A KEY STEP IN MANAGING THE EXPENSES OF ANY HOME-BASED TRAVEL BUSINESS IS UNDERSTANDING what things actually cost. Sure, your pens cost this much and your phone bill is that much, but do you have any idea of what it costs to sell a travel package or simply to open for business each day?
Often wrongly thought of as less than helpful, boring and time consuming, both the costing and budgeting process can have a significant impact on a business' bottom line.
At its most basic, costing asks a number of questions such as what does it cost to open the doors of your business each day and what does one sale cost. Creating a budget means guessing about the amounts that will be necessary to spend in order to prosper. Costing makes the guesses of the budget process educated ones.
Making Sense of Cost Accounting
Although your business' financial statements clearly show expenses, they are rarely broken down into specific categories, let alone by cost of serving a particular customer. That's where cost accounting enters the picture.
Cost accounting is the process of allocating all of the travel operation's costs associated with generating a sale, performing a service, etc., both direct and indirect. Direct costs include such things as the total wages paid workers and supplies; indirect costs include rent, depreciation and utilities.
It is the rare agency owner who doesn't know whether his or her business is profitable. Accounting statements or even the travel operation's tax returns often provide that information. How many home-based travel agents, however, know whether their cruise packages, tours or corporate services are profitable? Few are probably aware whether their "best" customers are generating profits sufficient to warrant the degree of individual service they demand.
Surprisingly, few business owners understand what a particular type of service or customer actually costs. Far too many travel business owners believe that if they charge one sum of money and pay a slightly lesser amount, the sale is a profitable one. In reality, however, nothing could be farther from the truth.
Any business that offers a prompt payment discount incurs a cost. The business must usually pay workers and its bills before it receives payment for the services rendered. Often, this means borrowing money. It is up to the operators of the travel business to decide whether it is more economical to borrow the money necessary to keep the operation going or to offer their customers an incentive for paying early.
The true cost of money is often misunderstood. Many home-based business owners wrongly believe, for instance, that using savings and investments to finance needed purchases or to keep the business going is an economical strategy.
Unfortunately, using savings or investments rather than borrowing involves a cost. Removing funds from savings incurs a so-called "lost opportunity" cost. If those funds had remained invested or kept in a savings account, they would have earned interest or increased in value. Using them in the business means that the business should consider that "lost opportunity" cost as a legitimate cost of doing business.
Like a road map of a rapidly growing city, a budget establishes the path that should be followed in order to get to a selected destination, usually a set amount of profit. In other words, a budget is a map leading the way to the goals established by the travel business' owner or manager. The budget attempts to show what expenditures will be necessary to achieve those goals.
After the cash receipts and disbursements have been estimated, a minimum cash balance is usually budgeted that will be adequate to meet cash requirements. How much does the operation's bank require in an account? How much reserve must be maintained in order to comply with loan terms? How much is needed to meet the monthly bills and payroll?
Put another way, if $10,000 per month is necessary for payrolls, rent, utilities, advertising and the like, the home-based travel agent should plan to maintain a cash balance of $10,000. If sales slip, and your business doesn't have sufficient income to promptly make payments, creditworthiness might be affected. Or, the home-based travel business may be forced to borrow funds to make up the shortfall, resulting in an unforeseen expense.
Obviously, a budget will greatly aid in effective cash management. Through a cash budget, the travel agent can anticipate the need for short-term borrowing and, perhaps, obtain more favorable borrowing terms. Conversely, when the budget indicates periods of excess cash, those funds can be invested in readily marketable securities to provide additional income for your business.
Accounting for and Reducing Costs
There is more to cost accounting than determining the cost of a sale or service performed. All travel business owners should also carefully analyze their costs of doing business to locate and reduce any expenses that are out of line.
Many small business owners begin by comparing this month's expense figures with last month's or with the same month last year. Eventually, year-to-date expenses are compared with the previous year's year-to-date figures. Usually, an attempt is made to determine the reason or reasons for any discrepancies between the figures in different accounting periods.
If computer repairs, for example, represented 2 percent of sales last year and shot up to 15 percent this year, you should want to know the reason. That analysis also provides a real insight into the fiscal health of your business. A business' financial health has its bearing on much more than the bottom line or profits. It can also affect both the cost and the availability of financing.
Managing the expenses of a home-based travel business can be as involved and complex as you desire. At its most basic, however, it requires understanding the cost of money.
It also means accounting for costs in order to understand what each service, package, or customer is actually costing. That same cost accounting can also be useful in discovering why costs have been rising.
Columbus didn't have a map and died broke. If you set out to find profits without a map or budget, you'll end up somewhere and may even profit for awhile but it will be because of luck. Imagine where you'd be by managing your expenses.