Financial Projections

CAPE PROJECT SCOPING STUDY FINAL REPORT

Chapter 7. Illustrative Financial Projections for Years 1 - 5 of Opening to the Public

n.b. The text in this chapter should be read in conjunction with the illustrative spreadsheets

that accompany it. The spreadsheet is also shown at Appendix 4 for quick reference, and

electronic copies have already been distributed to members of the CAPE Steering Group .

The spreadsheet is written in Excel, and operates largely on formulae acting on estimated

visitor numbers and average spends on site across the first five years of operation. The

projections can therefore be manipulated electronically to see the effects of a great many

"what ifs”. Please note that the readers' own versions of these spreadsheets may not be

represented as Ilex's work or Ilex's opinions about the viability of the project.

The spreadsheet is written as a P&L type account in standard form for the hospitality

industry. Added near the bottom, is a cashflow calculation showing the annual, cumulative

effect of operating profit,s losses and movement of funds in the first 5 years of operation.

1.1 Introduction

As may be see in another chapter of this report (in our initial market and competitor

analyses) we believe the scope for visits to Cape will lie between 50,000 and 150,000 visits

per annum at maturity. At less than 50,000 visits it is unlikely that the project would be

perceived as being targeted to achieve sufficient economic benefits to attract enough

capital for investment at the outset. At the upper end of these numbers, the wider

economic impact could be perceived as significant in terms of direct, indirect and imaging

benefits. At Scoping Study level, the range of potential visits is as wide as it is because

there are as yet so many unknowns about the project, eg; large or small site; well or less

well located; and the topic, storyline, and exhibition style ultimately to be chosen. But, we

have based this first spreadsheet on the project achieving 100,000 visits at maturity after 5

Years of opening to the public. This is a good number in Wales and not a bad one in

England. Although "Old Clwyd" is entirely Welsh, the available market for the Cape project

is also substantially English, across the border. So, the average pattern of visits to Welsh

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CAPE PROJECT Scoping Study Final Report Ch 7 Financial Projections

attractions may not be entirely appropriate as a comparator in this case. Given market

location, the project should do better.

1.2 Projection of Visitor Numbers

Projecting visitor numbers more precisely will depend on many factors, but particularly

market location and the strength of the public proposition to visit. On the one hand, a small

town-centre site with minimal floor space for displays and little room outside for dedicated

parking (eg; something like the Old Courthouse, Mold) will limit scope on numbers quite

significantly. On the other hand, a large highly visible site with easy access off a main

tourist trunk road, with plentiful dedicated car and coach parking, and a big impressive

show, will give the project a platform to achieve higher numbers. Each particular

development proposal will need to be assessed for potential numbers against many

influential factors. In another part of this report we have described 3 "genres" of site, each

of which would deliver different visitor profiles.

1.3 Two Phases of Product & Market Development

In the financial projections, we indicate the two-phase approach to development that we

advocate for this project. We advise this in order to plan stimulation of the market

deliberately, by product development and marketing, at a crucial stage two or three years

after opening to the public for the first time. This is when sustainability of this kind of

project is at it's most vulnerable. The financial projections anticipate adult admission prices

at £5.95 in Phase 1 and £6.95 in Phase 2, and total admissions income is diluted to take

account of concessions. In the spreadsheet, average admission prices are calculated by

taking VAT off £5.95 and £6.95 respectively and discounting these figures by a further 15%

to allow for Children, OAP’s and Groups in the mix of ticket sales.

The difference in value and experience for the visitor between Phase 1 and 2 would lie in

new and additional capital development especially new exhibitions created for the public to

marvel at from Year 3 onwards. In itself, Phase 2 - however defined - will potentially give

great marketing impetus to the project in Year 3, or in whichever year(s) significant new

development is planned.


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1.4 Notes to the Illustrative Financial Projections

1. The Projections: They are shown as a 5 Year P&L type account, excluding VAT.

Also, no allowance is made for r.p.i. inflation in expenditure and income during the 5

Year operating period that is covered. Experience shows that these can be more or

less self-cancelling. The most important aspect of the business must be to sustain and

grow the annual number of visits. This is the main financial driver and will be more

important than any other business factor when operating Cape sustainably.

2. Phased Development: The project is planned in two phases of product development

for reasons of market sustainability. But, this will also provide an opportunity for capital

drawdown to be spread over a longer period.

3. Year 1 Opening: Taking many factors into account, the most favourable time to open

an attraction of this kind in this location for the first time is probably late April or early

May, depending upon the timing of Easter and Mayday. The most appropriate

financial year would be the calendar year or the fiscal year. In either case Year 1 is

not likely to be a 12 month year. Adjustments should be made to income and

expenditure accordingly for a short Year 1, and we have used 8 months as a basis.

4. Admission Prices: are set for adults at £5.95 in Phase 1 and £6.95 in Phase 2 in the

spreadsheet. These prices are discounted by 15% for concessions in the manner

explained above. It is important that concessions work as an aid to marketing the visit

to Cape, and it is very important that they are not applied to such an extent that they

that they reduce admissions income by more than about 15%. However, this will

depend very greatly on the number of school children in the mix, and many Welsh

attractions "buy numbers" by excessive discounting in the market for organised school

visits. It is a worthy thing to do, of course, particularly for an educational charity. But,

we would expect Cape to charge for admitting school children and advise that the

operating plan for Cape should not be for adults and families segments of the market

to be under-represented in the mix.


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5. Guide Books: The price and "strike rate" at which they are sold are very important to

both income generation and marketing. The calculation we have used is that Guide

Books would sell at about £2 each (they are non-vatable) at a strike rate of about 1:7

visitors. This is possible, but will require constant motivation of the sales staff to do it.

6. Corporate Hire: We have entered some notional figures, which will need to be

considered carefully depending on site and building. It will be an important part of the

architect's brief that the building should be adaptable and flexible for events and

corporate/private hire.

7. Corporate Catering: We have not entered figures for this, but advise that net income

generation will be achievable, particularly if catering is outsourced in exchange for a

commission or a percentage. Space, services and equipment - preferably for outside

caterers use - need to be part of the architect's brief.

8. E-commerce & Mail Order: We are not sure if this will be viable as a line of income

worthy of separation from Gift Shop income, but it might be. No figures are entered for

the time being.

9. Grand Total Income: In the figures shown, income grows proportionately to visitor

numbers, except in admissions where there is a £1 per head increase in exchange for

Phase 2's product development. There will be an argument for increasing all the other

spends per head in Phase 2 as the operation gets into gear and sales activity is more

efficient, but we have not increased these expectations in the figures. Note that total

income over 5 years is projected at about £3 million, and visitor numbers in excess of

400,000 in these figures. These are important numbers as far as wider economic

impact and imaging benefits potentially deliverable by Cape are concerned.

10. Costs of Sales: These are the direct costs of purchasing items for retail sale. They

are itemised at achievable percentages of sales, but must be worked hard for in a

mixed activity business where the principal income stream comes from selling tickets.

Total costs of sales are small compared to total visitor income, accounted for by the

fact that ticket sales have no cost of sales, only overheads. We find from experience


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that Retail and Catering cost of sales at attractions cannot be managed as cost

effectively as in pure retail and catering enterprises. For one thing, waste is greaterer,

though that is not the only factor. But, if achieved and maintained, our estimates will

be found to be reasonable C/S% levels returning a very useful gross margin to the

business.

11. Gross Surplus: This is comparatively high, for the reasons given above. Low costs

of sales are balanced at attractions by relatively high overheads which can be very

difficult to control, particularly in publicly funded projects managed for charitable

purposes.

12. Overheads, Salaries: Salaries and Promotion are usually the two largest overhead

items. Employment is usually calculated in terms of Full Time Equivalent posts (fte's).

The average attraction employee is relatively low paid, and an fte employee might cost

Cape a figure in the region of £12,000 pa including all employer contributions. A

general manager with commercial operating and marketing skills is likely to cost a

figure in the range of £35-£45,000 pa including employer contributions. It would be

possible to recruit at a lower salary, but this will introduce a risk to the project. A key

question to be resolved is how and by whom the prehistoric collections will be curated.

This will depend on the size and quality of the collection and the intended "borrowing

policy" of the project sponsors and managers. There might be an argument for making

a qualified curator the general manager of the business, but we think not. Financial

viability out of commercial enterprise is key, and we advise that the general manager

must be competent in this area, first and foremost. If Cape becomes a Charitable

Trust Project, it will be able to recruit volunteers to help operate it on a daily basis. This

must be managed very skilfully, and does carry a small but definite cost for

recruitment; volunteer training; travel expenses (sometimes); and some volunteer

hospitality during the operating year. These costs are relatively small, but real, and are

notionally included in the overhead for salaries in our figures.

13. Overheads, Promotion: Normally the Promotion Budget is the first casualty in this

kind of project when visitor numbers start to decline. A dreadful downward spiral in

numbers is then virtually guaranteed. It will aid Cape if the eventually agreed


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Promotion Budgets are sacrocanct, ring fenced, and inalienable, though they rarely

are. Actually, it is easier to control staffing costs than to manage a business that is

under-resourced for promotion. In the spreadsheet, in Year 3, Cape should allow more

than £83,000 (15% of gross surplus) to promote the business at the launch of Phase 2.

There are two possibilities, (a) to increase the £83k out of revenue income (say to

£125k), or (b) Capitalise Phase 2 in such a way as to provide the increase in promotion

spend. We favour the latter course. So, the spreadsheet would stay as it is. We

believe it would be easier to raise the additional promotion spend that would be

required as "working capital" for Phase 2 than to burden the P&L costs with about £40k

of additional, one-off Phase 2 promotional costs. It should be noted that we intend all

of the promotion budget to be direct spend on advertising and publicity. Our promotion

budget does not include the salary of a marketing manager, though it could include

fees to a PR agency. We would recommend that marketing management is

undertaken by the general manager and a competent secretary.

14. Depreciation: In accounting law, charitable trust organisations may not be obliged to

account for depreciation, but only on condition that they preserve their assets in "as

new" order. Our advice is that the Cape project should ignore this possibility and

depreciate its assets at appropriate rates (variable, item by item) in its annual

accounts, as per commercial practice. The future costs of renewal and refurbishment

cannot be ignored, though it is true to say that most trusts do ignore it and rely on

future grant aid applications to compensate for their lack of depreciation and foresight.

We cannot give guideline annual figures for depreciation in the spreadsheet, because

so little is yet known about the capital cost of development. But, in a £5m project,

about 50% would be likely to go on bare building costs and 50% on content and fit-out.

The building might be depreciated at say 2% pa, whereas small high-tec items would

be depreciated over 2 or 3 years. If and when Cape finds itself in a position to move

forward, longevity of key assets and consequential depreciation rates will be very

important financial issues and "lifetime cost" is a real investment issue for Cape.

These matters must be taken into account in project plan generally and the architect's

and designer's briefs particularly. There will be great financial danger in a project of

this nature if rigid "lowest tender", or ill-considered "best value" procurements are

chosen. Buying cheap can mean buying twice.


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15. Net Surplus: It is perfectly acceptable to make losses in early years as long as a

project breaks even and moves into sustainable levels of profit within a reasonable

time frame. Here, we show in our illustration an ideal scenario where only reasonable

losses are incurred in Years 1 & 2, and profits build gradually throughout Phase 2.

Cumulatively over 5 years cashflow eradicates early losses, and in this example shows

a 5 year surplus of £113k. However, we would advocate that the operating losses

shown in Years 1&2 - along with pre-opening revenue costs which we have not

estimated for the Scoping Study - should be treated as "working capital", and the sums

involved should be included in the capital funding exercise. If this was the case the

cumulative Net Surplus after Year 5 would be £277k, not £113k - which would make a

sensible depreciation figure more affordable.

16. Cashflow: There is an automatic calculation for annual cashflow movement at the

bottom of the spreadsheet. This will be affected favourably if "below the line" income

can be generated by means of grant aid, say towards Education or Curatorial costs.

There is also space here to enter working capital figures, as referred to above.

17. Caution: These figures are illustrative only. They are not yet posited on a definite

example of development upon which market response and operating costs can be

judged more accurately. But within the terms of the Scoping Study, we believe that

this set of projections can be intelligently developed to suit one specific case or

another as Cape considers whatever sites might potentially become available.

The figures in this spreadsheet can be articulated, for example, to plan the revenue

operation of a Cape project at 50,000 visits pa just as easily as at 150,000 pa. On

bigger visitor numbers, some ratios and spends would change. Having a careful

revenue plan in advance of commissioning the capital development will help create an

affordable business plan for the revenue phase of this project. Sustainable generation

of income, and constant, disciplined control of costs are all that the project will have to

sustain it for it's lifetime of operation.


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Whilst all sorts of future grants should be applied for, successful post-opening grants

in aid should be regarded as windfalls. The business must plan for what can be spent

out of income in the years ahead. There is always the possibility, of course, that the

project could prove so valuable and important that it could be given financial shelter

by a national institution, particularly, for example, to provide free admission to children

in organised school parties. But, until such a day, we believe that the trustees and

sponsors of this project must plan to commission a building and exhibitions that are

affordable to operate on the net income that is generated year on year.


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Financial Projections

Economy & Finance

Transcript of Financial Projections