Black Water Rafting Case Analysis
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CRITICAL ISSUES
Black Water Rafting has outgrown their original business plan, goals, and partnership setup; to ensure growth, protect itself from impeding competition, and to ensure future financing Black Water Rafting must establish a strategic plan for the next two years.
Because of external pressures from both competition and uncertainty about their primary tour, which accounts for 66.7% of their income, Black Water Rafting must diversify their offerings to customers to ensure future growth and a competitive advantage.
As external market conditions and the environment change, such as the land rights of the native tribes of New Zealand, private landowners and a new hotel proposal, Black Water Raftings profitability and ability to react in the market is affected.
Increasing competition in the Waitomo area is slowly eroding market share from Black Water Rafting, through increasing rafting tours, tourist attractions, and the construction of a new restaurant and gift shop.
ANALYSIS
Originally Black Water Rafting was setup as a partnership, which handicaps their ability to take advantage of investment options. By incorporating Black Water Rafting will be able to sell a minority stake in the company to The Helicopter Line raising funds for future capital expenditures. Furthermore, Black Water Rafting would have funds for future use but also retain decision-making power. Also, another benefit of incorporating is that Mr. Ash and Mr. Chandler will have the ability to issue shares to specific long-term employees, giving them a sense of ownership in the business staving off defections and possibly the creation of additional competition. Moreover, Mr. Ash and Mr. Chandler would limit their personal and vicarious liability should anything go wrong during a trip.
With a 10% stake in a new property, Black Water Rafting will require capital to fund development, but with a developed new property Black Water Rafting would be able to diversify their offerings to customers and lessen the reliance on one product line and one cave location. With 60 hectares of pine forests on the new property, Black Water Rafting could research outdoor activities, which would include ATV tours and walking tours. The more activities that Black Water Rafting can offer customers, the more revenue possibilities they have. Exhibit 4 outlines that if 10% of the 23, 994 customers that visited Black Water Rafting in 1995 – 1996 participated in ATV tours and walking tours, an additional combined amount of $167,950 in revenue could be collected. Moreover, if 30% of the 23,994 visitors took part in combo tours, an additional $763,009 in revenue could be realized. By having multiple activities Black Water Rafting will be able to establish a one-stop-for-everything quality, but at the same time almost doubling their net income as project in Exhibit 1. However, Black Water Rafting does not have a solid financial base, as of year ending March 31, 1996, to be in a position that would provide favorable assistance from lenders to explore new ventures.
Outlined in Exhibit 5 as of fiscal year ending March 31, 1996, Black Water Rafting had a negative working capital of $66,041. This is an indication that there is a limited availability of capital to fund short-term operations. Furthermore, Black Water Rafting has a current ratio of 0.564:1, which would further indicate possible difficulties meeting short-term debts as for every $1 dollar of current debts Black Water Rafting has $0.60 of current assets to pay for it. For the 1996 fiscal year, Black Water Rafting had a debt-to-asset ratio of 1.058. According to Investopeida a debt-to-asset ratio higher than 1.00 indicates that Black Water Rafting has a high reliance on debt to finance assets. The total debt ratio, a look at total liabilities and equity, indicates that 95% of debt is used to finance operations. Moreover, as outlined in Exhibit 5, the debt to equity ratio of 17.4 signifies that for every $1 dollar of the owners equity in the company there is $17.4 dollars of debt highlighting Black Water Raftings inability to cover their debt. Black Water Rafting is in a position were it has liquidity issues, solvency issues and the initial signs of future cash flow problems, which may be a hindrance to establishing financing from lenders.
The decision of the Maori to modify the cave setup may have adverse affects on Black Water Raftings underground tours due to the severe aesthetic changes required to move the caves entrance. Negotiations between land rite holders and The Helicopter Line ensure that Black Water Rafting will have access to the caves but the changed aesthetics may affect the number of tourists attending.
A new hotel in the town of Hamilton