Mistake #3 – Not planning for zero
The majority of people who want to own a bed and breakfast tend to make the following errors (I know – I did!):
If you have followed this series of blog posts, hopefully you can grasp how not understanding the local marketplace – basically how seasonal my area was – rolled over into my lack of comprehension of the needs of off-season guests. Further, not having spent time understanding WHO I wanted as my guests (why wouldn’t I want anybody who was willing to pay me to stay?) lead to the fact that I quickly learned that I didn’t want to accommodate the type of guest that typically came in the off-season.
When you take all this information into account, you can see how quickly I had to learn how to accept the need to learn to plan for zero!
Understanding the importance of a bed and breakfast business plan
A lot of people (myself included) thought I really knew what I was doing when I purchased my property for the bed and breakfast: I had some background in marketing, I had the perfect location, I was making major renovations to provide the kinds of things I always looked for in a B&B when I booked, plans to host people just like me and felt there was lots to do to bring people to year-round. But then, the money starting flowing out and I started to panic.
So, I downloaded a free on-line business plan outline and plunged in.
Here’s what I didn’t realize:
- Most free plans overlook at least one or more components required
- Most lenders don’t understand the concept of a bed and breakfast and automatically consider you as a commercial enterprise
- Free plans (or even some of the paid ones) don’t tell you how to do the research to back up your projections
- Different lenders look for different components in a business plan
There are ways of presenting the actual plan itself that makes a huge difference to lenders being receptive to your proposal
Once I was done, I decided I would approach various government agencies as a new business to see what loans and grants I could get. That was my first rude awakening! Here’s what I found out:
- Since this was my home, no government grants were going to help me purchase a home – especially since I wasn’t a first-time home buyer
- I needed to register as a business in order to comply with government regulations
- If I decided to turn the property into a business rather than my home, I would have to comply to all the things a business providing the same services would have to do – accessibility issues, being treated like a restaurant as I was serving food, commercial insurance rates and a lot of other business permits that wouldn’t apply if I was a home-based business
So, my next stop was the bank. I had a great credit rating and no outstanding loans, so I wasn’t expecting any problems. Here’s what I learned:
- I was a single person with no other income – that made me extremely high risk to the bank, despite my excellent credit rating
- Even though I had included a lower revenue for the off-season months, they were worried that my forecasts were unrealistic and I would not be able to meet the monthly payments
Understanding the importance of planning for zero
The outcome of all this bad news was that I was now in the position that I needed to plan for zero income at certain times of the year.
The reality is that you need to get your thinking cap on and really look at all the ways you can deal with the situation of not having any income if you are strictly depending on the bed and breakfast to provide revenue. Sitting down and brainstorming one-on-one and sharing ideas that I’ve used and seen other B&B owners do to generate revenue successfully in the off-season is just one of the many exercises I do with clients in Step 4- Creating a Rock-Solid Bed & Breakfast Business Plan
Here are a couple of tips I share in that program:
- Be realistic about what money will be coming in and when it will come in
- Realize that it will take a few years to reach your maximum projections, so don’t plan on 100% occupancy during peak season in your first couple of years
- Don’t forget to include annual expenses such as auto maintenance and service contracts
- Track where cash goes – it is the hardest thing to keep track of, but it can add up quickly
Whether you decide to use a spreadsheet or a software program like Simply Accounting or QuickBooks (two of the most common programs), it is essential to keep track of your money on a monthly basis. If you plan for zero until you have a few years under your belt to understand your cash flows, you will be well prepared with options.
Because I am a cautious optimist, I ended up exceeding my revenue projections for the first two years and was OK. However, if I had of opened my b and b after the financial crash of 2008, I don’t know if I would have been so lucky.