QuickStart Guide to a Tourism Business How to Prepare a Business Plan Updated August 2006 How to Prepare a Business Plan Contents The Business Plan ............................................................................................................. 3 What the Financiers Want.................................................................................................. 4 Types of Loan Funds Available.......................................................................................... 4 Cost of Debt....................................................................................................................... 6 Some Special Characteristics of Tourism Businesses ....................................................... 6 ENQUIRIES General enquiries or comments regarding the ‘Quickstart Guide to a Tourism Business’ or the ‘How to Prepare a Business Plan’ should be addressed to: Tourism Western Australia Destination Development Coordinator Level 9 2 Mill Street PERTH WA 6000 GPO Box X2261 PERTH WA 6847 [email protected] Tel: 08 9262 1700 Fax: 08 9262 1944 westernaustralia.com © Tourism Western Australia 2006 DISCLAIMER This document has been prepared by Tourism Western Australia predominantly from information and data gathered in the course of its activities. No person or organisation should act on the basis of any matter contained in this document without considering and, if necessary, taking appropriate professional advice. Neither Tourism Western Australia, nor any of its employees, undertakes responsibility to any person or organisation in respect of this document. 2 Tourism Western Australia How to Prepare a Business Plan The Business Plan If you have never prepared a business plan before then it is strongly suggested that you at least undertake some background reading. There are many excellent, easy-to-read publications available on the subject. In addition, organisations such as the Small Business Development Corporation and TAFE run business planning courses from time to time. At a minimum your business plan should contain the following: Cover Page It should include the name of the business venture, contact name, address and phone number. Contents Page Make it easy for the reader by providing details of what is contained in the business plan. Executive Summary Keep this to a one page summary of your plan in very simple terms. Objectives Objectives should be clear statements of what you intend to achieve. Business Description What is the service that you will be offering your customers? Provide additional information about the attributes of your business and what is going to attract customers. Obtain research data which will show that tourism is growing in your area. You should also provide details of business costs, including your working capital needs, your equity contribution to the business and consequently any shortfall in capital. Market Feasibility What will be the size of the market necessary to make the business feasible. If you will be attracting market share from existing operators then you will need to provide details of how this will be achieved. If you are going to tap into a new market, again, you will need to provide details of how you propose to do this. Quite simply, if there is no market for your product there is no point in going into business. Financial Feasibility Initially, you will need to undertake a preliminary assessment, a ‘pre-feasibility’. However, your final business plan will need to demonstrate quite convincingly that the business can stand up to fair scrutiny. This can be a fairly complex part of your business plan. Hence, it is recommended that you use the services of an appropriate financial adviser. Loan Repayment Details Your intended repayments schedule, covering both interest and principal, should be included. This will be tied to your cash flow projections. Loan Security and Guarantees Many investors will use their home as security. If this is the case it is better to provide a sworn valuation rather than your own market appraisal. You will also need to provide details of any mortgages or outstanding encumbrances. Tourism Western Australia 3 How to Prepare a Business Plan Often banks will nominate their own valuer and their conservative valuations will usually be well below yours. Personal Details A statement of your personal assets and liabilities and any other principals involved in the business should be included, as well as any other pertinent details, such as special skills and knowledge, prior experience in the tourism industry and generally anything that will support your case that you are a "fit and proper" person to be running a business. Statutory Details Provide details of the business structure, whether a limited liability company, partnership or just yourself as the sole trader. If a company structure is involved you will need to provide details about the directors, company secretary and the location of the registered office. Financial Reporting Details It is likely you will need to provide the financial institution with a periodic financial report. Appendices Provide any additional information as necessary in support of your business plan. For example, market research information, statistics, consultant's assessments and so on. What the Financiers Want Banks and other financiers are always on the look out for good investment opportunities. That's how they make their money. Many first time investors get disheartened when the bank rejects their loan application. More often than not, the bank is probably doing them a favour. The last thing that the bank wants to do is sell you up. If you do your homework right and provide a well-reasoned, substantiated business plan, you are, in fact, helping the bank to make a decision in your favour. The attitudes of lending institutions toward tourism businesses can vary quite considerably. Remember, banks and other financial institutions want to lend money. You can help them by: • Providing accurate financial data including details of the type of finance being sought • Providing substantiated cash flow projections (not figures seemingly plucked from the air) • Demonstrating sound business knowledge and strong expertise in tourism • Demonstrating the capacity to not only pay off the interest, but also repay the capital Types of Loan Funds Available Banks provide a variety of financial products for business investors such as: 4 • Term Loans • Commercial Bills at both variable and fixed rates • Overdrafts • Bridging Finance • Leasing, Hire-Purchase and Chattel Mortgages Tourism Western Australia How to Prepare a Business Plan There are very few tailored or packaged products that are aimed specifically at the tourism industry. Term Loans Fully drawn advances are granted for capital purchases such as land, buildings, equipment and machinery, or for extensions to buildings. Loan terms can be from three to eight years but are usually about five years. The repayments generally consist of a principal reduction, plus interest on the balance of the account. In some circumstances, fixed rate fully drawn advances can be negotiated for terms of up to five years. Commercial Bills General Commercial bills provide short term or long term finance for capital, carry-on or bridging purposes. There is a distinction between a bill facility and a particular commercial bill discounted under that facility. The bill facility may have a term of up to 5 years, but any particular bill will usually have a term from 30 to 180 days. When a particular bill matures, it can be paid out or, if the bank agrees, it can be ‘rolled over’ by discounting a new bill to take its place. You may also find at times that the bill rate quoted in the newspaper is slightly different from the bill rate you are quoted when you go to your local bank. Bill rates in the bill market vary minute to minute, but for any given bill they are fixed on the drawing date for the term of the bill. Bill rates are continually changing, and so the rate quoted in the paper could be different from the rate applying on the morning of the inquiry. On top of the discount rate, borrowers will pay charges of approximately 2% to 4% to cover the risk margins. When a bill is drawn, the borrowers will not receive funds equal to the face value of the bill instead the interest and charges for the term are deducted from the face value of the bill. A minimum loan of $100,000 is preferred. Fixed Rate Bills These bills are a relatively new source of finance where money is made available for a fixed period with a fixed interest rate. The period of the loan can be up to five years. A minimum loan of approximately $100,000 is preferred. Costs in addition to interest will be 2% to 4%, depending on the size of the loan and the assessed risk of the loan. No principal repayment is made during the term of the loan, but some repayment may be required at the time of the rollover. It is possible to pay out a fixed rate, fixed term bill. Depending on whether bill rates have moved up or down relative to the fixed rate, there may be a penalty involved with this. Obtain a quote prior to deciding to pay out a bill early, to identify the precise net cost or net benefit to you. Overdrafts Overdrafts are offered on cheque accounts to permit the account to fluctuate from credit to debit. Overdrafts are made available principally for working expenses. The limit is reviewed at least annually. Banks do not like to see overdrafts used for long term core debts of a business, because overdrafts are repayable on demand. Customers may be able to negotiate a lower-cost long-term finance package rather than simply relying on an overdraft facility. Tourism Western Australia 5 How to Prepare a Business Plan Bridging Finance Bridging finance is usually granted to applicants intending to construct their own business premises or wishing to purchase a business while awaiting the sale of their existing assets. Leasing, Hire-Purchase and Chattel Mortgages Banks will provide funds for leasing, hire purchase or chattel mortgage of capital equipment either directly or through their finance company subsidiaries. With chattel mortgages or hire-purchase of new plant or equipment, an initial deposit in the order of 20% - 30% of the cost price is required and the term of hire-purchase is generally four to five years. Repayments are usually monthly until the whole of the purchase price is repaid. Leasing is a similar method of finance, but ownership of the leased goods remains with the lessor (the financier), until an ‘option to purchase’ is exercised by the user at the end of the lease agreement. Leases are often entered into with no deposit. Generally, new equipment is leased for three to five years. At the end of the lease term, the finance company takes back the equipment unless the lessee pays out the residual value. Alternatively, the lessor may re-lease the equipment for a shorter period of perhaps two years. At the end of that period there is a nominal residual value. Lease payments may be negotiated on a monthly, quarterly or seasonal basis but payments are made in advance. The tax implications of these particular forms of finance are complex. Discuss each transaction with your accountant before you buy any piece of equipment. Cost of Debt You need to keep in mind that most debt financing packages have extra charges which need to be included in the overall cost of using debt. The real cost of debt finance consists of the cost of the interest and other borrowing charges. Use this formula to work it out: Cost of Debt (%) = Total Financing Charges Amount Borrowed Worked Example Let's suppose you borrow $20,000 as an interest-only loan from the bank for two years at an interest rate of 10%. That means you will have to pay $2,000 a year in interest. If there is also a fixed establishment fee of $1,000 your total financing charges over the two years before tax will be $5,000. The before tax cost of your loan will be:C o st o f D e b t = ($ 4 ,0 0 0 + $ 1 ,0 0 0 ) ÷ 2 $ 2 0 ,0 0 0 = 1 2 .5 % Some Special Characteristics of Tourism Businesses Once fully developed, your business will become known as a tourism ‘product’. 6 Tourism Western Australia How to Prepare a Business Plan Tourism products are in fact, services and, as such, there are several characteristics which apply to any service sector, not just tourism, that you will need to be aware of. • Seasonality of demand Most tourist destination areas are characterised by fluctuating periods of demand called ‘peaks’, ‘shoulders’ and ‘troughs’. • Long term market development Very few new businesses achieve maximum capacity utilisation in the early years of operation. • Co-operative nature of competition The competitive field for tourism is comprised of destinations. Competition at this level requires businesses, that would normally see themselves as being in competition, to work in a co-operative manner to jointly promote their destination. • High fixed costs Many tourism businesses have a high fixed cost component. • Single use nature of assets Accommodation facilities in particular have limited alternative uses for the assets. • High capital intensity Many tourism businesses require substantial up-front capital investment. Seasonality and long-term market development factors as explained above often mean the asset will initially be under-utilised. The single use nature of some tourism assets can be a disadvantage when making capital gains decisions. Commercial investors can spread the risk across a number of sectors depending on the industry of the occupants. However, there is greater risk when an investment is locked into a single use industry like tourism. Consequently, capital gains for tourism (particularly the accommodation sector) can be lower than other property investments. In addition, some lenders question the security which a single use asset provides. Banks will normally lend to the extent that they believe the cash flow of a business will at least repay the interest of the original loan. As protection for repayment of the principal, however, loans are normally secured over the assets used to generate the income stream. The value of these assets is dependent on what the market will pay for them. An asset with only one end use such as a motel or a tour coach provides less security than assets with application across several industries such as an office building or a truck. In short, many tourism investments present low profit streams in the short term, carry higher risks than many other investments and generally produce modest capital gain. However, the prudent investor who takes the time to prepare a comprehensive business plan and takes a longer term view to tourism investment can reap substantial financial gain. ********* Tourism Western Australia 7