Tourism Enterprise Opportunities - Section 3 Creating a Financial Plan

Index Page - Introduction - Getting Started - Section 2 - Section 3 - Section 4 - Section 5 - Appendixes

Tourism Enterprise Opportunities - Section 3: Creating a Financial Plan

Objectives
* Begin writing out a description of the experience you will offer
* Complete the basic elements of a financial plan

3.1 Defining your product: The Experience

An experience is created through a mix of products and services. Take a moment to look at the brochure included with the handbook and complete the exercise below by writing out the products and services that the Ranch Bed and Breakfast described below.

Example of Descriptive Information Provided on a Nature Tourism Enterprise Brochure

Ranch Bed and Breakfast Quiet contemplation, inspiration enhanced by the expanse of earth and sky. Recharge the soul experience the grandeur and serenity of the beautiful West Texas desert. The traveler will find one of West Texas best kept secrets the perfect tranquil place to rest a weary head at night.

A wide variety of activities includes hunting with cameras or guns; hiking trails can be experienced afoot or on mountain bikes. Bring your horse for some scenic trail riding. Birdwatchers may enjoy many varieties of birds year-round. Abundant wildlife, native plants, and fossils give the visitor many opportunities to explore one of nature's dramatic climates.

Products/Activities
Products that guests are charged for:


Products that guests are NOT charged for:


Services/Accommodations
Products that guests are charged for:


Products that guests are NOT charged for:


Did you notice the key selling point is not that they have a bed to sleep in, or a meal to eat, but rather they promote the experience? Being able to describe the experience your guest will have at your place is essential.

Go to Worksheet 5 and begin the process of writing out a description of your place, the products, services and the experience you will offer. This description will help you focus on the specifics which lead to the next section in the Handbook that will help you evaluate the economic feasibility of your proposed tourism/recreation enterprise.

3.2 What is a financial plan?

A financial plan helps you, your partners and potential investors or loan officers evaluate the amount of money that is likely to be generated by this operation. Estimating income and expenses may seem impossible, but by using information you already gathered on other enterprises you can be much more informed as you develop your financial plans. At this point you will create a basic projection of costs and returns for the enterprise you have chosen to evaluate.

This exercise is designed as a starting point to guide you in the decision making process. If you decide to proceed with a particular enterprise, additional financial analysis will likely be required.

Read the following description of Mr. Jones's ranch and his idea for a new tourism/ recreation enterprise. Then look at how we have broken the example down to be evaluated.

Mr. J's Cattle Ranch
The Situation: Mr. Jones manages a 2700-acre cow calf operation. He runs 55 cows and sells a hunting lease. Mr. Jones nets about $36,000 from all the enterprises operated by the ranch. He wants the tourism enterprises to earn (¼) ($9,000). He wants the ranch to support him, be self-sustaining, and generate enough income to potentially expand his operation.

The Idea* Mr. Jones wants to begin a tourism business consisting of three parts
1) renting rooms in a bunkhouse,
2) offering guided bird tours, and
3) offering ranch tours.

Mr. Jones has decided to evaluate the potential profitability of the ranch tour enterprise first, later he will go back and evaluate the other two ideas. Ranch tours will be offered primarily between January and May to avoid conflicts with hunters and the summer heat. Mr. Jones will provide a meal and then drive the guests around in a modified trailer. He will conduct an interpretive program, which means he will tell guests about the natural and cultural history of the ranch.

The Question Can Mr. Jones meet his goals with this idea*? *
This idea has been significantly simplified for demonstration purposes and does not necessarily take into account all income, expenses incurred, or profitability of a tourism/recreation business, but it does provide an excellent starting point for assessing the economic viability of the proposed activity.

3.3 How do I determine if I will make money?

Steps In the Process

Here are the steps in this economic assessment process.
1. Getting Started Questions
2. Projecting Gross Revenue
3. Projecting Expenses
4. Projecting Net Income
5. Creating Income and Cash Flow Projections

Step 1 Getting Started Questions . . . and Mr. Jones’s answers, in parenthesis.
1. How many hours per event are required to prepare, conduct and clean up for each event? (8)
2. What is the maximum capacity per event (number of people)? (40)
3. What is my predicted rate of attendance or % of capacity? (75%)
4. How many events per day will you offer? (1)
5. What will be your average event price per guest? ($25)
6. How many acres will be used for each event? (2700)

What will be your attendance seasonality (events per month):
7. Jan (4)
8. Feb (4)
9. Mar (6)
10. Apr (6)
11. May (6)
12. June (0)
13. July (1)
14. Aug 0
15. Sept (0)
16. Oct (2)
17. Nov (0)
18. Dec (0)
19. How many total events per year? [29]

These answers are put into the analysis in the next section. When you complete Worksheet #6, enter your answers directly into the table.

Step 2 Projecting Gross Revenue
Revenue is the amount of income that you expect to generate before expenses. The following table represents how Mr. Jones answered the getting started questions for his operation.

Questions
Ranch Tour Enterprise
1. Work Hours per Event (8)
2. Capacity per Event (40)
3. Attendance - % Capacity* (75%)
4. Event per Day (1)
5. Average Event Price per Guest ($25)
6. Acres used for Event (2,700)

Attendance Seasonality (Events per Month)
7. January (4)
8. February (4)
9. March (6)
10. April (6)
11. May (4)
12. June (0)
13. July (1)
14. August (0)
15. September (0)
16. October (2)
17. November (0)
18. December (0)
19. Total Events per Year (29)

* Notice that the attendance capacity % is estimated at 75%. This figure is included to provide a more real world estimate of attendance. Often organized events will not fill to capacity so your revenue projections should reflect that. From this information Mr. Jones determined his projected revenue by using a calculator and simply multiplying the answers to the following questions together.

Ranch Tour Enterprise
2. Capacity per Event (40)
3. Attendance - % Capacity* (75%)
4. Event per Day (1)
5. Average Event Price per Guest ($25)
19. Total Events per Year (29)

Revenue 40 x $25 x 0.75 x 29 = $21,750

STEP 3: Projecting Expenses
The next step in this process is an assessment of expenses. Typically, when conducting a financial projection for a business there are two types of expenses types Indirect and Direct. Both of these expenses will be discussed in some detail below.

Indirect Expenses and Direct Expenses

Indirect Expenses
An indirect expense is any cost that is incurred one time, regardless of the number of events. The costs can be paid completely in year 1 or paid out over multiple years. Do your best to place each expense into one of the following nine categories: Advertising, Equipment, Facilities & maintenance, Insurance, Professional (legal, acct, etc.), Management, Permits, fees, & licenses, Land cost, and Income Tax.

Mr. Jones identified the following indirect expenses that affect this enterprise. Now, Mr. Jones adds up the costs for each category and places that amount in the $ per Unit column below.

Mr. Jones Ranch Tour Enterprise Total Indirect Expenses
Item Description
Year 1
Advertising - Wildlife Expo Booth, Web Site, Brochure & word of mouth ($2,000)
Equipment - Obtain a trailer modified for hauling people on tours ($3,000)
Facilities & Maintenance - Build a 1/8-mile native plant trail and interpretive program ($250)
Insurance (Cost for recreation) - Commercial Liability Policy ($1,300)
Professional (Legal) - Hire a trained interpretive guide to develop a plant and history interpretive program ($500) Management (Your salary portion) - Mr. Jones's net income ($36,000) of which $9,000 is paid by the tourism enterprises ($0)
Permits, Fees & Licenses - To Health Department ($75)
Land Cost ($0)
Income Tax Rate (28%)
Total ($5,125)

Expense Allocation:
* Some of these costs will be paid off over the next three years (in other words 33.3% of the expense will be paid off during the 1st year). * To help calculate how much expense to assign to the first year simply divide the cost of items by the number of years that it will take to pay off the expenditures. Example: Trailer 3 years $3000/3 = $1000 expense 1st year. In this example this is the only item to be paid over multiple years. This would be the case if Mr. Jones took a loan to pay for the $3000 trailer and his payments equaled $1000/year.

Direct Expenses
A direct expense is any cost that is required each time an event is conducted. Therefore, total direct expenses will depend on the number of events that take place. All direct expenses should fall into one of the following 5 categories: Food, Labor, Guide, Supplies, or Fuel. In this case, Mr. Jones hires help (Labor) to assist planning every event at a cost of $75.

Mr. Jones Ranch Tour Enterprise Direct Costs
Direct Expenses | (Unit) ($ per Unit) (# Units*) (Total)
Food | Person ($5.00) (870) {$4,350.00}
Labor | Event ($75.00) ( 29) {$2,175.00}
Guide | Event ($0) (29) {$0}
Supplies | Person ($0.10) (870) {$78.00}
Fuel | Event ($5.00) (29) {$145.00}
Total {$6,757.00}

*# units for Person = Questions #2, #3, #19 from Step 1 multiplied together. #units for Event = Question #19.

STEP 4: Projecting Net Income
In this step you will take the gross revenue of each enterprise (from Step 1) and subtract from it the expenses of each enterprise (from Step 2) to give your projected net income. By doing this for each enterprise, you can see which enterprises are producing the most net income.

Mr. Jones Ranch Tour Enterprise Net Income Calculation
[Gross Revenue = $21,750] [ Direct Expense = $6,757] [ Indirect Expense = $5,125 ]
$21,750 - ($6,757 + $5,125) = {Net Income = $9,868 }

Our initial projections are complete and according to preliminary estimates Mr. Jones would achieve his goal of $9,000 income over the year. This process has helped determine what he may need to charge for his product. After finishing a first projection he can easily evaluate other scenarios simply by changing some of the values in these projection tables. For example how would Mr. Jones's Net Income change if he charged $30.00, or if he added one more event per year? These are the types of 'What if?' scenarios that can easily be performed using a simple business finance software in order to focus in on the economic feasibility of your proposed enterprises.

Note: If you do perform additional analysis be sure to change values in all the appropriate places in order to get an accurate analysis. (e.g. increasing tour capacity or the number of tours will increase meal and supply expenses and maybe your labor). In Mr. Jones's case he has decided to set $25 as the price for his product because it meets his hoped for Net Income. In this hypothetical situation this price should also be competitive price for what other people are charging for similar activities in his area. This pricing evaluation should have been completed while he conducted research about comparables. After he conducts a number of tours he will learn more about how people respond to his product, how his advertising plan works, and with whom may want to create a partnership or cooperative effort.

STEP 5: Creating Income and Cash Flow Statement Projections
The final step used in this handbook is to create an income statement and a monthly cash flow statement using the information gathered in the steps above. You will see examples and complete your own income statement and monthly cash flow statements in Worksheet 6.

Index Page - Introduction - Getting Started - Section 2 - Section 3 - Section 4 - Section 5 - Appendixes