If your travel firm is turning a profit, it may seem as though you have nothing to worry about.
However, many businesses discover that profitability is not enough to keep the doors open and travel firms may be particularly vulnerable to these types of issues.
Understanding what further steps should be taken to improve the resilience of your firm is vital once you have achieved the goal of being profitable.
What are the main risks that profitable travel firms face?
Profitability is an excellent metric of a business’s success, but it only reveals part of the picture.
A business is considered profitable when its incoming funds surpass its outgoing expenses, yet the question of when this happens is not necessarily factored into the equation.
Imagine a firm that has incoming funds of £500,000 and outgoing expenses of £300,000. On paper, it appears that the firm will be completely fine, as, by the end of the financial period, it will be left with £200,000.
However, if the income is staggered or delayed and the firm only receives £100,000 by the time all £300,000 worth of debts come due, it will be facing a shortfall of £200,000 instead.
With travel firms, the risk of payments being delayed is sharpened by the need to manage supplier costs ahead of the customers parting ways with the full sum of their travel costs.
To make matters worse, it is often necessary to put aside a portion of this income in the event that something goes awry and refunds are required.
Yet despite these delays in when the money is likely to hit the account, the sale may still be recorded from when it is booked, thus resulting in it showing up as profit on the balance sheet.
Ironically, another key risk faced by travel firms is growth itself.
For a travel firm to successfully grow, it is often necessary to take on more staff and expand the range of packages offered.
This brings with it a host of upfront costs that will then need to be paid off once the funds accrued through the expansion materialise.
Keeping the travel firm going during this time is where the challenge can arise.
How do travel firms endure the gap between bookings and payments?
The real issue that travel firms must address is the cash flow issue that leaves them vulnerable to debts overwhelming any reserves.
When possible, building up a stronger financial reserve can help to mitigate the struggle during the next gap between booking and payment, but travel firms should also consider more dynamic ways to handle cash flow issues.
Negotiating more favourable terms with suppliers is a clear priority, as greater flexibility can reduce the stress and allow for a more staggered approach to debt resolution.
This may be particularly effective if there is a strong working relationship between the travel firm and supplier, with neither wanting to lose the other’s custom.
Beyond this, being strategic with investment and growth planning ensures that the firm is not needlessly overstretching or attempting to operate beyond its means.
There may be times when it is necessary to use short-term finance options, such as loans, to bridge the gap, but these should be handled with great care, as they may succeed only in pushing the problem further down the road.
Getting support from a trusted accountant is vital if you want to prevent your profitable travel firm from running out of cash.
Our team can help you to set a clear budget, supported by accurate financial forecasting that allows you to understand what payments are due and when so that you can have enough cash to hand to clear them off.
For expert accounting support that lets you grow your travel firm with confidence, get in touch with our team.
