From “Ask Kit!”:
Q: How much money would I need in savings, after I buy a furnished B&B and before the biggest season.
A: Times have changed. During the ’90s I didn’t have a problem with innkeepers “banking” on high season stuffing the coffers. Today I advise innkeepers to keep a six-month cushion in the bank becasue you can’t really count on a high season, as you used to, for being strong and building the bank account. You never know when weather, natural disasters, high gas prices, or terrorist activity will soften your high season.
1 thought on “How much reserve do I need?”
A six month operational cash reserve is conservative.
You never know what you’re getting when you buy a B&B as a turnkey. My facility is a case in point. I THOUGHT I was buying a turnkey with a gross revenue of $40,000 a year and an annual occupancy rate of 40%. I was wrong.
Bottom line? The former owner cooked her books and lied to me. She didn’t earn $40,000 in 2003. She earned $15,800. She didn’t have a 40% occupancy. She had an 11% occupancy.
To make matters worse, she raided the inn. Contrary to our turnkey agreement, she removed furniture, linens, towels, bedding, place settings, pots, pans, lamps, alarm clocks, and basically everything you need to run a B&B.
It cost me $40,000 just to replace everything that was taken.
Fortunately for me, I wasn’t entirely stupid. I purchased this facility with nearly $80,000 in cash reserves. I darn near needed all of this money. Half of this amount was spent within the first three months just refurbishing this facility. Additional money was spent in repairs and remodeling.
I took a big loss during my first year of ownership. I expect to break even this year and anticipate making my first profit next year.
On the brighter side, the 11% occupancy rate of 2003 rose to 28% last year and is currently hovering at 34% for this year.
I cannot emphasize enough the importance of having cash reserves. It’s been a difficult two years, but my cash reserves saved my bacon and helped this facility survive long enough to re-invent itself and become successful.
Chances are that if you do your homework better than I did, you won’t be blindsided by an unscrupulous owner who’s trying to unload a business that’s teetering on the edge of bankruptcy.
With this being said – you can never entirely plan for the future. The furnace could break. A heavy storm could blow tiles off your roof and create problems with leaks. Water pipes (especially in old buildings with original plumbing) can break.
Sometimes things just happen and a strong cash reserve will help you weather most of the financial problems that your inn may encounter.
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