B&B Cash Flow

Cash flow is the movement of money through your business. At its basic level, it is your gross income (money actually received) and your expenses, fixed and variable. Depreciation, amortization, sales tax and unpaid debts are not part of your cash flow. The “bottom line” is your net income.

Your income minimally comes from room sales. It might also include income from a gift shop or from special events, or other associated businesses you run from and for your B&B. How do you project annual gross room income? Multiply the room rate by 365 (or the number of days you’ll operate during the year) and then multiply that by the anticipated occupancy rate. How does monthly occupancy rate get calculated? Divide the number of rooms rented (occupied) by the actual available room nights (the number of rooms times 30 days — or whatever). For example: If you have a 7 room inn and rent 100 room nights during February, the occupancy rate for February is 100/(7×28)=51%. These formulas are covered in the Money ebook.

Expenses include fixed and variable costs. Fixed expenses are those which don’t change, regardless of occupancy. Variable expenses are those affected by occupancy or by the season. There will be a sample budget breakout later in the book.

  • Fixed expenses include, but are not limited to, innkeeper’s salary, telephone, property tax, insurance, dues and subscriptions, advertising,accounting and legal fees, and reserve accounts.
  • Variable expenses (because of occupancy) include wages, utilities, trash removal, office supplies, laundry, cleaning supplies, bank fees, food.
  • Variable expenses (due to seasons) include repairs and maintenance, lawn care, snow removal, firewood, ….
  • Mortgage generally, but not always (some interest rates adjust — monthly, quarterly, or annually) is a fixed expense but it doesn’t go into Net Operating Expenses.

To help you budget your expenses start with the suggested percentages I provide in the Money ebook, covered in the chapter called Projecting Expenses. Based on the homework I did for a four-room inn, my innkeeping experience, and the above sources, I apply rule-of-thumb percentages to my gross room income to help budget expenses. One difference between my projections and those offered by others is that I project two savings accounts for B&B improvements and expansion.

Financials can be available from the seller and those numbers will help your analysis. Don’t let those numbers deter you from doing your own projections, though. Create your own cash flow projections and then compare those to the numbers the seller provides. That process will raise questions that you will want to research for clarification and answers. You’ll have questions like why is the seller spending $X rather than $X+2 or $X-1; why don’t you have category “Y”; why do you have category “Z”. Just as you will have your own way of looking at your budget, so does the seller. This is a great learning opportunity, so take it and use it well.

Understand that these numbers can vary from one situation to another. They can vary depending on your part of the country, how you approach renovation, the number of employees you hire, the meals you serve, the form of ownership you choose, your creativity with advertising, etc. Do Your Homework! Don’t take these numbers as gospel. They are guidelines to help you anticipate expenses until you have real numbers to plug into your scenario. They can also be used to analyze the business of an operating inn to see how well the business is run.

Rooms are your primary profit center. The restaurant, bar, gift shop — other profit centers — make money but are secondary profit centers. The restaurant and bar have great cash flow but also great expense; that cash flow can fool you, trick you into thinking it’s your primary profit center. Look at more than just the gross income, look at the bottom line, taking into account all of the expenses, to help you see where your primary profit center truly is.

Is the cash flow of the property you are considering strong? Can it be improved or is it as good as it’s going to be for a period of time? Does it reflect a good, steady energy flow or is it weak and sporadic? There may not be a right or wrong answer here, but you have to look and decide if it works for you and your situation. Look beyond the surface answer of what the cash flow is and see whether it represents opportunity or not.