Summary
Rho recently assisted a top tour operator in Kerala with significant cost and working capital issues. The company had zero visibility on costs per destination and was therefore unsure if the destinations sold were at a profit or loss.
Rho’s dedicated team of Cost Accountants and Virtual CFO partnered with the company to drive cost optimization through effective costing and cost control techniques. Numerous High Impact Initiatives were imparted that helped the company to not only identify loss-making destinations but also helped price tour packages better. The Company also received valuable insights to take informed decisions on all future strategies.
Client Situation
The tour operator being one of the top tour operators in Kerala, did not have any dearth of bookings. Due to increasing sales and the nature of the business, the company had enough cash flow and was in a comfortable operating mode. This resulted in the company not giving enough attention to its costs. The assumption was that high cashflow meant profits and the company did not realize the importance of analyzing the cost ingredients.
Due to mounting competition, the company started reducing the price of packages as per advice from the sales team, without knowing that they were losing money with every group departure. The lack of data on destination wise costs was a contributing factor. To accurately calculate the actual costs of a destination, Overhead costs have to be allocated using cost accounting techniques. This was completely ignored.
Also, December to March is traditionally a lean period for the company when international tour packages are few. Many of the manpower resources were underutilized during this period. The company used to face a working capital gap due to low bookings during this period forcing them to rely on bank / other loans to thrive during the lean period and in the process masking the real situation.
Rho’s Approach
Rho, drawing on years of providing costing and cost control services to business entities across different sectors – commenced by educating the Company’s personnel across disciplines.
A team of cost consultants, Virtual CFO, and back office support was formed to implement the cost control initiatives drawing a roadmap with distinct milestones. Rho’s cost accountants carried out a detailed analysis of the cost structure of the company, identifying the standard cost or the expected cost and then the actual cost. Destinations that showed a lot of variance from standard costs were identified and called out.
Post this, the Virtual CFO team did a deep dive into the cost variances of these loss-making destinations. The team immediately focussed on making the client destination level profitable through a combination of a) Price optimization and b) cost reduction.
Various pricing strategies such as Value-based Pricing, Cost+ Pricing, and Competitive pricing were explored. Post analyzing the competition, Customer Willingness to Pay, Internal Product differentiation, and Quantum of value-added, the Optimal pricing strategy was decided.
Cost reduction was carried out through the cross-utilization of resources across multiple functions that ensured cost reduction as well as faster process time.
The team also worked with the client to start inbound tourism during the lean period of December to March to ensure better manpower utilization and to meet working capital needs, which made additional contributions to the cash flow and profitability.
Results
Under hands-on support and collaboration, Rho was able to bring about significant changes in the client’s sustainability, and future growth and could scale the Company to greater heights which even started attracting investors. The company was able to sell destinations that were running at a 5% Loss prior to intervention to 8% profit. The working capital requirement was also reduced by 30% in the process and Manpower utilization during lean periods went up by 60%.
