This is the first in a quarterly series of columns in which Joselyn offers insights and advice based on his analysis of financial benchmarking data from the 120 agency members of TAMS, of which Joselyn is president and CEO.
Remember that car insurance commercial where a creep named Mayhem wreaks destruction on unsuspecting individuals and families? There are business creeps as well. One goes by the name of Expense Creep.
Dr. Robert Joselyn
As with the case of Mr. Mayhem, Expense Creep raises havoc when travel agents become inattentive or distracted. And the consequences can be just as painful for your agency’s business finances as an auto accident can be for your personal finances.
In my consulting practice, I learned long ago that good management is the single defining difference between travel agencies that make money and those that lose money (also between those that make a great deal of money and those that make not so much).
Small expenses make big difference
But it’s not just management of big issues – revenue generation and employee expense – that makes the difference between success and failure. It’s management of those expense categories at the edge of the radar screen.
I’m referring to those expenses that consume as little as 1% or as much as 5% of revenue – expenses like subscriptions and dues, postage and phone costs.
Those expenses may be small relative to revenue, but so is the bottom line of most travel agencies. So those small expenses have a big impact.
Let’s do the math. A decently managed agency should end the year with 15% of revenue available for the owner to take out however she or he chooses. If an expense that is 5% of revenue is reduced to 3% of revenue, that adds 13% to the agency’s “profit before owner takeout,” or PBOT.
And that’s just one expense category. When an agency effectively manages expenses across the board, profit before owner takeout can be doubled or tripled.
Eliminate unnecessary expenditures
During the recession of the last couple years, the travel agencies that survived and prospered were those that were tenacious about routing out unnecessary expenditures.
During one quarter, I urged the 120 TAMS members to review their phone expenses. They were shocked to discover that, collectively, they were paying for more than 500 phone lines that they did not know about or use.
That’s what happens when times are good and we are making money. Expense Creep slips in the back door and starts picking your pocket.
In the agency community, Expense Creep is back.
Revenues are up, but . . .
The TAMS data for the first three quarters of 2011 shows encouraging increases in revenue over the same period in 2010. For my smallest members, average revenue is up 9.5%, with one member’s increase at 37%. The largest agencies are showing an average revenue increase of 18%, with one member at 41%.
But, what about expenses? They are going up as well. The good news is that, for most, the increase in expenses is less than the increase in revenue.
|Agency Revenue & Expense Change*
|3rd Qtr 2011 YOY
|3rd Qtr 2011 YOY
|*Derived from TAMS 3rd quarter 2011 data
While the data is positive overall, a few agencies clearly have taken their eye off the expense management ball as sales and revenue improve.
Giddy with success?
For example, one member is showing a 16% increase in revenue but a 25% increase in expenses.
It may be that they cut expenses to the bone during the recession and simply must add expenditures back now that they can afford it.
Or they may be getting a bit giddy with the revenue increase.
The bottom line is that when times are good, or improving, we tend to get careless with our expenses. It happens with our personal finances, and it can happen in our businesses as well.
Keep track of nickels & dimes
At the start of a New Year, many agency owners are creating business plans and budgets. I hope the past year brought you increased revenue and that the trend will continue through 2012.
But as you enjoy those increased revenues, remember where you have recently been. And remember that nickels add up to dimes and dimes to dollars. When those dollars are on the expense side, those nickels and dimes add up to a bottom line that is much smaller than it could and should be.
So when Expense Creep knocks at your door, don’t answer.
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 120 members in North America.