Short on Cash? Here’s How to Conquer Balance Sheet Blues

by Dr. Robert Joselyn, CTC
Short on Cash? Here’s How to Conquer Balance Sheet Blues

The latest in a series offering insights and advice based on an analysis of financial benchmarking data from the travel agency members of TAMS.

Recently I was asked by an industry consultant to identify the top three of four challenges that travel agencies face in the current environment. The one challenge I named that no one else he interviewed mentioned was the lack of adequate capitalization.

Yet this is a fundamental problem in the travel agency industry. Too many agencies are undercapitalized. And the problem may be getting worse.

Lengthening booking cycle
As regular readers know, one part of my business is TAMS, a financial benchmarking and best practices networking organization of approximately 120 agencies in the US, Canada and now the Dominican Republic.

At meetings this fall of six TAMS groups, a common refrain was the increasing length of the booking cycle.

Robert Joselyn

Time after time members talked about how sales were improving, especially on big ticket travel. They also said they had an increasing number of bookings for travel late in 2013 and even in 2014.

Short on cash
A number of agency owners mentioned separately that their cash flow challenges were increasing. Not only is there a connection, the cash flow issue reflects the fundamental undercapitalization issue.

The lack of adequate capitalization – i.e. available and adequate cash resources – is an obvious problem when a recession comes visiting. It’s also a problem when booking cycles change, though this always seems to surprise owners.

The underlying reasons for the current shift in the booking cycle can be debated. For agency owners, the fact that they are doing work today for revenue that arrives a year or more down the road is a cash flow reality that needs to be dealt with.

Tracking the numbers
One of the most important metrics in TAMS, and one that is too often misunderstood and ignored, is what’s called the “current ratio.” Current ratio is simply current assets divided by current liabilities, which is defined as liabilities due within a year.

Smaller businesses must track this far more closely than large firms. They should continually estimate their revenues and obligations over the next few months.

If they are severely undercapitalized, they must do so monthly, or even more frequently. (I am personally familiar with one airline on the financial cash flow ropes whose executives calculated their position on a daily basis.)

Predicting your cash flow needs
The first step is to know in advance what your cash position is likely to be.

Predicting your cash flow needs might sound simple, but it isn’t, and it always involves some guesswork. Estimating upcoming cash-consuming expenses is typically a piece of cake. Estimating revenue? Not so much.

To estimate expected revenue, combine an estimate of new seasonal business not yet on the books with the revenue you expect to generate from that. While not perfect, past history provides some sort of baseline.

Monthly estimates
When the booking cycle lengthens, as seems to be the case now, you also need to run a futures report indicating when final payments are due and estimating when commissions are likely to be realized.

For TRAMS users, and there may be options for other back office products, there is a futures report available to you.

I recommend a rolling 12-month (month by month) estimate of your cash position based on your best estimates of revenue and expenses. Establishing this report for the first time may involve a little pain but after that updates are easy.

Dealing with the book-to-bank gap
There are ways to at least partially mitigate the growing gap between bookings and commission receipt by bringing in revenue at or near the time of sale. They include:

•    Service fees for consulting and transactions

•    Commitment deposits that apply to final payment but are held as a possible cancellation fee

•    Selling travel insurance, which is even more important as the time between booking and travel increases. See: Why You Should Be Selling More Insurance (and How to Do It).

Building a cash flow safety net
Personal financial advisors suggest we have, at minimum, enough liquid assets to cover our expected expenses for at least six months. That’s good advice for your business too.

If you don’t meet the six-month standard, you need to give serious consideration to bulking up your balance sheet. How do you accomplish this?

•    By investing more of your personal assets in the business

•    By finding investors to provide capital.

Note that I did not mention borrowing money. In fact, I don’t like the second option, finding investors, much better.

In my experience travel agencies cannot be profitable when they run on borrowed money. The exception is line-of-credit borrowing used to cover very short-term cash needs. Too often, however, I encounter businesses whose line-of-credit has been consistently maxed out for years.

Reinvest in your business
I recently interviewed an amazing 29 year-old woman who has grown her salon business from a two-person startup to a business with a staff of 35 over a period of just a few years.

She told me that since the beginning, she and her partner put 50% of every paycheck back into the business. As a result, the 50% of today’s paychecks that they get to keep is far greater than 100% of those earlier paychecks.

There is a lesson there for all of us.

Dr. Robert W. Joselyn, CTC, is president and CEO of Joselyn, Tepper & Associates, Inc., a travel agency consulting firm, and of TAMS, LLC (Travel Agency Management Solutions), a travel agency financial analysis, benchmarking and networking organization with 124 members in the U.S., Canada and the Dominican Republic.

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