Financial Management

The first step in good financial management is to ensure that you keep appropriate records for meeting the legal requirements for reporting, tax and VAT purposes. The central government websitehttps://www.gov.uk/has excellent, clear advice on most of the financial aspects of running a small business – legal structure of the business, registering the business for tax and VAT purposes, National Insurance, essential record keeping, filing tax returns and claimable expenses for example. Click https://www.gov.uk/topic/business-tax/self-employed here and search for the subjects you need to know more about.

As a business owner you will also want to plan your finances to ensure that you have sufficient cash, cover your costs and ideally create a surplus. With some simple tools in place you will be able to ensure that you understand the costs of running your business, can identify cash shortages in advance and can plan for growth.

Financial Records

Most proprietors (unless personally experienced in financial management) will employ an accountant to present Profit and Loss Accounts, Balance Sheets and to file year-end tax returns. However, it is up to the business to keep all the financial records to create these documents so accurate record keeping of all income and expenditure is vital. There are computerised account package systems – some linked to booking systems which your accountant/bank should be able to advise on.

All businesses are required to keep records regarding business transactions. However, the extent of record keeping required will depend on the business structure that you choose for your business. https://www.gov.uk/business-legal-structures The legal structure will determine:

  • the complexity of documentation required to get started
  • the type of taxes that you will need to pay
  • how you can reward yourself with the profits from your business
  • your extent of liability

Business rates may apply to your property – more on this topic can be found at https://www.visitbritain.org/pink-book/business-rates You may decide to employ people to help with your bed and breakfast operation. All paid workers should be listed on your payroll. For more information regarding the minimums that employees should be paid visit: www.gov.uk/minimum-wage-different-types-work

It is easier to use software which allows you to perform most payroll tasks, including working out the tax and National Insurance for your employees and sending this information to HMRC. The software provided freely by the HMRC https://www.gov.uk/basic-paye-tools is ideal for businesses with only a few employees.

Employers will have to provide a workplace pension for eligible staff by 2018. This is called’automatic enrolment’.

The nature of corporation taxation will depend on your business structure. After the end of its financial year, a private limited company must prepare:

You need your accounts and tax return to meet deadlines for filing with Companies House and HM Revenue and Customs (HMRC).

Monitoring Revenue

On a day to day basis you will want to forecast and monitor how your business is performing. The hospitality industry uses a range of measures to monitor the selling of accommodation so that you can track your performance. The key performance indicators recommended for accommodation businesses are:

Occupancy % (Occ %) = number of rooms sold / number of rooms available

Average room rate (ARR) = total sales / number of rooms sold

Revenue per available room (REVPAR) = total sales / number of rooms available

Revenue per available room is also ARR x Occ %

All of these ratios can be calculated nightly, weekly, monthly, quarterly and annually.

These ratios can be compared to the rates achieved by the hotel sector to monitor how the rates for the B&B compare.

For more information about the measures used in the hospitality industry visit www.hospa.org

Setting the room rate

The simplest approach would be to offer all rooms at one rate. The advantage of this approach is that it is easy to administer and to communicate to customers. However, the approach fails to respond to peaks and troughs in demand by recognising customer price sensitivity and as a result fails to maximise revenue.

Alternatively room rates can be set by room type depending on the room characteristics. This approach is also fairly simple to administer but less useful where all rooms are uniform.

Another approach is to flex the rate depending on the demand and this requires researching your market and understanding the behaviours of your customers. In coastal locations which tend to be very seasonal this is often the best approach. In practice a combination of these approaches work best.

An approximate guide to testing the room rate is to use a bottom up approach based on the predicted annual operating costs for your business:

Target Profit + Total Operating Costs = Target Revenue per annum

The Target Revenue can be divided by the forecasted rooms sold to give a guideline selling price.

To summarise, the setting of the room rate should be based on a range of factors:

  • Analysis of the competition
  • Facilities offered (parking, views, access to transport networks)
  • Seasonality
  • Special events in the region
  • Variable costs (laundry, room cleaning, guest amenities)
  • Historical patterns for the market

Registration for VAT

Currently all businesses with a turnover of more than £85,000 per annum must be registered for VAT. A VAT registered business must keep records of sales and purchases.

Sales invoices should contain all the required information for a VAT registered business. For full details visit: https://www.gov.uk/vat-record-keeping/vat-invoices

If you are registered for VAT you will need to add 20% to your selling prices. This is payable to the Inland Revenue and can be offset by the VAT on your expenses.

Controlling food costs

As well as providing accommodation for guests most B&B and Guesthouse operations will also provide breakfast and possibly other food items such as packed lunches. Controlling food cost is important to ensure that profit is not lost through poor food cost control or unnecessary wastage.

Here are some aspects to consider:

  • Do you know the cost price of each breakfast item that is served?
  • How much of the total selling price per room is allocated to breakfast?
  • Do you monitor wastage?
  • Do you have a standard recipe for each item served to ensure consistency in terms of quality and cost price?

The cost of food used each month can be calculated from the stock values and the purchases.

The cost of food consumed is the Opening Stock + Purchases – Closing stock

This requires taking stock at the end of each month and calculating the value at the cost price.

If your stock levels are minimal or do not change significantly the cost of food consumed will equal the purchases.

Food sales less cost of food consumed = Gross profit

This is a standard measure in the food service industry and Gross Profit % is typically 70 – 75%.

A standard recipe is a good tool for managing the food cost of each breakfast item that you offer. It is also useful if you employ staff to prepare breakfast for you as the standard recipe communicates what each dish consists of in terms of ingredients and quantity. Click here for more advice on Standard recipes for breakfast menu link

.Cash Flow

The seasonality inherent in the B&B and Guesthouse business, particularly for those located on the coast and in other holiday areas can make managing cash flows challenging. Cash flow forecasts are crucial and budgeted figures should be closely monitored with actual figures. Understanding peaks and troughs within the year and managing the business accordingly is vital.

A business needs to have cash available to meet day to day expenditure such as payment to suppliers and staff but it should also not be holding too much cash as this is an inefficient use of funds. Forecasted cash flow statements are essential for identifying peaks and troughs in cash requirements and may be produced with a simple receipt and payments approach. The attached template provides a tool for forecasting your cash flow needs on a month by month basis.

Operational factors that impact on cash flow:

  1. Waiting for customers to pay
  2. How much cash is tied up in stocks of food, stationery and cleaning materials
  3. Taking credit from suppliers
  4. Seasonality of the business – revenues maybe seasonal but some of the costs will fall all the year round
  5. Timing of payments for VAT and taxation

The following 5 tips can help with managing cash flows:

  1. Take payments from customers in advance
  2. Take credit from suppliers
  3. Do not buy and store lots of products – have regular deliveries instead
  4. Take care to plan for taxation, VAT and prepayments
  5. Plan for capital costs such as refurbishment and replacement of equipment

DOWNLOAD A CASH FLOW TEMPLATE HERE AND A COPY OF AN ITEMISED B&B CASH FLOW SPREADHSEET HERE

Forecasting for Profit

Whether your guesthouse/B&B is a “lifestyle business” or your route to retirement, making a profit is likely to be one of your objectives. The attached template provides a tool for forecasting your revenues and costs month by month. Follow these steps to determine the revenue and costs expected.

Breakeven point

It is useful to know your breakeven point i.e. level of sales required to make a net profit. In order to calculate the breakeven point you will need to determine whether your costs are fixed or variable. To find more information about the nature of costs visit the arena4finance Self Study Centre.

Fixed costs are those that remain unchanged in total regardless of business activity whereas variable costs change proportionately with a change in the level of business. The key relationships are:

Sales revenue – Variable costs = Contribution

Contribution – Fixed costs = Profit

Typically fixed costs include salaries, insurance, depreciation, rent, utilities and maintenance. The majority of operational costs in your business will be fixed.

Variable costs include food, cleaning materials, laundry and guest amenities in the room such as shampoos, soaps etc.

Try this resource from the Hospitality Professionals Association (www.hospa.org) for more information about how to analyse your costs.

Example

Your bed and breakfast operation has 5 rooms available per night and is open for 300 nights per year with guest occupancy of 1.5 on average. The average room rate is £75.00 per night. The variable costs are:

Food - £3.00 per guest

Laundry costs - £4.00 per room

Cleaning costs - £10.00 per room

Guest amenities - £1.00 per room

Fixed costs for the year including salaries are £75,000.

The contribution per night is:

£75 less ((3.00 x 1.5) + 4.00 + 10.00 + 1.00) = £55.50

The breakeven point is £75,000 / £55.50 which is 1,351 rooms per year or an average occupancy of (1,351 / 1,500) 90.1% for 300 nights per year.

The calculation can be modified to allow for a target profit. So given the previous data if your target is to make £8,000 profit per annum the level of sales required is:

(£75,000 + £8,000) / £55.50 = 1495 rooms per year or an average occupancy of 99.7% for 300 nights per year.

In order to improve profitability the following aspects need to be considered:

  • Can we increase the average spend or introduce flexible pricing when demand increases?
  • Can we reduce the variable costs per room without reducing the quality of the guest experience?
  • Can we reduce fixed costs but maintain standards as well
  • Should we open for more nights per year?

Managing Seasonality

The seasonality of a coastal business in a tourist destination means that there will be peaks and troughs to the business activity. If you will incur the fixed costs all year around then the contribution from even a lower level of occupancy will help to offset some of those costs in the off peak periods.