Creating a Roadmap for

Part 7 - Financial Plans

By Sherrie Funk

My past six columns have dealt with different aspects of writing a business plan for a home based agency. Now, we’re going to get into reality and the meat and potatoes of your plan. This is the part that I hate the most, but realize that without it, we would fail.
Unless you are thinking of starting a religious, charitable or intentionally non-profit organization, the main reason you’re in business as a travel agency is because you think you can make money at it. The drive to be your own boss might have caused you to quit being an employee and start your agency, but the quest for income is what keeps it going. When you develop a business plan, financial projections and cash flow analysis are among the most critical elements.
Fortunately, or perhaps unfortunately, the financial projections are the most formalistic and stylized documents that you will have to prepare. There are certain accounting conventions that you are expected to follow. Simple accounting or business planning software can be extremely helpful in formatting the statements and doing the math.
The type of financial information that you’re going to need to prepare your analysis will depend on whether your agency is an established enterprise or is just starting out. As a general rule, however, you should plan to include three years of projected financial statements. The first year’s statements should be broken down by month, the second by quarter and the third and succeeding on an annual basis.

Startup Agency Financial Information
If you’re just starting out, you face a special challenge because there is no history of operations, profitable or otherwise. You’re going to have to rely almost entirely on financial projections; that is “pro forma” (prospective) statements based on assumptions that you’ve made as to how your agency will perform in the future.
The startup-funding plan will show how your personal investment will be used to fund the agency. If you plan to contribute any personal assets to the agency such as a car, office machines or computers, etc., you should provide specific details on this, as well. Other required documents, particularly if you’re trying to obtain outside financing, are a personal financial statement and your income tax returns for the last few years.
As with an established agency, you’re also going to need to provide a statement of important assumptions, a breakeven analysis, and projected sales forecasts, profit and loss statements, cash flow budget worksheets and balance sheets. These documents quantify the results you expect to achieve through your operation.

Historical Financial Information
If you have had a brick-and-mortar agency and have moved to home based, or if you began as a home based agency and are just now writing your business plan, you can bolster the credibility of your business plan by documenting the results of your ongoing operations. A proven track record is very persuasive evidence of your chances for continued success.
Hopefully, you’ve been creating and maintaining financial records since the inception of your agency. If so, most of your work is done. You’ll already have balance sheets, income statements, and cash flow budgets for the last three to five years (or since inception if your agency is less than three years old). Generally speaking, the reader of your plan will expect that “history will repeat itself” and that your agency’s future will be an extension of the trends that are shown in your historical statements. So, if you expect that the picture will improve dramatically, be sure your plan provides solid evidence as to why that will happen.

Establishing Reasonable Assumptions
Drafting a business plan entails making many different types of assumptions. Some are so basic as to remain, appropriately, unstated. Beyond that, there are several broad types of assumptions that you’re going to have to make. These assumptions support and quantify the financial projections that you’ll make in the plan.

Assumptions about the Business Environment
As you draft your business plan, you may feel somewhat overwhelmed by the sheer number of external factors that can dramatically impact your agency. Most of these factors are simply beyond your control. But such assumptions or deductions are an absolute requirement when it comes time to project sales. Here are some examples of the wide variety of types of statements you may want to include in your assumptions:

• We assume continued stable government and political structure in the U.S. economy.
• There will be no major competitive threat from a currently unknown source.
• 50% of sales will occur during the first three months of the year.
• Personnel burden (the extra costs of payroll taxes and benefits for employees or yourself) will be 25% of total payroll.

Despite the difficulty in ensuring that your assumptions are reasonable, there is a lot of help available. Get as much information as you need to feel comfortable with your ability to make reasonable assumptions. Remember, however, that no one is likely to be right all the time. If the assumptions on which you base your planning are generally “in the ballpark,” you have done a good job.

Assumptions About Your Agency
As you work your way through the planning process, you will be called on to make a best guess regarding the key operational issues facing any agency, including estimates regarding productivity, cash flow, costs, and a hundred other interrelated factors.
From a practical standpoint, there are two potential sources for the information you need to make reasonable assumptions. If you have an existing agency, you have your personal experience on which to rely. While there is no substitute for personal experience, you can learn a lot by drawing on the experience of those around you. You’d be surprised how willing even potential competitors are to share information, if asked in the right way. This is particularly true if your agency will serve a limited geographic market and won’t directly compete with a similar agency some distance away.

Breakeven Analysis
The “breakeven point” for your agency is the commissions earned on the sales volume you need to achieve in order to cover all the costs of your agency. It’s extremely important for you to know what your breakeven point is, and to have confidence that you can achieve that volume of sales within a reasonable period of time — otherwise, you need to do more work on the marketing portion of the plan, or to rethink your agency idea altogether!

Fixed and Variable Costs
So, how do you calculate breakeven? Start by determining all the costs of doing business. You may want to use your income statement as an aid. Virtually all of your agency’s costs will fall, more or less neatly, into one of two categories:

• “Variable costs” increase directly in proportion to the level of sales in dollars sold. Some examples of variable costs would be the sales commissions, shipping charges, wages of part-time or temporary employees and sales commissions to independent contractors.
• “Fixed” costs remain the same, at least in the short term, regardless of your level of sales. Some typical examples would be interest on debt, insurance, GDS and equipment expenses, business licenses and your salary.
Your accountant can help you determine which of your costs are fixed and which are variable, but here the key word is “help.” In order to be accurate, the ultimate classification has to be done by someone who’s intimately familiar with your agency operations — which probably means you.

Variable Costs Per Booking
If you add up all your variable costs for the accounting period, and divide by the number of bookings made, you will arrive at the cost per booking. This cost should remain constant, regardless of how few or how many bookings you make.

Calculating the Breakeven Point
Once you know what your variable costs are, as well as your overall fixed costs for the agency, you can determine your breakeven point: the volume of sales needed to at least cover all your costs. You can also compute the new breakeven point that you’d need to meet if your cost structure changed (for example, if you bought some new office equipment, thus increasing your fixed costs).

Projected Sales Forecast
Every financial plan must include a sales forecast for the agency. Any forecast will include some uncertainty. Your sales forecast probably won’t match your actual sales because of the many variables that ultimately affect the final amount. The economy, inflation, competitive influences, and a whole range of other variables will affect your actual sales. No matter how much uncertainty you associate with these variables, you must come up with an estimate of future sales.

Existing Travel Agency Sales Projections
If you anticipate making changes that will affect your sales volume in the future, the sales forecast section of the plan should explain those changes, and why they will have the effect you state. Similarly, if you expect that external changes will have an effect on your sales volume, such as a major industry closing, changing demographics in your area, or new competition entering the market, this is the place to say so. You might also want to explain your strategy for meeting the challenges you foresee.

Projecting Sales for a New Agency
Before we take a look at some ways to estimate revenues for a startup agency, a word of caution. Estimating your sales will be an inexact science. Don’t count too heavily on your projections and, if you’re going to err, err on the conservative side in predicting how much business you’ll do in your first year. Remember that your sales figure will still be just an educated guess.

Projected Profit and Loss Statement
Also called an income statement, a profit and loss statement lists your income (commissions earned), expenses, and the difference between the two, which is your net income (or loss). Your agency’s tax return will use a variation of the profit and loss statement to determine your potentially taxable income.

Three years’ worth of projected income statement data is normally presented, so that you can make comparisons and identify trends. The data on your projected profit and loss consists of the following:

Sales revenue
Cancellation refunds
Cost of services sold
Selling, general and administrative expenses
Depreciation and amortization expenses
Interest expense

A detailed, month-by-month P&L should be provided for the first year. For year two, break down the information by quarter. For succeeding years, provide an annual summary.

Projected Cash Flow Budgets
In its simplest form, cash flow is the movement of money in and out of your agency. It could be described as the process in which your agency uses cash to generate bookings for the sales to your clients, collects the cash from the sales and then completes this cycle all over again.
“Inflows” are the movement of money from all sources into your agency, and will largely be from the bookings or sales to your clients. The proceeds from a bank loan are also a cash inflow. “Outflows” are the movement of money out of your agency, and are generally the result of paying expenses. A travel agency’s sales involve selling “space” (hotels, air seats, cruises, land tours, etc.) through preferred suppliers. This will most likely be your largest outflow.
As you can see, profit and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat narrow, and only looks at income and expenses over an entire accounting period. Cash flow, on the other hand, is more dynamic. It is concerned with the movement of money in and out of an agency. More importantly, it is concerned with the time at which the movement of the money takes place. You might even say the concept of cash flow is more in line with reality!
So, your cash flow projections will be the most important financial statements in your business plan. You need to include a month-by-month cash flow projection for at least the first year. For year two, project annually by quarter. For succeeding years, project annually.

Projected Balance Sheets
The balance sheet is a statement of your agency’s relative wealth or financial position at a given point in time. It’s often referred to as a “snapshot,” because it gives you a fairly clear picture of the agency at that moment, but does not in itself reveal how the agency arrived there or where it’s going next. That’s one reason why the balance sheet is not the whole story — you must also look at the information from each of the other financial statements (and at historical information, as well) to get the most benefit from the data.

Sherrie Funk and husband Charlie own Just Cruisin! Plus, Nashville. They founded the Travel Agent Management Academy to educate owners and managers about the techniques that have been instrumental to their agency’s success.