The break-even point is the occupancy rate at which you quit losing money and start making money. Strive to have your break-even point be no higher than 50 percent, and below that would be even better. Innkeeping is a lifestyle, but it’s also a business.
Making money in your bed and breakfast is so much fun! And it’s the money you make that pays the bills, right? So you better be good projecting income before buying a B&B or expanding the one you have. Here are some pointers on doing just that.
As I have spoken with B&B Brokers and appraisers across the country lately I’ve gathered lending to the bed and breakfast industry has gone from challenging to difficult. It would seem lenders are increasingly edgy about financing and money so are making things challenging at the very least and being more particular about the mortgage loans they write.
The steps you need to take to project income for your B&B include setting your room rates, projecting occupancy rates, and calculating income — monthly and annual. These steps require you to do your homework. Here are some pointers in attaining those numbers.
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 bed and breakfast business plan is where you demonstrate all the thinking you’ve done for making your business successful. It should cover creating and growing income, and managing expenses. Also, you should address keeping your operating expenses down through conservation measures without hurting customer service or the guest experience.
While much of the insurance we buy is betting on a rare event, long-term health insurance is betting on almost a sure thing. I’ve seen statistics that show the probability of needing long-term care insurance is fifty percent. Given those odds, you can be assured that this policy is going to be expensive, especially the older you get. As the rate goes up, it strains the budget increasingly until many times the consumer drops it because their fixed income budgets can’t handle it any longer. Because insurance companies know how high the cancellation rate is for this kind of policy, and consumers don’t tend to know it, the potential for fraud is high in this area of insurance.
One of the most common questions I get from clients is whether their homeowner’s insurance will suffice for their bed and breakfast. The short answer is “no”. The longer answer is “no way”. It’s important to think about insurance for the business — building, liability, and contents — just as it’s important to think about auto insurance, health insurance, life insurance (be it term life, whole life, or universal whole life), long term care insurance, and disability insurance.
A will lets you take control of how your property is distributed after your death. If you have a simple estate, a simple (or basic) will may be sufficient. But the more complex your estate and life are, the more complex the will may need to be. This is where you get to choose your executor, a guardian for your children, and a manager for property you leave to minor children.
Retirement planning is a multi-pronged activity. You want to incorporate retirement income planning with:
- health insurance
- disability insurance
- long-term care insurance
- various POAs (power of attorney)
Financial planning is one of the more boring-sounding topics to think of as you go about life, but it’s critical to the well- being of you and your inn. The kind of financial planning I’m talking about goes beyond financial retirement planning and even personal financial planning. Do you have a plan to cover the eventuality you (be that singular or plural) get sick?
Part of owning and operating a successful business is knowing what your primary intent is, or your business focus. When the merchants along the main street of Boulder, Colorado, decided to create a pedestrian mall, they first discussed what their purpose was in forming a pedestrian mall. Initially they thought the focus was to create a merchandising center, but with further conversation they realized that they really were creating a place that was safe for people of all walks of life to come together and interact. Boulder’s Pearl Street Mall is one of the most successful pedestrian malls in the country because the merchants understood what they were creating, and have been faithful to that vision during its almost thirty years of existence. Similarly, a B&B inn’s purpose might not simply be “a lodging property,” but rather a place to provide a fun and safe time while at the inn.
When the B&B industry was entering its growth phase about 25 years ago, few innkeepers entering the business thought about how they would get out. Reasons for that lack of planning include thinking they’d be innkeepers forever and believing there would be a line of potential innkeepers waiting to buy their operating B&B. Instead, what we find today are buyers savvier and better educated than they were 25 years ago, at a time when there’s a glut on the market, despite, or because of a continued rise in prices.
B&B Profits: Short-Term vs Long Term
The Receding Recession
The two topics I’m covering in this newsletter are about occupancy and room rates starting to rise, and how the recession has affected the meetings industry. Let’s start with the aspect that impacts all of us regardless of additional sources of income — the increase of room and occupancy rates.
A B&B inn purchase may be the biggest investment you ever make. Don’t ignore the little things that can make the difference between a positive investment and bankruptcy. Bankruptcy is a harsh reality I’ve seen with several inns, especially in recent months.
September 11 Attacks And The Recession.
I mentioned last month, As I mentioned last month, I attended the International Society of Hospitality Consultants (ISHC) meeting in Santa Fe, NM. You can imagine, there were several points of view shared. Most people were positive about the travel industry’s future, near and long-term, and predict that the impact of the attacks will have minimal affect on the lodging industry. In fact, according to Smith Travel Research, occupancy and room rates have returned to almost the same point they were before the attacks. What can’t be quantified is what the recession will do to the industry. For this issue, I’ll focus on the group’s consensus on how to survive in a down market.
As I talk to Innkeepers, Aspiring Innkeepers, and B&B consultants/brokers alike, I hear about the myths of the innkeeping business — misconceptions that can affect your business as you get in or get out. This is the third in a series exploring some of these myths.
At the conference I attended this spring, I sat in on Feasibility and Appraisal presentations, which gave me a better understanding of why financing B&Bs is challenging for so many buyers. There were several interesting points which I can share with you which will help you in your B&B acquisition quest. This information also applies to sellers, since if buyers can’t get financing you can’t close the sale.