For travel businesses, financial planning can become difficult even when there are no obvious problems with cash flow.
Bookings could seem healthy and this surface of stability might be hiding financial issues that are eroding the future of the firm.
Knowing how to manage supplier payments, seasonal fluctuations, refunds and changing customer demand requires a clear understanding of the difference between a budget and a forecast and how to use both effectively.
What is the difference between a budget and a forecast?
A budget sets out what a travel business expects, or wants, to achieve over a particular financial period.
Your budget will centre on the expected revenue for the period, with costs and profitability squared with each other to create a reasonable framework from which performance targets can be derived.
When looking beyond this original plan, a financial forecast is the metric to use to consider what is most likely to happen based on the information available to the business.
For example, a tour operator may prepare its annual budget expecting a certain number of summer bookings. If demand is stronger than anticipated, the budget does not necessarily need to change. Instead, the forecast can be updated to demonstrate how the additional bookings are expected to affect revenue, supplier costs, cash flow and profit.
Why is budgeting particularly important for travel businesses?
A good budget provides travel firms with a financial framework for the months ahead.
This can be particularly important in an industry where income and expenditure may not occur at the same time.
Customers might pay deposits many months before departure, while balances, supplier payments and other costs can fall at different points in the booking cycle.
Seasonality can create further challenges, as a business may experience strong booking volumes in January but have significant supplier obligations later in the year.
Preparing a detailed budget allows those running the business to plan for these movements, mitigating the need to react when payments become due.
Budgets can also provide individual departments with targets and spending limits, allowing management to identify whether costs are increasing beyond expectations or revenue is falling behind the business plan.
Why do firms also need regular forecasts?
Budgets may have the greatest amount of care put into them, but they will always be based on the estimates that existed at the time of their creation.
When a travel firm is looking to make decisions throughout the year, relying on old estimates can result in under- or over-confidence in the firm’s financial prospects.
A forecast uses the latest trading information to give management a more realistic assessment of the likely financial outcome.
If bookings for a particular destination are behind budget three months into the year, for example, continuing to rely entirely on the original annual budget could give an unrealistic picture.
Updating the forecast enables the firm to consider shortfalls and decide whether costs need to be controlled, marketing activity adjusted, or cash retained elsewhere.
How should travel firms compare budgets with actual performance?
Travel firms should review actual revenue and expenditure against the budget and investigate significant differences to identify whether operational strategy needs to be adapted.
If sales are above budget, management should understand what is driving that growth and whether it can reasonably be expected to continue.
Equally, being below budget does not always mean something has gone wrong.
Timing differences can be particularly important for travel firms. A booking that was expected in one month may arrive in another, while supplier payments may be brought forward or delayed.
The aim should therefore be to understand why a variance has occurred before deciding whether action is required.
Collating this information then results in more accurate forecasts being generated, creating a steady flow of information that paves the way for more dynamic decisions.
How often should forecasts be updated?
There is no benefit in creating a forecast and then leaving it untouched until the end of the financial year, as that renders it superfluous to the original budget.
Travel firms should review forecasts regularly and more frequently where circumstances are changing quickly.
This might involve maintaining a rolling forecast that continuously looks several months ahead rather than concentrating solely on the end of the current financial year.
Cash flow should form an important part of this process.
A business can appear profitable while still experiencing cash flow pressure if customer receipts and supplier obligations occur at different times.
Forecasting when money is expected to enter and leave the business can help management identify potential gaps early enough to take appropriate action.
How can travel businesses make budgets and forecasts work together?
A truly effective strategy will bring a united approach to the use of budgets and financial forecasts.
Looking at both alongside actual performance can give travel firms a much clearer understanding of whether the business remains on track.
The quality of the information behind those figures is equally important. Booking systems, accounting records and management information should provide sufficiently accurate and timely information for forecasts to be meaningful.
By making budgeting and forecasting part of regular financial management, travel firms can identify problems sooner, make better-informed decisions and plan for growth with greater confidence.
Our expert team can help you create budgets and forecasts that provide meaningful insight into the financial performance of your travel business.
We can support you in improving your financial planning so that you have the information you need to make confident decisions.
If you want greater clarity and control over the finances of your travel business, speak to our team today.
