REC 3033 Commercial Recreation and Tourism. Class Week 12. The Dollars and Sense of Your Business. Preparation of Proforma Statements

Transcription

1 REC 3033 Commercial Recreation and Tourism Class Week 12 The Dollars and Sense of Your Business Tourism operators not making large sums of money Tourism Canada Study (1995) average adventure travel operator had gross revenues of $180,000, while 46% reported annual sales of less than $36,700 Gross profits average 18% Highest profits in soft adventure sea kayaking $30%), bicycling (30%), river kayaking (25%) Because ecotourism operators are small to medium sized businesses, financial resources must be carefully managed low sales levels, modest gross margins, and seasonal revenue streams post challenges Preparation of Proforma Statements Balance sheet and income statements prepared using transactions that have not occurred (forecasting) (see page 97) Categories developed to suit business Most difficult part is generating sales figures (comes from marketing plan) 1

2 Budgeting Usually done on annual basis Operating budgets forecast sales revenues and expenses Capital budgets forecasting the money need to purchase equipment, land, and buildings (generally not done by small operators due to size) Operating Budget Template Cash Flow Forecasting Looks at the timing of money coming in and going out Alerts for shortages and investment opportunities 2

3 Cash Flow Pro Forma Sensitivity Analysis Does what if scenarios examine assumptions underlying proformas and operating budgets Bankers will want to see sensitivity analysis before proving financing Understand problem on p. 103 Financial Analysis Financial statements describe state of a business Comparative analysis compares this year s financial statement to last year s Common size analysis revenue and expense items are expressed as a percentage of sales (e.g. labor is 26% of sales, marketing is 7% of sales, gross profit is 20% of sales) Ratio analysis liquidity: ability of business to pay bills. Current assets minus current liability Current ratio = current assets/current liabilities (should be greater than 1:1) Acid-test (a.k.a. quick) ratio same as current but excludes inventory from assets Debt-equity ratio most banks not comfortable with greater than 3.5 to 1 Financial Analysis Ratio analysis profitability Expenses as percent of sales Gross profit/sales (indicator of how efficiently business is run ) Net profit/sales (factors in general and administration expenses) Return on investment (ROI) = net profit/owner s equity Ratio analysis--growth Sales growth = (Sales this year sales last year) / Sales last year Profit growth = (Profit this year profit last year) / Profit last year Asset growth = (Assets this year assets last year) / Assets last year Debt growth = (Total debt this year total debt last year) /Total debt last year (debt growth should not be higher than asset growth) 3

4 Break Even Analysis Break-Evan Analysis Several methods Calculated in units 1. Contribution per unit = Selling price Variable cost per unit 2. Break-even point in units = Fixed costs/contribution per unit If do not know costs by unit: 1. Variable cost per sales dollar = variable costs/sales Dollars Break-Even Point Profit Revenue Total Costs 2. Contribution per sales dollar = $1.00 variable cost per sales dollar 3. Break-even point = Fixed costs/contribution per sales dollar Loss Fixed Costs Rentals per day 4

5 Profit Margin Return on Investment Current (Working Capital) Ratio 5

6 Acid Test Ratio Debt / Equity Ratio Debt / Equity Ratio Price/Earnings Ratio 6

7 Obtaining Financing Relatively small amount of capital needed for ecotourism startup Tourism and Rec not familiar to many banks Sound business plan is needed Bank may want significant portion of startup costs covered (e.g, from personal funds, family/friends, Other Business Concerns Accounting/bookkeeping keep good records Payroll pay the payroll taxes Taxes meet legal obligations Internal controls separate functions within business Cash management will need more than anticipated Develop clear deposit/cancellation policy 7

8 Chapter 5 Financial Management Concepts Liquidity ability to business to generate enough cash to pay the bills Profitability revenues exceed expenses. Greater risk requires greater profit. Market share--% of overall market captured Occupancy rate, use rate, load factor--% of available rooms, court times, or seats filled Labor factor, food factor, or fuel factor--% of total costs attributed to these items 8

9 Business Records to Keep Income records Expense records Tax records Payroll records Mortgage/debt records Financial statements Personnel records Accounting records Facility records Equipment records Legal documents Misc. administration records Accounting Process Gather and record original transaction documents (e.g., invoices, check stubs, register tapes) Assignment to accounts and sub-accounts all recorded receipts and expenditures Preparation of appropriate financial statements Take management action Balance Sheet Concepts Current assets Accounts receivables Fixed assets (capital equipment) Depreciation Accounts Payable Current liabilities Long-term liabilities Net worth (owner s equity) 9

10 10