Professional Documents
Culture Documents
Pre-Feasibility
There is no standard method or technique for doing a pre-feasibility. The
suggestions provided here should be used as a guide only. There are many
other approaches that can be taken. In the final analysis it will be your
decision as to which approach is best suited to your needs.
A pre-feasibility is undertaken in the very early stages of a business to
determine whether it is worth further consideration. This is where some ball
park figures are generated.
At the very least there are three key elements you will need to look at:
Financial Analysis
Market Analysis
Technical Constraints
Financial Analysis
The purpose of this part of your pre-feasibility is to determine the start-up cost
of the business, how it will be financed, what price will be charged to the
customer and what the likely return will be to you.
Market Analysis
The purpose of a market analysis is to determine if there is a market for the
product. It is strongly recommended that you speak to Tourism Western
Australia staff when undertaking your market analysis. We may be able to
provide some insights you have not yet considered.
Learn as much as you can about your potential customers. For starters, try to
find out:
What they buy?
Where your customers can be found? Are they mostly in Perth,
interstate, overseas or some mix of all?
When do they purchase? Do they have long lead times or make
spontaneous/impulse decisions?
Why they buy? What really motivates them?
What are your potential competitors saying about your prospects?
Technical Constraints
There is a real need to identify potential government planning regulations that
may need to be complied with, preliminary engineering and design issues
where applicable, and potential social and environmental impacts.
The Financial Quick Test
Here is a very simple approach to ascertain whether you have the financial
capability to consider doing a pre-feasibility.
The Business Hurdles
What will be the total
cost of the project?
Amount to be
borrowed
Revenue
Interest payments
=
All other costs
=
Principal repayments
Repayments hurdle
=
Desired Profit
Capacity
Utilisation
Price
Capacity
This is the basic number of saleable units of the product you intend having on
the market at any one time. For a hotel it is rooms. For a coach, boat or
aircraft it is seats.
Many accommodation operators prefer to talk in terms of room nights. The
formula used to calculate available room nights is:
Available Room Nights = Rooms Available x Nights Open for Business
Anywhere Motel
Anywhere Motel has 100 rooms. The owners want to express the motel's
capacity in terms of room nights. They also want to work out the revenue
potential of the property.
Firstly, let's work out the annual number of rooms nights available. This is
given as follows:
Annual Room Nights Available =
Room Nights
Utilisation
Because unused units of capacity can not be stored, you need to have a good
idea of capacity utilisation over any given period. Utilisation refers to how
much capacity was actually sold. Rarely will total capacity be sold every day
of the year.
Tourism operators refer to utilisation in terms of occupancy rates
(accommodation) and load factors (coaches, boats and aircraft).
The room occupancy rate for an accommodation establishment is given by
the following:
Occupancy Rate (%) = Rooms Occupied x 100
Rooms Available
Hence, the occupancy rate of an accommodation establishment is a ratio of
the number of rooms occupied to the total number available.
Worked Example
Anywhere Motel
If an average of 50 rooms is occupied each night by paying guests, then the annual room
occupancy rate for Anywhere Motel is:
Occupancy Rate =
50%
Anywhere Motel
The annual number of room nights occupied generated at Anywhere Motel will
be:
Room Nights Occupied
=
=
36,500 X 50%
18,250 Room Nights
The proprietors of Anywhere Motel produced and sold 18,250 room nights.
The remaining 18,250 room nights were, in a sense, wasted. They can not be
stored. Their capacity to generate revenue for the business has gone forever.
A room or a seat is said to be a highly perishable product.
It will be noted from the above that while the occupancy rate provides a basic
measure of market demand it does not tell exactly how many guests you can
expect at a given occupancy.
Annual occupancy rates and load factors rarely reach 100% and must be built
over time. Capacity utilisation is usually lower in the early few years of a
business than once it is established in the marketplace.
There are several problems associated with using occupancy rate as the sole
measure of performance or productivity. Artificial price decreases can boost
occupancies and consequently given an inflated view. This issue is
particularly important if you are considering buying an existing business.
Price
Pricing is the only marketing decision that will impact on revenue. All other
marketing decisions will impact on expenses. The average price you sell your
product at can be varied - it is the only element of revenue you do have direct
control over.
One of the more important factors you will need to consider when pricing your
product is that of travel agent's commission. In particular you need to be
aware of the tourism industry practices for marking up a price.
When working out the annual expected revenue flow you will be interested in
the average price (or tariff). However, the average price does not necessarily
mean the selling price.
The actual selling price can vary quite considerably. For example, high
season, shoulder and low season pricing, corporate, travel industry and group
rates, and so on.
Annual Revenue
Three factors combine to determine revenue, as follows:
Revenue = Capacity x Utilisation x Price
Depending on the nature of the business, for example, a coach tour or tourist
attraction, there are some subtle differences in the method of calculation.
It is important to keep in mind at this early stage that the revenue generated
by the business will not alone determine whether the investment is
worthwhile.
Worked Example
Anywhere Motel
The average room tariff is $120.00. The annual room revenue will be:
Rooms Revenue
=
=
=
The fair share is the starting point for further analysis. The new business may
be able to get more than this depending on its competitive characteristics.
Worked Example
Anywhere Motel
The proprietors of Anywhere know that there are six other competitive hotels and motels in
town with a total capacity of 900 rooms. They want to work out their likely fair share of the
market.
Fair Share (%) =
100 Rooms
900 Rooms + 100 Rooms
x 100
= 10%
The proprietors can expect to get 10% of the market. If the existing accommodation
operators are experiencing an average of 60% occupancy, the new average once your
business becomes established will be 54%.
Paying guests generate guest nights. However, guest nights and room nights
are not the same thing because more than one guest can be accommodated
by one room. Therefore, in order to find the required number of guests, you
need to know the number of guests per room. The formula for calculating
guest nights is:
Guest Nights = Room Nights x Guests per room
The average number of guests per room will need to be estimated. It is rare
for this figure to be greater than 2.0 (unless the business operates exclusively
in the family market). Guests per occupied room for a locality can often be
found for a locality in the Australian Bureau of Statistics Tourist
Accommodation Survey.
The second variable that needs to be known before guest arrivals can be
calculated is the average length of stay. Average length of stay can often be
found from industry averages through the Australian Bureau of Statistics
Tourist Accommodation Survey. Where statistics are not available, you will
need to make a best guess.
Guest Arrivals
These two variables, guest nights and average length of stay, can be divided
to find guest arrivals:
Guest Arrivals =
Guest nights
Average Length of Stay
Guest arrivals can often be found for a locality in the Australian Bureau of
Statistics Tourist Accommodation Survey.
Worked Example
Anywhere Motel
On average guests stay two nights at the motel and the average number of
guests per room is 1.2.
Therefore:
Guest Nights
room
Guest Arrivals
Fixed Costs
Fixed costs tend to remain relatively stable over a given occupancy range.
Examples are
Depreciation
Lease payments
Office expenses
Insurances
If loan funds are to be sought, a major expense item will be interest payments.
The use of loan funds also means that you intend to introduce debt into the
capital structure of your business. Your business will then be described as
geared. Gearing will be discussed further in a later section.
Variable Costs
Variable costs, on the other hand, tend to change in direct proportion to
changes in occupancy.
Laundry costs
Agents Commissions
Advertising
Some costs, such as advertising, have both a fixed and variable component.
For example, some base level of advertising will be maintained regardless of
the level of sales.
Profitability Forecasts
Once you have an idea of revenues and expenses it is possible to start
making some profitability forecasts.
This can best be achieved through computer spreadsheet analysis.
An example of a typical spreadsheet for several businesses is available from
Tourism WA. Take special note of the presentation and not the actual figures
themselves. It is common to provide projections for the first five years of the
business and, for the first year, monthly figures.
Cash Flow Projections
The net cash flows of a business and the profit generated in a given year are
not the same thing. Many businesses have in the past failed despite rapid
profit growth. Profit can increase without a corresponding increase in net
cash flow. For example, depreciation does not involve any cash outflow
although it is charged as an expense against income. Furthermore, principal
payments on borrowings do not feature in the profit and loss statement.
These and other adjustments must be made when determining cash flow.
The business spreadsheet examples provide both profitability and net cash
flow projections and reconciliation between both.