Case Study
Companies in the service sector especially in the field of Tourism generally work on advance payments, So if we look at their cash flow situation, they will always be in a comfortable position, as both inbound and outbound tourism is flushed with money. Hence cost control, cost-cutting measures, or any kind of austerity measures are generally not conceived as a requirement to run that business. The mode of conducting business as far as the financial aspect is concerned with be smooth and relaxed as opposed to other Industries where cash flow will almost always be tight.
Most Tour operating Companies will be controlled by the owner himself, there will be no mismanagement and turnover will be huge, cash flow being on killer mode. Money will always be rotating as parties pay in advance, airlines and agents need to be paid only subsequently. Small problems arise when based on competition myth, employees or the staff who are selling the tour packages tend to undersell for easy selling. They are able to undersell not on a calculated basis, but general underquoting to convert the package and because they have no idea about the actual cost of each activity.
The importance of cost comes here – if each activity is estimated and a cost fixed for it with a minimum margin for the Company, the method of underquoting will not arise. If deviating from the estimate or cost, it will show up as underselling and corrections can be made if necessary.
Most often, this practice will go on for years together as cash flow is abundant and rotation of money is always happening. The actual profit is often not calculated, hence the honeymoon period goes on for years together. When there is a huge natural calamity or a pandemic like we are experiencing now, or when there is a dearth of tourists, most of this comes crashing down. Things go out of control, there will be no cash flow for salaries, no receipts, more payables and the day-to-day activities of the Company comes to a standstill due to the cash crunch. This results in a loss of reputation for the stakeholders.

What can we learn from this:-

1. Each activity should be based on a cost estimate and we should ensure that the money comes back for every service and the accounts maintained for every activity.
2. Cash flow coming in is not our money, only the percentage of profit generated from each package is ours.
3. Estimate of services not included in the original package is accounted for, billed and money to be received. In most cases, these activities go unaccounted, and such extra services if not billed and money received will render the package a loss-making one.
4. Hence from the above, it could be observed that knowing the cost can save you from making unwanted losses.