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.
Set the Room Rate:
There are two basic ways of setting room rates: figure out what it costs you to offer the guest experience you want for your inn, or charge what everyone else charges. Look at these two approaches more closely.
- What it costs:
- Calculate what it costs to provide the rooms (and the guest experience) you created by adding Total Start-up Costs, Annual Operating Costs, and Annual Debt service.
- Divide by 365.
- Divide by the number of guest rooms. For example:
- $191,775 + $92,724 + $18,762 = $301,261
- $301,261 / 365 = $825.37
- $825.37 / 7 = $117.91 => $118
This gives you an average room rate. Adjust up and down for each room, accommodating the variations in rooms and guest experiences to determine each room’s rate. This calculation does not provide for a profit, but time should take care of that. As you build your business you will continue to raise your rates. Your first goal is to get people into your beds and build occupancy, then you will naturally develop profit — if you are satisfying guests’ needs. Remember that money is like energy flowing through your B&B inn. The more people, the more energy, the more money, the more success.
- What the market implies:
- Charge rates that are in the range everyone else charges. Be careful that you aren’t accused of price fixing (illegally conspiring with other inns to inflate rates). Does this approach reflect your business?
Caveat: Keep your room rates low initially so you can build your occupancy and reputation. As your occupancy rises you can raise room rates. Earn the “right” to raise your rates.
To figure what the average room rate is, add all the room rates and divide by the number of guest rooms.
This approach does not take into account room preferences — which rooms rent more or less often than others — but does give you a value to work with for your projections. Typically your reality will be better because the more expensive, deluxe rooms rent more often than your basic rooms. But until you have been open awhile you can’t anticipate that. For example:
($90 + $100 + $100 + $120 + $120 + $150 + $150)/7 = $118
This is also known as ADR (average daily rate) in the lodging industry.
Speaking of the lodging industry, there are various terms and philosophies I don’t urge you adopt. I am going to mention one other briefly so you at least have an awareness of other ways of doing business — ways your guests are familiar with and may expect from you. Hotels/motels promote their rooms at their “Rack Rate”. But the rates do go up and down from there, based on the season, time of day (travelers can get a better rate later at night than earlier in the day), etc. The problem I see for B&B innkeepers with that approach is B&B guests do talk to each other, unlike most hotel/motel guests. Stop to think about how the guest who planned ahead and paid full price will feel when they learn a guest who didn’t plan ahead got a discounted rate. Can you afford to alienate your guests that way? I think not.
As you start your income projections, you have to anticipate the occupancy rate, unless you are buying a going concern and can trust their income numbers. But even then, it would be an interesting exercise to test their stated income.
I believe in anticipating your income low. It’s better to be pleasantly surprised than unpleasantly surprised should the income not meet your needs. If you can learn your community’s average occupancy rate, anticipate half of that for your first year. If you are buying a going concern, anticipate a minor drop in the occupancy to be conservative.
Use 25 percent (if you are in a remote area, 10-20 percent is more realistic) as your occupancy rate for a new inn.
In either case plan to grow 10 points (from 25 percent to 35 percent) annually for the first two years. Strive to get to 55 percent occupancy as soon as you can. If you can maintain that growth pattern longer by all means do. Obviously you can’t keep that pace forever.
Multiply the average room rate by the number of rooms by the days per month and multiply that by the occupancy rate. For example:
Your average room rate is $118 so for February you would earn, such as:
$118 x 7 rooms x 28 days x 25% = $5,782
Note: Sales tax (from room rental, gift shop, etc.) is not an income item!
Multiply the average room rate by the number of days per year you’ll be open and multiply that by the occupancy rate.
$118 x 365 days x 25% = $107,675
You now have tools to help you project your B&B income. The cash flow analysis is starting to take shape for you. The cash flow of the inn is important, but don’t let it take all of your focus and energy. You have so many decisions to make about the viability of innkeeping for you as a career and lifestyle.
The ebook Show Me The Money! Great Expectations has more details on the various money aspects of owning and running a bed and breakfast inn.