Finance advice for travel businesses: Cash flow

In my past two articles I wrote about how ttravel companies can trim overhead costs and reshape business profitability.

However, the key factor to control through the recession and beyond is your cash flow position.

We’ve all heard the saying ‘Cash is King’ – but why? Quite simply more businesses fail through running out of cash than through a fall in profits.

So why has the cash position become so important? Well there are a series of negative impacts that follow a decline in bookings which we are increasingly seeing in the travel industry.

Incoming cash flows generally weaken in a downturn with customers looking to book later into the season. Downward pressure on your profits further reduces your liquidity as prices drop to encourage bookings.

Your suppliers will also typically seek a reduction in credit as they in turn seek to strengthen their cash position which adds to the drain on your cash reserves.

Many tour operators benefit from have customers’ deposits in their accounts well in advance of the holiday commencing and this is a valuable source of income for many companies – particularly on high value bookings that can attract a larger deposit. However with interest rates at their lowest levels in living memory the loss of this income is adding to the pain that many companies are feeling.

What can you do to control your cash flow situation and ensure that you maintain the support of your business bankers? The most important action that your bank will be looking for is the production of good management information. With increasing economic risks and the well-publicised shrinking of available bank finance you need to ensure that you are regarded as a good risk by your bankers.

To increase your chances of retaining their support take action now to make sure regular management accounts and cash flow forecasts are produced. These should ideally be available monthly and contain clear information on how the business is performing and, in particular, focus on cash flow management and forecasting.

What actions will your bank expect that you will be undertaking to preserve cash flows? If you are giving any form of trade credit it is essential that you have in place formal and systematic Credit Management procedures. This starts with reviewing your terms and conditions of trade, assessment of new and existing trade customer credit limits, prompt invoicing, settlement incentives and extends to active credit control over your ‘book debts’.

In addition you can consider charging interest on late payment of commercial debts over 30 days old under government legislation. Let’s face it – if your business clients are faced with some bills that charge interest on late payment but others that don’t, which bills do you think they will pay first?! And be prepared for a phone call from your clients asking for better credit terms. You need to be tough on this. Remember, your business is smaller than theirs!

Alternatively if you have good standing commercial debtors you can look at ‘Invoice Discounting’ to accelerate cash flow which again will only be attainable with good management information.

On the payment side, wherever possible, look to negotiate longer settlement terms with your key suppliers, and put in place regular communications to reassure them that you are in control of your cash management.

You may find anxious suppliers are prepared to renegotiate the terms of existing agreements favourably to preserve your business. For example have you considered applying to your business a recent trend with commercial landlords to switch to monthly property rental payments as opposed to quarterly in advance? 

This is a time for realistic business management and when it comes to stress testing your financial forecasts you need to be thinking ahead with caution and consider the worse case scenarios in advance to ensure you take steps now to avoid financial risks and reduce cash exposures wherever possible.

The biggest challenge is to be honest with yourself and take note of your actual enquiries and sales performance in recent months and don’t assume that business will automatically be maintained at the levels achieved over recent years.

If after properly considering your cash flow forecast you do identify a problem then better to talk earlier rather than later to your advisers and approaching your bankers with your positive pre-emptive proposals will gain far more support than ‘burying your head in the sand’.

Andrew Burnham is a senior member of the travel industry team at chartered accountancy firm MacIntyre Hudson.

Next week: Andrew answers reader questions.

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