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 is important and part of what you are striving for. The lower your break-even point the sooner you can start making money. The lower your break-even point the easier it is for you to weather slow times, be it a seasonal situation, a natural disaster, or even terrorist activity. You want to enjoy this lifestyle and having a lower break-even point will take pressure off you, a pressure that can make the difference between your enjoying your work and stressing too much.
As you are projecting your income and expenses, be realistically conservative. If you have sound research numbers you should be able to derive sound projections. If your research indicates you could expect a 25 percent occupancy your first January, use that number even if your gut feeling is that you should expect a 30 percent occupancy. It is better to be pleasantly surprised with the 30 percent occupancy than be disappointed with a 25 percent occupancy (or worse) when you were counting on 30 percent.
Bed and breakfasts have a higher break-even point than hotels do because the economy of scale is so different so be careful in comparing yourself too closely to a hotel. You need to know what your break-even point is in order to make sense of the income and expense numbers. I know of some inns that have a 6568 percent break-even point, but your break-even should not be more than 50 percent for your inn to be comfortably viable. Let me walk you through the math required to calculate your break-even point.
First, calculate the average room rate. You take the total of the room prices and divide by the number of rooms. For example: $805/7 = $115.
To project your maximum annual income take the number of rooms, multiply that number by the average room rate. And multiply that value by your number of operating nights per year. Here’s the numeric demonstration. 7 x $115 x 365 = $293,825.
You can now calculate your break-even point by dividing your projected annual income by your maximum potential annual income. Numerically that looks like: $146,000/$293,825 = .5 or 50 percent, with the expenses made-up for this example.
Your bottom line is affected by the blend of your area’s attractiveness to tourism and by your niche. What is the area’s average annual occupancy rate? If your break-even is higher than that, you have a difficult goal to strive for because that means either you have to raise your rates to be the highest in town (which may not necessarily be “bad”) or you always have to be more full than anyone else! A strong and clearly stated market niche will help you be full when others aren’t, especially in these days of uncertainty regarding the economy, terrorism, and war.
The national break-even point is 65 percent. I think that’s because the early innkeepers, and those who don’t do enough research before diving into the industry, bought wonderful homes and renovated them to original condition and then added modern comforts. When the renovation was complete they bought beautiful furniture, keeping true to the era, and decorations — often sparing no expense. All of that wonderful creation cost them plenty and made for a situation where they weren’t going to easily make a return on their investment. In many cases these people never did get a return of investment. Ouch! Don’t let your break-even point exceed 50 percent so you don’t have those kinds of investment problems. If “life happens” and you have to sell your inn early, you want to increase the chance you at least get your money back, if not make a profit too.
One way to approach renovations is to create one deluxe room and let the income from its increased room and occupancy rates pay for the renovation of the next guestroom(s). That can help keep your break-even below 50 percent and your return on and of investment high.
Get to break-even as fast as possible, and then work to build your occupancy from there. Use the tips offered in Increase Your Off-Peak Business to build and maintain your business. Have fun with it! Let this business building be a reflection of your niche and style.
Keeping your break-even point low is vital to your business viability. What do you need to do with your plan to get your break-even point below 50 percent?