Financial planning for travel agency businesses
The internet has changed the rules of the travel industry. Millions of Britons jet off at least once each year under normal circumstances, and many more take domestic breaks. And with Covid, many travel businesses have been severely disrupted. UK consumers normally spend around £81 billion on holidays each year and it is becoming easier for holidaymakers to book their flights, accommodation, hire cars and arrange insurance from their laptop or even their phone.
But whilst the DIY online travel market has boomed in recent years, there are still opportunities for travel professionals. It is still possible to start out as a travel agent from home with a desk, a laptop and a telephone line – but, even in a post-covid world, you need to think bigger if you intend to build a business.
You don’t need a shop on the high street. Successful new travel agents tend to work online and serve a national audience – and tend to specialise in the services and destinations they provide.
For some, this can mean working in a niche such as business travel. If you can become the travel agent with the contract for a large corporation, with people needing flights and accommodation around the world, it will be lucrative. You have the ideal basis for a business that should be busy all year round. When travel and work both return to a more familiar pace, multinational companies will still need feet on the ground across the globe.
The other approach is to specialise in travel to a particular location, or experience. Building expert local knowledge of a key destination could help you corner a lucrative market.
But no matter what industry you’re in, a business plan is essential. You may not think that you need a formal plan if you’re not seeking a loan or investment funding for your business, but it will still be vital for you to understand the challenges and costs your business must deal with before it can start to generate a profit.
“Running my own travel agency was a dream, but then I woke up and realised that I could do it - I just needed to get organised.”
You need a financial plan. Not only will it let you ensure that your travel business can get off on a professional and businesslike footing, it can be vital if you do need to borrow to set up, or to keep your business afloat in the challenging first few months.
What is financial planning?
Anyone setting up a business needs a Financial Plan. Financial planning takes the guesswork out of starting up your travel business.
It lets you work out on paper how your business will generate money in the real world.
It lets you understand your fixed costs, variable costs, staff costs and how many customers you need. It helps you work out if your business is going to be profitable, it lets you see where those profits are going to come from, and the costs you will face as well.
To do this, the Financial Plan needs to describe every aspect of the financial side of your business. That means estimating all the amounts involved, as well as the timeframes, resources and assumptions that support the figures.
Your financial plan also defines the funding you will need to get your travel business to take off – and lets you present your plans to lenders. The more detailed your plan and the more professional your presentation, the better your chances of securing the funding that you need.
Your Financial Plan will help you to see how your business will:
- Bring in cash
- Cover its costs
- Generate a profit
- The financial target that you need to hit each month
- The investment you need to succeed
“It looks like a lot of faffing about, but writing up a financial plan is time well spent. It shows you where potential problems may arise and that means you can avoid them.”
Doing the groundwork
You will need real-world figures to support your planning, and that will require some research. Your financial planning will need to contain the following sections:
As you will already be fully aware if you work in the profession, the travel agent industry is based on commission. Every time you sell a holiday for a tour operator they will pay you a percentage of the fee. This commission varies a great deal – to get good rates you will need to become a member of a trade organisation and arrange an agreed level of bookings.
There are also commission earnings from airlines, hotels and car hire and fees for things like arranging documents and foreign currency.
The more business you arrange the better the rates you may be able to negotiate with travel companies.
Minimum commissions start at around 10% but the high street chains may be getting considerably more, with figures of 15% up to 18%.
The fierce competition that is a factor of the travel business will mean that you will have to be content with small profit margins when your business is small. It is only when you have achieved sufficient volume to enjoy increased bargaining power to up your commission rate that you can start looking at large profits.
The travel business is very seasonal and, although the customer will pay you a deposit on the holiday when they book, you will only receive your commission from the tour operator when they receive payment in full. Working Finance to maintain your cash flow during slow months may be essential.
Be realistic about what your business will be bringing in - especially in the first months and years, while you start to establish yourself.
“You need to be a negotiator to succeed - but if you don’t mind a little to and fro on the phone you can start out with rates that will offer you some kind of income, and you can always build on them once the work starts coming in.”
Costs of running a travel businesses
Your income is not the same as profits, and the next section of your financial plan will look at the costs.
Some costs are fixed - you will need to pay regardless of how much work you are doing. Others will depend on the level of business you are doing, and you need to be clear about each.
Work out your costs for different levels of customer - just like your income.
Your travel business needs premises
Walk-in business is now becoming rare, so you may not need costly premises on the high street. A desk or desks in a shared office or business incubator may be more than adequate. However, many people still prefer to deal with a friendly face and to arrange their holidays with someone they can feel they can trust. Many smaller agents work from easily-accessible office space where customers can call in.
The cost of retail premises on a busy high street will vary across the country, however, leasing a suitable unit may cost £24,000 a year in a small market town and £60,000 or more in London.
An office suite - perhaps over retail space - could offer the space you need for half the cost. Talk to local estate agents to find out the costs for suitable premises in your area.
“I found a little office over a butcher's shop. Not ideal, but there were plenty of people coming past, and word soon got out about that we were here. But the main thing was that the costs were low.”
The equipment you need in your travel business
Thankfully, your equipment needs will be minimal. You will need a laptop for every member of staff, a mobile phone - and desks and chairs. The costs will depend on the scale of your business and how many staff you need to equip, but expect to pay £1500 for each employee's basic kit of computer, chair and desk, plus all the extras they need - from business cards to software licences - to get down to productive work.
Draw up a list of the equipment you need, with the cost of everything. It may be worryingly high, but you may be able to use Asset Finance - leasing and HP - to bring in the equipment you need.
“I was lucky - I found a business that was shutting down and bought in all the office kit I needed. I arranged some finance so I didn't even need to pay for anything up front.”
Travel trade associations
You will need to be a member of the relevant trade organisations. Being able to show the ABTA - Association of British Travel Agents - logo will ensure you are taken seriously from day one but start-up companies may wish to progress to ABTA when they are more established. Requirements include:
- Your business must demonstrate a minimum paid-up share capital or proprietor's/partners capital of around £30,000 (but this is flexible)
- All members are required to provide a bond to reimburse clients in the event of the member's financial failure
- Registration fee of £330 plus VAT to be submitted with the application form
- One-off entrance fee of £1,200 plus VAT
You could also consider the Global Travel Group which is specifically aimed at start-up businesses and runs as a franchise to provide licensing and bonding to independent travel agencies. It provides support, IT booking system and national tour operator deals while allowing agencies to run as independent businesses under their own names.
“I had to take out ABTA membership. You can’t be a travel agent and not.”
Marketing yor travel business
One of the biggest costs you are likely to face is your marketing.
You have to make sure people call you when they are ready to travel. You can’t count on repeat business - competition is fierce and sales are price-sensitive, meaning that people will always shop around. Press advertising that will be seen by your target market is essential, and online and social marketing even more so.
Travellers have grown used to going online to arrange travel which means you need an effective web presence. If you are providing a specialised service, it can help to include material about your key destinations - it can also help ensure that it is your site that is seen when potential customers search online.
Your website will probably be how most of your customers find you - and it can act as a sales channel, letting customers book online, automating your business and driving up your productivity and profitability.
You need your website to be seen first when potential customers come online and search for your destinations or offers. It must look professional because people will make decisions about whether or not to do business with you based on the impression it gives about your service. And it must be 100% stable and absolutely secure if people are going to trust it with online bookings.
A website that meets all these needs with multiple pages to showcase destinations, interactivity to help people enjoy planning their holiday online and secure payment and booking facilities could cost £10,000 or more. You will also need to support it with content marketing - details about trips and destinations - and social marketing. This will help drive site visitor numbers but will require further external support. Realistically, you should expect to pay a minimum of £1000 each month to provide the fresh content and social links you need.
“I found a local agency who could set up a website for me. It felt like quite an expense, but I saw that a website was going to be the centre of my business.”
Staff for your travel business
Staff can be crucial to building your business. Travel agency work tends not to be highly paid. Salaries may be similar to basic office work but you will need to pay more for people with languages or experience. Many good people come into the travel business for the perks, which can include heavily discounted, and even free, holidays. Getting the right staff will be crucial to running and building your business.
Expect to pay a minimum of £18,000 a year for a trainee, more for someone with industry qualifications and established skills, and up to £25,000 for people with languages or a few years experience. But remember that you will have extra costs, such as National Insurance and Auto-enrolled pensions on top of your basic salary costs.
“I had some friends who were keen to come in and help - but even friends need paying every month. I knew I had to get the numbers right because they were depending on me.”
Insurance for your travel business
Adequate insurance is essential and a standard business policy will not suffice. Travel agents and their associated business may need insurance policies providing coverage for litigations, liabilities and a number of other risks that can arise when you least expect it.
Your insurance package needs to include:
- Employers liability – this is legally required for any business that employs people. It will cover you in the event one of your employees is injured or becomes ill as a result of working for you.
- Public liability – this will cover you if a member of the public is injured whilst on your premises
- Professional Liability - no matter how diligent you are, mistakes can and will happen. If you have made an error while planning for your client’s vacation or business trip, the client could sue your business. Professional liability insurance protects your travel agency from such claims.
Talk to an insurance broker with experience of the travel industry to see what your costs would be.
“I’ve seen what can go wrong when I was working in a large agency when a large party of doctors was delivered to the wrong airport in Florida and missed the start of their conference. I made sure I had cover against that happening to us.”
Putting it all together
When you have your projected income and costs in place, it is time to start using them to create a financial plan. Look at the ‘planning horizon’ - the time period of your calculations. You may need to look at both a short-term (usually 12 months) or long-term (2–5 years) basis.
There are some basic elements that you need to include
1. Start with a forecast of income. How many customers will you bring in during those crucial first few weeks and months? What kind of income will each one generate? Break your forecast down into every month for the first year and either on a monthly or quarterly basis for the second and third years. Be realistic. Your first year will probably not be very rewarding!
2. Create an expenses budget. You need to calculate gross margin. Gross margin is the sales - or revenue - your travel business generates, less the costs you incur generating them.
You need to include fixed costs such as rent and payroll and variable costs such as most advertising and promotional expenses.
This is a forecast, not accounting of actual figures, and you're going to have to estimate many of the figures you include, but you should include:
- Premises. The cost will depend on your location and the floorspace you choose, but you could easily spend £15,000 a year to lease a small office
- Running costs. You will be billed every quarter by the utilities. You can contact energy suppliers who may be able to give you an idea of likely consumption, based on the nature of your business, the location and size of your premises.
- Staff. They will need a basic salary and you need to take into consideration all the extra costs such as NI and pension payments.
- Marketing. This will be an ongoing cost at least to start with, as you will need to attract a constant stream of new customers.
3. Provide a cash-flow statement. Cashflow is vital for any business. You need a positive flow - more money flowing into your business than flows out. Realistically, this may be impossible to achieve during the first few months and you may need to look at ways of providing additional working capital to make up the shortfall.
Begin by projecting a cash-flow statement broken down into 12 months. How many sales, how much income will they bring in, how much will be taken up by the costs you need to pay.
Some business planning software programs have formulas built in to help you make these projections.
4. A profit and loss statement, detailing forecasts for your travel business for the coming three years. Base it on the numbers that you put in your forecast, expense projections, and cash flow statement.
This will help you ensure whether or not your business will actually be financially viable with the financial arrangements that you believe you will need to make, and the assumptions about the numbers of clients you believe are realistic.
The funding you may need
You will inevitably face challenges when it comes to funding a start-up business.
Traditional lenders are only interested in lending to established businesses with years of audited accounts. Even the new breed of online business lenders usually want evidence of a year’s trading, with online accounts and VAT returns before they will consider an application. As a start-up your business has no trading history - so they have no evidence that the finance they lend to you will be repaid.
Fortunately, there are solutions which can help start-ups, even in the current economic climate.
At Rangewell, we have experts who understand the travel industry business and the challenges you face. Our team are always keen to discuss the possibilities and to work with you to find the solutions you need.