upcoming planning period, the next year here, versus what was done during the historical budget period (Column I, or last year). In essence, Column II is an estimate of what your Income Statement would be for the upcoming budget period if you simply continue doing what you have been doing. Initially this is usually fairly easy to do on the expense side of the income statement, although it almost certainly will require some assumptions about expected changes in costs (lamentably, almost always in the positive direction). The real challenge in developing a “projected” budget

FINANCIAL PLANNING


typically arises in estimating income for the upcoming budget period. Remember, at this point in the process you are still assuming no change in what you have been doing. Given this, any projected change in income will relate to predicted changes in overall demand, market prices, competition and other outside factors that impact income.

Once you have completed Column II, our “no change in agency action” estimation of income and expenses, you have a “projected” budget. To develop your “projected budget,”consider six areas where changes can impact your business. They are:

■ TheEconomicEnvironment;

■ TheCompetitiveEnvironment;

■ TheTechnologicalEnvironment;

■ ThePoliticalandLegalEnvironment;

■ TheSocialandCulturalEnvironment; and

■ TravelIndustrySupplierActions.

How do you make the projections found in Column II?

First, evaluate each of the six areas of your operating environment listed above and ask yourself whether there are any significant changes occurring which you believe will impact your business in the next year. For example, you might

assume that in an effort to sell an increasing number of cruise berths, cruise lines will substantially increase their consumer advertising next year, thus causing an increase in cruise enquiry’s and sales in your agency. Or, you might assume that the economy will not be strong and that sales will decline five percent. You might identify dozens of changes with the potential to impact your business.

Second, do your best to “guesstimate” the impact that such changes will make to your historical budget (such as last year’s financial statements). It’s up to you to choose how much time, effort and other resources you wish to employ in making estimates versus how much you are willing to trust in your own judgment. In doing so, it is hard to imagine that you won’t have to make some assumptions about the changes taking place and the impact these changes are likely to have on your business.

There is nothing inherently wrong with making assumptions. Realistically, we all have to make assumptions, perhaps many, about the changes taking place and the impact these changes are likely to have on your business.

What is wrong, however, is failing to recognize that you’ve made an assumption. The problem with failing to recognize an assumption is that you will

not be sensitive to assumptions that don’t come true and the impact that this might have on your plan. To avoid this mistake, when you make an assumption, recognize it, label it and write it down!

Third, estimate what each line item in your “projected budget” will look like in the coming year by summing up your individual “guesstimates” for that line item.

The key to developing your prospective budget for the coming year is being perceptive or sensitive to changes in your operating environment from the previous planning period (historical budget). If nothing in your operating environment changes, you should expect the previous planning period to be an excellent predictor of the next.

While it is highly recommended that you do your own analysis, for this example, you may wish to consider some of the more significant changes in operating environment issues that Joselyn, Tepper & Associates (JTA) predict for the future.These may not be the only income-related changes to expect, but they may be enough to get you started.

What about the expense side of the income statement? For JTA Travel we have simply projected our expected expenses line item by line item. You’ll note, of course that after all things are considered, JTA Travel expects



a decrease in income of $17,316, given no changes in our behavior. Unfortunately, our projected costs also increase, resulting in an increased projected loss over last year.

The Prospective BudgetOnce the Projected Budget in Column II is completed, examine it carefully, line by line, and determine whether you like what you see. If you don’t like what you see, and it’s fair to say in our example that we don’t like the bottom line among other things, change the line item to what you would like it to be in Column III.

The only caveat in Column III is that your desired result must be at least remotely reasonable. While reasonableness should be considered, it is not the time to worry about how your line item objectives will be achieved. Column III becomes what you would like your income statement to be at the end of the upcoming budget or planning period. It is the “Prospective Budget,” a financial representation of your operating Objectives and Goals.

The Action Plan BudgetThe line items in Column IV are the difference between Column III and Column II. It should surprise no one that Column IV, the Action Plan Budget, asks for increases in income and decreases in expenses from the Projected Budget (Column II).

What have you arrived at here? The answer is what you would like to happen that isn’t expected to happen if your agency continues on its present course of action. The $64 question is, “what must you do to make the wishes come true?”

The Action PlanFor each variance calculated in Column IV, an Action Plan must be developed that holds forth the possibility (indeed the probability) that it will cause the hoped-for variance between what is expected and what is hoped for, to become reality. Your Action Plan must specify four things:

■ WhatActionsdoyouintendtotake?

■ WhoIsResponsibleforinitiat-ing and completing these actions?

■ When will the actions beinitiated and completed?

■ WhatResources(time,talentand money) are expected to be required to accomplish the task?

Expense Side Action Plan ExampleAn examination of Column IV reveals that we believe our telephone expense is too high for our agency business mix and volume. We might have determined this by comparing our telephone costs as a percentage

of income to those of similar agencies in a consortium we belong to. The issue here is what are we going to do to reach our objective (Column III) and reduce our costs by the target goal (Column IV)? After examining the issue, it is determined that there are four possible actions that may lead to a desired reduction in telephone expenses as a percentage of agency income. They are:

■ The purchase or leasing of aprivate phone system;

■ Theadditionofanagency800number;

■ Greateruseofexistingsuppli-er 800 numbers by the agency staff; and

■ Chargingclientsforlong- distance calls made on their behalf.

Given that this example is for illustrative purposes, let’s focus only on the third action item: “Greater use of 800 numbers by the agency staff.”

Actions to Be TakenA list of 800 numbers for commonly used suppliers will be assembled and placed in the CRS system profile.

■ WhoIsResponsible?AssistantManager (Sally).

■ When?Thistaskwillbecom-pleted within 30 days.

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■ WhatResources?Itisesti-mated that this project will take 10 hours of the assistant manager’s time. This com-monly includes identifying used suppliers, locating 800 numbers and entering data into a CRS profile. Estimated agency investment is $150.

While illustrating the development of a mini action plan, it should be obvious that even this example could have more components. For example, an agent incentive might be considered for a measurable percentage increase in the use of 800 numbers.

Once all four of these issues are examined, a preliminary Action Plan for reducing telephone expenses is complete. It is preliminary because we must now evaluate whether a given action and its corresponding investment appear to be a good idea. We may discover that no matter how much we would like to change a financial line item, there isn’t an Action Plan that appears feasible. Here, we need to readjust Columns III and IV to reflect the reality of the situation.

Revenue Side Action Plan ExampleAfter examining our Projected Budget determined that we want to, and believe we can, increase our cruise business versus what was projected. Given the general growth of the cruise market, and what we believe the potential is for our specific market environ-

ment, a $13,077 increase in cruise income over projection seems fea-sible. There are a number of actions that would lead to an increase in cruise sales. They include:

■ Increase education on cruiseproducts for leisure agent sales personnel (check out The Travel Institute’s education programs);

■ A 25 percent increase incruise-oriented advertising;

■ Thedevelopmentofaspecialcruise desk within an agency, including cruise-oriented decoration; and

■ Acruisenightpromotiontobe run in early January. Again, for each of these action possibilities, it will be necessary to specify: 1) What Action; 2) Who Is Responsible; 3) When; and 4) What Resources. When that is completed, you will have an action plan for increasing your cruise business.

Additional Considerations We’ve had a good look at how you should go about developing your business plan for the coming year.

Like our hypothetical agency, JTA Travel, I suspect that many of you would like your projected bottom line to look better in the coming year. What should you be considering in your business plan?

Service FeesThe agency community in North America almost universally implemented at least some service fees. Most admit their very survival is tied to a successful service fee program. Having said that, many travel agencies still have a long way to go. Service fees account for 20% or more of the revenue for many good agencies. Most agencies should look to being even more aggressive in this area.

Positioning Your AgencyIf you haven’t already started thinking about developing a market niche or specialty, time will soon be running out. Aside from forcing you to focus your efforts on profitable business opportunities, niche marketing (and you can have more than one simultaneously) positions your agency services on the basis of expertise instead of price.

Specialized expertise also makes it easier to implement and expand service fees. Another advantage to niche marketing relates to e-commerce marketing and promotional efforts. Few agencies can even dream of successfully competing against the large, powerful and well financed broad based travel e-commerce companies. The same is not true for true niche markets where consumers interested in such offerings show an increased willingness to search harder and farther.



Preferred Supplier Section And SupportThis is an old tune that is still played very poorly by most travel agencies. Aside from incentive income possibilities, there are simply far too many cost-saving and cooperative marketing opportunities that are left on the table. Rededicate and redouble your efforts here.

Become Affiliated With An Agency Consortium or Franchise That’s Right for YouAlthough the ranks of unaffiliated agencies are relatively small, the ranks of those affiliated having the wrong affiliation for them are not. Like every other business, in today’s competitive environment it is becoming more difficult to compete without the clout and expertise that involvement with a larger entity can bring to the table. There are many fine choices out there with a wide variety of features and obligations. Take the time to find the right one for you.

Turn Your Travel Counselors into SalespeopleThere continues to be a huge problem in the agency business with too many travel counselors viewing themselves as professional transactors instead of salespeople. Get your staff some good sales training and implement an incentive compensation system that gives them the motivation to succeed.

Look for New Travel-Related Business OpportunitiesThe groups, meetings and incentive business are out there, growing and profitable. It’s hardly business as usual, but these business arenas are definitely worth a look.

Also, open your mind and business plan to the inherent opportunities involved in selling travel-related products and services. Remember that in a service fee environment the question is no longer what you can afford to give away, but what the customer is willing to pay for.

The Balance SheetWhile all the examples to this point have focused on the Income Statement, and that is the recommended place to start, the same approach can be taken with the balance sheet. For example, you may wish to change your cash position, your current asset-to-liability ratio, or something else on the Projected Balance Sheet Budget. To accomplish this requires an Action Plan similar to that illustrated with the expense and revenue issues described earlier.

Final ThoughtsDeveloping a formal business plan is often an overwhelming prospect for management in a business that leaves little time beyond keeping the day-to-day alligators at bay. The benefits of

having one, and from developing one are, however, enormous. You will accomplish more, you will be able to have some measure of the return on your investment efforts, and you will have fewer alligators to deal with when you have a well-thought-out plan. While there is “no gain without pain,” you will find the “Low Sweat Business Plan©” is a viable approach.

Dr. Robert W. Joselyn, CTC, is the president and CEO of Joselyn, Tepper & Associates, Inc. and can be reached at www.joselyntepper.com.

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