Tourism is cyclical. This has a direct impact on managing tourism ventures and managing cyclicality becomes key. As management tenures grow shorter, there is a tendency to focus on the Income Statement which is a short term measure of success as opposed to the balance sheet. Yet, it is a clear focus on the balance sheet that ensures success of the firm in the long term.
Key items to focus on while building balance sheet strength:
- Look at on loan quality
- Look at liability structures
- Capital structure
- Lower costs of funding
- Alternative funding sources
- Unencumbered assets
These items require a long term focus and ideally should be repeatedly ingrained in all tourism ventures including startups. What is my hurdle rate, what is my return on invested capital and what is the impact to liquidity are good questions to ask. Similarly in addition to revenue and profit targets, targets on return on invested capital, margin targets, free cash flow targets and seasonal targets should be used from the beginning.
Ultimately a strong balance sheet makes for a good moat. This not only ensures that the business is prepared for the cyclicality of tourism ventures, it also leads to better decision making –led by strategy and not by other immediate needs that emanate from a delicate balance sheet and force short term thinking.