Financial Management

Buying accommodation to let requires considerable thought to ensure that your investment delivers a satisfactory return on an annual basis. The first step is the purchase of the property and you will need to consider:

• The location and the purchase price
• How the property will be funded
• The returns required to repay interest and loan repayments
• The pattern of likely demand
• The predicted length of the booking season
• The local market rates for similar accommodation

Owning and managing accommodation for rental requires financial planning to ensure that the business is profitable. Good returns for the owner may be achieved from the growth in asset value during the period of ownership, but most owners will also want to ensure that the letting business is profitable on a year by year basis as well, as this can help asset values to increase when the time comes to sell.

All businesses must keep appropriate records for meeting the legal requirements for reporting, tax and VAT purposes as a minimum requirement. The central government website 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.

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 so you can identify cash shortages in advance and 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, see 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

For more information visit the page on the VisitEngland website.

If you employ people to help with your self-catering operation you can find more information in the Employing People section of this guide. All paid workers should be listed on your payroll. For more information regarding the minimums that employees should be paid click here.

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 is ideal for businesses with only a couple of employees.

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

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

• full (‘statutory’) annual accounts
• a Company Tax Return

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

For more information on setting up your business visit the English Association of Self Catering Operators

Monitoring Revenue

Self-Catering operations usually work on a weekly basis in terms of rentals. The total available inventory is calculated as:

Number of unit’s available x number of weeks available

The accommodation 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 units sold / number of units available

Average weekly rate (AWR) = total weekly sales / number of units sold per week

Revenue per available week (REVPAW) = total weekly sales / number of units available per week

Revenue per available unit is also AWR x Occ %

If you plan to let your property for less than a week at a time then you will need to consider what to charge per night. Nightly rates should be higher than for the equivalent nightly rate for a weekly rental. This is because there will be more cost involved with cleaning and changeover costs. For information on how to calculate daily values visit the NCTA Best Practice for B&B and Guesthouses.

Example

For a self-catering business with six holiday cottages open for 50 weeks per year selling weekly lets.

If each of the six cottages is significantly different in terms of size and therefore letting price, it would be more useful to calculate the occupancy and average weekly rate by property to track performance.

Setting the rental rate

The simplest approach would be to offer all weeks 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 weekly rates can be set by unit type depending on the unit characteristics such as number of bedrooms, additional facilities and so on. This approach is also fairly simple to administer. Another approach is to flex the rate depending on the demand and this requires researching your market and understanding the behaviours of your customers (see NCTA Best Practice Guide on Marketing). In practice a combination of these approaches works best.

An approximate guide to testing the weekly 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 weekly lets to be sold to give a guideline selling price.

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

• Analysis of the competition
• Facilities offered (number of bedrooms, cots, living space etc.)
• Seasonality based demand factors
• Seasonality based cost factors such as heating, air conditioning etc.
• Special events in the region
• Additional variable costs (laundry, unit cleaning, guest amenities such as Welcome Packs)

Registration 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 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.

Insurance

As an owner of self-catering accommodation you will need insurance which is specific to the business – home buildings and contents insurance will be insufficient. There are specialist policies available for letting businesses which includes building and contents cover as well as public liability. The English Association of Self CateringOperators can advise.

Cash Flow

The seasonality has a significant impact on the cash flow of the self-catering business, particularly for those located on the coast and in other predominantly tourist areas. A cash flow forecast is essential and will become a document that the business owner refers to on a weekly basis. Running out of cash is one of the prime causes of business failure. 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 on a spreadsheet. The attached Excel template provides a tool for forecasting your cash flow needs on a month by month basis and should be updated on a regular basis.

Operational factors that impact on cash flow

1. Waiting for customers to pay
2. How much cash is tied up in stocks materials such as cleaning materials, brochures etc.
3. Taking credit from suppliers
4. Seasonality of the business – revenues may be 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

Forecasting for Profit

Making a regular profit will enable the business owner to reinvest in the business to maintain the quality of the buildings and this will help to increase the asset value of the property for the future. The attached template for an Income and expenditure forecast provides a tool for predicting 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 accommodation such as shampoos, soaps and so on.

Example

Your holiday cottage operation has 5 cottages and is open for 50 weeks per year. The average weekly rate is £350 per week. The variable costs are:

Laundry costs - £8.00 per cottage

Cleaning costs - £10.00 per cottage

Utility consumption - £20.00 per cottage

Guest amenities such as fresh milk on arrival - £1.00 per cottage

Fixed costs for the year including salaries are £50,000.

The contribution per week is:

£350 less (8.00 + 10.00 + 20.00 + 1.00) = £311.00

The breakeven point is £50,000 / £311.00 which is 161 weekly lets per year or an average occupancy of

161 / (5 x 50) = 64.4% occupancy during the 50 weeks of opening.

The calculation can be modified to allow for a target profit. So given the previous data if your target is to make £10,000 profit per annum the level of sales required is:

(£50,000 + £10,000) / £311 = 193 weekly lets per year or an average occupancy of 77.2%.

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

• Can we increase the average weekly rate or introduce flexible pricing when demand increases?
• Can we reduce the variable costs per cottage without reducing the quality of the visitor experience?
• Can we reduce fixed costs but maintain standards as well

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. However, for many letting businesses fixed costs can also be reduced by closing during the off peak periods. For advice on how to maximise sales for your business visit the NCTA Best Practice Guide on Marketing for Self-Catering Businesses.