Harvard Case - Classic Tours, Inc.: Financial Projections for Starting a Business
"Classic Tours, Inc.: Financial Projections for Starting a Business" Harvard business case study is written by E. Richard Brownlee II. It deals with the challenges in the field of Accounting. The case study is 3 page(s) long and it was first published on : Aug 23, 1994
At Fern Fort University, we recommend that Classic Tours, Inc. proceeds with launching its business, focusing on developing a comprehensive financial plan that addresses key areas like capital investment, operational costs, pricing strategy, and cash flow management. This plan should be built upon a robust financial model that incorporates realistic assumptions and scenario analysis to ensure the company's financial viability and long-term success.
2. Background
Classic Tours, Inc. is a new venture aiming to provide guided tours in the historic city of Charleston, South Carolina. The company is founded by three individuals with extensive experience in the tourism industry. They are planning to offer a variety of tours, including walking tours, ghost tours, and historical tours. The case study focuses on the financial projections needed to launch the business, including capital investment, operational costs, pricing strategy, and cash flow management.
The main protagonists of the case study are the three founders:
- John: Experienced tour guide with a strong understanding of the Charleston tourism market.
- Mary: Experienced marketing professional responsible for developing the company's marketing strategy.
- David: Financial expert responsible for creating the financial projections and managing the company's finances.
3. Analysis of the Case Study
The case study presents a comprehensive overview of the financial aspects of starting a tour company. We can analyze the case using the following frameworks:
Financial Framework:
- Financial Statements: The case study emphasizes the importance of creating accurate and realistic financial statements. The company needs to develop a detailed balance sheet to track assets, liabilities, and equity. An income statement is crucial to project revenue and expenses, and a cash flow statement will help manage cash flow and ensure the company has enough liquidity to operate.
- Costing: The case study highlights the need for accurate cost accounting. Classic Tours must develop a robust cost system to track direct and indirect costs, including labor, transportation, marketing, and administrative expenses. Activity-based costing can be used to allocate costs more accurately to specific tours and customer segments.
- Financial Performance Measurement: Key performance indicators (KPIs) need to be established to track the company's financial performance. These KPIs should include metrics like revenue per tour, customer satisfaction, and profitability. Variance analysis can be used to compare actual performance against the budget and identify areas for improvement.
- Capital Budgeting: Classic Tours needs to carefully evaluate the capital investment required for the business. A break-even analysis will help determine the minimum number of tours needed to cover fixed costs. The company should also consider the payback period and net present value (NPV) of potential investments.
- Financial Analysis: The case study emphasizes the importance of conducting thorough financial analysis. This includes ratio analysis, which can be used to assess the company's liquidity, profitability, and leverage. Financial statement analysis will help identify trends and potential risks.
Strategic Framework:
- Business Model: Classic Tours needs to define a clear and concise business model that outlines its value proposition, target market, revenue streams, and cost structure.
- Pricing Strategy: The company must develop a competitive pricing strategy that considers factors like cost structure, target market, and competitor pricing.
- Marketing Strategy: A well-defined marketing strategy is crucial to attract customers and generate revenue. This should include a mix of online and offline marketing channels, such as social media, website, and partnerships with local businesses.
- Growth Strategy: Classic Tours should develop a growth strategy to expand its offerings and reach new customer segments. This could include adding new tours, expanding to new markets, or partnering with other businesses.
4. Recommendations
Develop a Comprehensive Financial Plan: Classic Tours should develop a detailed financial plan that includes:
- Capital Investment: Identify and quantify all capital investments needed for the business, including vehicles, equipment, marketing materials, and technology.
- Operational Costs: Develop a comprehensive budget that includes all operational costs, such as labor, transportation, marketing, and administrative expenses.
- Pricing Strategy: Determine a competitive pricing strategy that considers cost structure, target market, and competitor pricing. Consider different pricing models, such as value-based pricing, cost-plus pricing, and competitive pricing.
- Cash Flow Management: Develop a cash flow projection to ensure the company has enough liquidity to operate and meet its financial obligations. Implement strategies to manage cash flow, such as offering discounts for early payments or negotiating payment terms with suppliers.
Implement Robust Financial Management Systems: Classic Tours should implement robust financial management systems to track financial performance, manage cash flow, and ensure compliance with accounting standards. This includes:
- Accounting Procedures and Policies: Develop a clear set of accounting procedures and policies that comply with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), depending on the company's location.
- Financial Reporting: Establish a regular reporting cycle to provide management with timely and accurate financial information. This should include monthly financial statements, cash flow statements, and variance analysis reports.
- Internal Controls: Implement strong internal controls to prevent fraud, ensure accuracy of financial records, and protect the company's assets.
Conduct Regular Financial Analysis: Classic Tours should conduct regular financial analysis to assess the company's financial health and identify areas for improvement. This includes:
- Ratio Analysis: Calculate and analyze key financial ratios to assess the company's liquidity, profitability, leverage, and efficiency.
- Financial Statement Analysis: Analyze trends in financial statements to identify potential risks and opportunities.
- Variance Analysis: Compare actual performance against the budget and identify areas where the company is exceeding or falling short of expectations.
Develop a Marketing and Sales Strategy: Classic Tours should develop a comprehensive marketing and sales strategy to attract customers and generate revenue. This includes:
- Target Market Identification: Identify the company's target market and develop a marketing strategy that resonates with their needs and preferences.
- Marketing Channels: Utilize a mix of online and offline marketing channels, such as social media, website, email marketing, partnerships with local businesses, and traditional advertising.
- Sales Process: Develop a sales process that includes customer acquisition, lead generation, and closing deals.
Focus on Customer Service: Classic Tours should prioritize customer service to build a loyal customer base and generate positive word-of-mouth referrals. This includes:
- Providing Excellent Service: Train tour guides to provide knowledgeable, engaging, and memorable tours.
- Responding to Customer Feedback: Actively solicit and respond to customer feedback to identify areas for improvement.
- Building Relationships: Build relationships with customers to encourage repeat business and referrals.
5. Basis of Recommendations
The recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations are consistent with the company's core competencies in tourism and its mission to provide high-quality, memorable tours.
- External Customers and Internal Clients: The recommendations consider the needs and preferences of the company's target market and the needs of the company's internal clients, including the founders and employees.
- Competitors: The recommendations take into account the competitive landscape in the Charleston tourism market and aim to differentiate Classic Tours from its competitors.
- Attractiveness ' Quantitative Measures if Applicable: The recommendations are supported by quantitative measures, such as the break-even analysis, which helps determine the minimum number of tours needed to cover fixed costs.
- Assumptions: The recommendations are based on realistic assumptions about the Charleston tourism market, the company's operating costs, and the pricing of its tours.
6. Conclusion
Classic Tours, Inc. has a strong foundation for success in the Charleston tourism market. By implementing the recommendations outlined in this case study solution, the company can build a solid financial foundation, develop a competitive business model, and achieve its long-term growth objectives.
7. Discussion
Other alternatives not selected include:
- Partnering with an existing tour company: This would provide Classic Tours with access to an established customer base and operational infrastructure. However, it would also limit the company's control and potential for growth.
- Focusing solely on online marketing: This would be a less expensive option than traditional marketing, but it may not be as effective in reaching the company's target market.
Risks associated with the recommendations include:
- Competition: The Charleston tourism market is competitive, and Classic Tours needs to differentiate itself from its competitors to attract customers.
- Seasonality: The tourism industry is seasonal, and Classic Tours needs to manage its cash flow and expenses to account for fluctuations in demand.
- Economic Downturn: An economic downturn could reduce tourism spending and impact the company's revenue.
Key assumptions include:
- The Charleston tourism market will continue to grow.
- The company will be able to attract and retain qualified tour guides.
- The company will be able to effectively market its tours and attract customers.
8. Next Steps
Classic Tours should implement the following steps to launch its business:
- Develop a comprehensive financial plan: This should be completed within the next 3 months.
- Secure funding: The company should seek funding from investors or lenders to finance its capital investments and working capital needs.
- Develop marketing materials: This should include a website, brochures, and social media presence.
- Hire tour guides: The company should recruit and train qualified tour guides.
- Launch the business: Classic Tours should launch its business within the next 6 months.
The company should monitor its financial performance closely and make adjustments to its business plan as needed. Regular financial analysis and reporting will be crucial to ensure the company's long-term success.
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Case Description
The purpose of this case is to allow students to confront the issues related to starting a new service business, such as evaluation of the business concept, identification of different customer segments, and assessment of the comprehensive service package necessary for long-term success in a competitive service industry. Students are also asked to record projected transactions, prepare projected financial statements, and perform a break-even analysis. It is intended for use early in a course on financial accounting and reporting. A companion case, Classic Tours, Inc.: Strategic and Financial Issues in Starting a Business, (UVA-C-2141), was subsequently written for use in such courses as Starting New Ventures or Entrepreneurship, where greater emphasis would be placed on the strategic considerations and somewhat less emphasis would be placed on the financial details.
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