Dear Roger,

Thanks for the call last week, you have the makings of a fantastic tour opportunity.
You are situated in such a beautiful part of the Pacific, and your business can showcase what makes it so unique.
The next stage of planning isn’t as simple as getting a “Yes” or “No”, it’s a matter of “Yes if…”.
If the numbers stack up, it’s worth putting in the investment of time and money.
If the numbers don’t stack up, then we gain this insight with just a spreadsheet, rather than learning this the hard way.

Let’s build a simple tool that shows us how the numbers stack up, so that we can make adjustments and see if they make a big difference to the tour’s viability.
We don’t want anything too complicated, just a simple description of how this new business makes, spends and retains money.

The first thing we can look at is your revenue – a product of your prices and your customers.
Growing either of these two numbers will have a hugely positive impact on your sustainability, but it takes some planning.

The second thing we can look at is your variable costs (or Cost of Goods Sold) – the amount your business spends on serving each customer.
You want to put on a great day, but also want to make a margin, so this will be an important balance to monitor.

The third thing we can look at is your overhead costs – the amount you spend each month or year just running the business.
These help us determine how many tours you need to run each month to break even, the lower the overheads, the sooner you’re making a nice profit.

The fourth thing we can look at is your sensitivities – the small changes that have a big impact on your margins.
These help us make wise plans and prevent issues coming up in the future.

The fifth thing we can look at is some scenario planning – understanding what happens if various circumstances were to occur.
This lets us see the best case, worst case and typical case, each of which help us make good decisions as well as giving us some peace of mind.

But before all of this, we’ll create an assumptions table.
This is three simple columns: Assumption, Amount and Source
Assumption is where we list the name of the guess
Amount is the figure we’re using
Source is where the figure comes from.

e.g. Ticket Price - $100 – Based on current price of $95 plus inflation

Petrol Per Tour - $44 – Based on 20L fuel at $2.20 per litre

Cost Per Tour Guide - $60 – Based on market rate as of August 2020

When we get better estimates, we just update this table, and all of the calculations will update automatically.
It’s also great for gathering expert feedback, people can read this table and offer more accurate numbers, and see why we are using our current figures.

Revenues
Since we’re assuming that most tourists only visit a destination once in a five year period, the two numbers we have to work with are the price and the amount of customers on each tour.
There are three things to consider with your price:
1. How much it costs to run the tour (since we can’t afford to make a loss)
2. How much the market typically charges (since we can’t afford to price ourselves out of consideration)
3. How much customers value this particular experience (since they can always opt to do something completely different with their time)

By thinking about each of those three considerations, we can pick a price that’s not too high, but not too low either.
We can run some tests later on to test these guesses, in order to find the right balance.

Next, we can estimate the number of customers we’ll be serving on each tour.
Perhaps you’ll be happy to do private tours, perhaps there’s a minimum group size, perhaps there’s a maximum group size too.
I have no strong opinion, I just want to know how we make go/no-go decisions.
Price and customers are probably connected – is there a higher price for smaller groups, or a discounted rate for larger groups. 
By estimating these two figures, we can forecast our revenue.

Variable Costs
The best way of working out your per-person costs is to look at your batch costs.
That is, to work out the costs of running a full tour group, then divide those costs by the number of people in the group.
e.g. $550 in tour costs, for 12 people, gives a per person cost of about $46.
Batch costs are straightforward, you just tally up all the expenses for the day.
Drivers, buses, fuel, catering, site fees, dancers, tour guides, gifts, etc.
Each of these goes up with each additional family on the tour – more customers means more buses and more bottles of water, but their revenues more than cover these extras.

You probably have some semi-fixed costs, like the number of buses or tour guides you need.
These are when you reach a tipping point, and by adding one more passenger you suddenly need an additional vehicle and driver or tour guide.
Let’s map these out so that we understand when/how to add on more customers.

Revenues minus variable costs gives us a “Gross Margin”, the amount of money we have to cover the costs of the business.
e.g. $100 per ticket, with variable costs of $46, gives us $54 per customer to run the organisation.

Overheads
While customer numbers will go up and down, your business has some predictable costs.
These are things like manager’s salaries, administration, rent, registration, insurance, etc.
We can count on these, and average them out over each month to make life easier.
For example, we might tally these up to $3,000 per month.
If we’re making $54 in gross margin per customer, we need ($3,000/$54) = 56 customers a month to break even.
If our overheads go up, the breakeven point goes up, and if we can reduce our overheads, the breakeven point gets lower.

Once we’ve covered our overheads, the rest becomes “Net Margin”, and that figure can bounce up and down depending on busy seasons and unexpected costs.
Another option is to average out these overheads for each customer or tour group.
e.g. assuming each customer contributes $33 towards these overheads.
For a $100 ticket with $46 of variable costs and $33 of overheads, we make a net margin or profit of $21 per person.

We might also find that some customers are more or less lucrative than others, and we can repeat the process to determine how much profit we make from each type of customer.
This might be helpful in deciding which opportunities to prioritise, and when it’s a good idea to offer discounts or special deals.

Sensitivities
As you know first-hand, things change very suddenly in tourism: buses break, weather cancels plans, flights are delayed, landowner politics adds some complexity, etc.
We want to identify the most “sensitive” figures, the ones that have a large impact on the financials.
e.g. if going to a new location costs 3x more than the current one, if bad weather cancels a whole week of tours, or an extra cruise ship brings in 50 more passengers per month.
We want to list these sensitivities out, so that we can see their effects and plan some responses.
That way, when life happens and plans change, we can still predict how much money will be earned and spent by the business.
Most importantly, this help us ensure that we’re never “over a barrel”, where a single supplier, partner or competitor can destroy our viability.

Scenarios
We can’t be 100% confident in predicting the future, but we can create some hypothetical scenarios and see how the numbers stack up in each of them.
A great way of doing this is with a best case, average case and worst case scenario.
To do this, we rebuild the assumptions table with more optimistic estimates about customer numbers, group sizes and costs, then do the equivalent with pessimistic estimates.
What you’ll probably notice is that some numbers change a lot, and other remain pretty constant – we want to learn about the numbers that have a big impact on our profits.
My guess is that the big variables are on the revenue side, as in the number of tour groups, customers per group, and the price you negotiate.
A change to any of those figures probably has a big impact on your bank account.

Other Considerations
Once we do all of that, we’ll have a clear understanding of your business’s financial strength.
At this point, you’ll probably want to explore some changes that make your position stronger.
For example:
·      Can we spend money after we’ve earned money? Can we avoid incurring certain costs until after customers have paid for their tours?

·      Do we have a diverse range of suppliers? Can we start thinking about the next best alternatives so that the business can avoid being held hostage?

·      Can we raise our prices? Can we improve the tour to make for a great day that customers will happily pay more for?

·      Can we find team members to free up your personal time?

·      Are good team members found or made? If they’re found, where do we find them? If they’re made, how do you train them?

·      Do we need alternative ways of finding great customers? Can we predictably fill the tour bus?

·      Can we talk to other veteran tour operators about ways of improving the day and ways of building our reputation?

·      Can we talk to some past/future customers in order to learn more about what they need and what they enjoy?

If you haven’t built anything like this before, I can set it up in Excel and send it through to you – you’re the best placed person to make the guesses about costs and revenues.
Simple models like this don’t magically make money, but they show you traps ahead of time and help you think up new ways of making the business profitable.
Let me know how I can help!
Cheers,
Isaac