How to prepare a Business Plan v3 270706 (final)

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QuickStart Guide to a Tourism Business

How to Prepare a BusinessPlan

Updated August 2006



How to Prepare a Business Plan

Contents

The Business Plan............................................................................................................. 3 What the Financiers Want.................................................................................................. 4 Types of Loan Funds Available.......................................................................................... 4 Cost of Debt....................................................................................................................... 6 Some Special Characteristics of Tourism Businesses....................................................... 6

ENQUIRIES

General enquiries or comments regarding the ‘Quickstart Guide to a Tourism Business’ or the ‘How to Prepare a Business Plan’ should be addressed to:

Tourism Western AustraliaDestination Development CoordinatorLevel 92 Mill StreetPERTH WA 6000

GPO Box X2261PERTH WA 6847

[email protected]

Tel: 08 9262 1700

Fax: 08 9262 1944

westernaustralia.com

© Tourism Western Australia 2006

DISCLAIMER

This document has been prepared by Tourism Western Australia predominantly from information and datagathered in the course of its activities. No person or organisation should act on the basis of any mattercontained in this document without considering and, if necessary, taking appropriate professional advice.Neither Tourism Western Australia, nor any of its employees, undertakes responsibility to any person or

organisation in respect of this document.

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Often banks will nominate their own valuer and their conservative valuations will usually be wellbelow yours.

Personal Details

A statement of your personal assets and liabilities and any other principals involved in the businessshould be included, as well as any other pertinent details, such as special skills and knowledge,prior experience in the tourism industry and generally anything that will support your case that youare a "fit and proper" person to be running a business.

Statutory Details

Provide details of the business structure, whether a limited liability company, partnership or justyourself as the sole trader. If a company structure is involved you will need to provide detailsabout the directors, company secretary and the location of the registered office.

Financial Reporting Details

It is likely you will need to provide the financial institution with a periodic financial report.

Appendices

Provide any additional information as necessary in support of your business plan. For example,market research information, statistics, consultant's assessments and so on.

What the Financiers WantBanks and other financiers are always on the look out for good investment opportunities. That'show they make their money.

Many first time investors get disheartened when the bank rejects their loan application. More oftenthan not, the bank is probably doing them a favour. The last thing that the bank wants to do is sell

you up.

If you do your homework right and provide a well-reasoned, substantiated business plan, you are,in fact, helping the bank to make a decision in your favour.

The attitudes of lending institutions toward tourism businesses can vary quite considerably.

Remember, banks and other financial institutions want to lend money. You can help them by:

• Providing accurate financial data including details of the type of finance being sought

• Providing substantiated cash flow projections (not figures seemingly plucked from the air)

•

Demonstrating sound business knowledge and strong expertise in tourism• Demonstrating the capacity to not only pay off the interest, but also repay the capital

Types of Loan Funds Available

Banks provide a variety of financial products for business investors such as:

• Term Loans

• Commercial Bills at both variable and fixed rates

• Overdrafts

• Bridging Finance

• Leasing, Hire-Purchase and Chattel Mortgages

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There are very few tailored or packaged products that are aimed specifically at the tourismindustry.

Term Loans

Fully drawn advances are granted for capital purchases such as land, buildings, equipment andmachinery, or for extensions to buildings. Loan terms can be from three to eight years but areusually about five years. The repayments generally consist of a principal reduction, plus intereston the balance of the account. In some circumstances, fixed rate fully drawn advances can benegotiated for terms of up to five years.

Commercial Bills

GeneralCommercial bills provide short term or long term finance for capital, carry-on or bridging purposes.There is a distinction between a bill facility and a particular commercial bill discounted under thatfacility. The bill facility may have a term of up to 5 years, but any particular bill will usually have aterm from 30 to 180 days.

When a particular bill matures, it can be paid out or, if the bank agrees, it can be ‘rolled over’ bydiscounting a new bill to take its place.

You may also find at times that the bill rate quoted in the newspaper is slightly different from the billrate you are quoted when you go to your local bank. Bill rates in the bill market vary minute tominute, but for any given bill they are fixed on the drawing date for the term of the bill. Bill ratesare continually changing, and so the rate quoted in the paper could be different from the rateapplying on the morning of the inquiry.

On top of the discount rate, borrowers will pay charges of approximately 2% to 4% to cover the riskmargins.

When a bill is drawn, the borrowers will not receive funds equal to the face value of the bill -instead the interest and charges for the term are deducted from the face value of the bill.

A minimum loan of $100,000 is preferred.

Fixed Rate BillsThese bills are a relatively new source of finance where money is made available for a fixed periodwith a fixed interest rate. The period of the loan can be up to five years.

A minimum loan of approximately $100,000 is preferred. Costs in addition to interest will be 2% to4%, depending on the size of the loan and the assessed risk of the loan. No principal repayment ismade during the term of the loan, but some repayment may be required at the time of the rollover.

It is possible to pay out a fixed rate, fixed term bill. Depending on whether bill rates have movedup or down relative to the fixed rate, there may be a penalty involved with this. Obtain a quoteprior to deciding to pay out a bill early, to identify the precise net cost or net benefit to you.

Overdrafts

Overdrafts are offered on cheque accounts to permit the account to fluctuate from credit to debit.Overdrafts are made available principally for working expenses. The limit is reviewed at leastannually. Banks do not like to see overdrafts used for long term core debts of a business, becauseoverdrafts are repayable on demand. Customers may be able to negotiate a lower-cost long-term

finance package rather than simply relying on an overdraft facility.

Tourism Western Australia 5




Tourism products are in fact, services and, as such, there are several characteristics which applyto any service sector, not just tourism, that you will need to be aware of.

• Seasonality of demand

Most tourist destination areas are characterised by fluctuating periods of demand called‘peaks’, ‘shoulders’ and ‘troughs’.

• Long term market development

Very few new businesses achieve maximum capacity utilisation in the early years ofoperation.

• Co-operative nature of competition

The competitive field for tourism is comprised of destinations. Competition at this levelrequires businesses, that would normally see themselves as being in competition, to workin a co-operative manner to jointly promote their destination.

• High fixed costs

Many tourism businesses have a high fixed cost component.• Single use nature of assets

Accommodation facilities in particular have limited alternative uses for the assets.

• High capital intensity

Many tourism businesses require substantial up-front capital investment. Seasonality andlong-term market development factors as explained above often mean the asset will initiallybe under-utilised.

The single use nature of some tourism assets can be a disadvantage when making capital gainsdecisions. Commercial investors can spread the risk across a number of sectors depending on the

industry of the occupants. However, there is greater risk when an investment is locked into asingle use industry like tourism. Consequently, capital gains for tourism (particularly theaccommodation sector) can be lower than other property investments.

In addition, some lenders question the security which a single use asset provides. Banks willnormally lend to the extent that they believe the cash flow of a business will at least repay theinterest of the original loan. As protection for repayment of the principal, however, loans arenormally secured over the assets used to generate the income stream. The value of these assetsis dependent on what the market will pay for them. An asset with only one end use such as amotel or a tour coach provides less security than assets with application across several industriessuch as an office building or a truck.

In short, many tourism investments present low profit streams in the short term, carry higher risksthan many other investments and generally produce modest capital gain.However, the prudent investor who takes the time to prepare a comprehensive business plan andtakes a longer term view to tourism investment can reap substantial financial gain.

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Tourism Western Australia 7

How to prepare a Business Plan v3 270706 (final)

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