In a business, there are fixed and variable expenses. Generally, the variable expenses will change with revenue (more revenue means higher variable expenses and vice versa). The type of expense will vary depending on what business you are analyzing and if you are looking at the cruise ship business, there are a few main costs that will be different depending on the volume / activity levels.
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Some of the typical variable expenses for a cruise ship business may include:
- Fuel expenses: Cruise ships consume a considerable amount of fuel, which is a significant variable expense for the business. Fuel costs can vary depending on the type of fuel used and the distance traveled. More tours during the year means more revenue and higher distances traveled = more fuel used. This is a little tricky though because it could be that you travel longer distances with lower passenger counts and charge more per passenger or travel shorter distances per tour but have more tours during the year, charging less per person, but doing more volume. Holding all else equal though, fuel costs should scale with revenues and be correlated fairly closely.
- Food and Beverage: Cruise ships offer their passengers a variety of food and beverage options, which can range from simple snacks to fine dining experiences. The cost of food and beverage is a variable expense that depends on the number of passengers, the duration of the cruise, and the type of menu offered.
- Port fees: When a cruise ship docks at a port, the company has to pay port fees, which can vary depending on the location and the duration of the stay.
- Crew expenses: Cruise ship companies have to pay salaries to their crew members, including the captain, officers, chefs, and service staff. The cost of crew expenses is a variable expense that depends on the number of crew members and the duration of the cruise.
- Maintenance and repair: Cruise ships require regular maintenance and repair to ensure their safety and efficiency. The cost of maintenance and repair can vary depending on the age and condition of the ship.
- Entertainment and activities: Cruise ships offer a variety of entertainment and activities to their passengers, such as shows, concerts, casinos, and water sports. The cost of entertainment and activities is a variable expense that depends on the number of passengers and the types of activities offered.
If you are trying to come up with a small business valuation, it is important to understand the businesses fixed and variable expenses so you can get a good picture of how your ownership strategy will effect operating cash flows, which should influence the purchase price.
You may also like this expense tracking template.
