Now that you've opened your vacation home, hired your help and are maximizing occupancy, it's important to know how to protect your vacation rental profits.
Having managed $100M+ businesses at one point in life, I can tell you that the backbone of fiscal control is managing information. Unfortunately, clear bookkeeping is the easiest for newbies to overlook, which can really hurt your chances of managing (and controlling) the business. Quickbooks, a must-have for any vacation rental business, makes it easy to record every transaction, and even create budgets, so you won't be open to inaccurate data, waste, and poor decision-making. But above and beyond Quickbooks, follow these three steps to help protect your assets and increase your vacation rental profits.
1. Budget to Protect Vacation Rental Profits
The single best method to increase your bottom line is by way of a thoughtful budget. In corporate settings, it's not uncommon to pad the budget to give room for error. A good leadership team, or you in this case, should flesh out the padding so you see the actual state and potential of your business.
To do so, create your budget line by line. Take each line back to zero; don't apply a factor (inflation or otherwise) to last year's figures, however tempting. As by doing such, you are accepting inefficiencies of the prior year(s).
A Practical Example
Let's use “Guest Supplies" as an example budget line. To create this, you investigate every item that goes into this category. Let's just say there's one item, shampoo, for the sake of this example.
First understand your operating standard. Will you provide fresh shampoo bottles daily, or just one (per shower) upon arrival to get your guests started? If you operate a luxury home and adhere to the standard of providing fresh shampoo bottles daily, examine the size and cost per bottle. Does it make sense to reduce the size of the bottle, and thus the cost, while maintaining your level of service?
Assuming you move forward with the existing bottles of shampoo, simply multiply the cost with the number of forecasted nights booked and the number of showers in your home.
Now that you have an idea of what the shampoo costs should be, compare it to the previous year. Is there a large difference? This exercise will probably make you reconsider how your goods are bought, stored, and controlled.
2. Be Smart About Your Vacation Rental Inventory
Never buy too much at once, keeping your stocks as low as possible. Not only does this preserve interest-bearing cash, but your inventory is much easier to control.
If your supplier offers you a 20% discount to buy 100 cases of shampoo bottles at the start of your season, for one or two properties, proceed carefully. Shampoo sitting in a closet will not earn you any money and they will be hard to keep an eye on. Your kids might decide to give them out to friends, or your cleaning staff might feel the need to pocket a few every visit.
If your stocks are low (and delivered “just in time"), it's much easier to recognize when items have gone astray and subsequently take action to protect your profits.
3. Liquidity is Crucial to Your Vacation Rental Business
Remember the 2009 recession? In case you've forgotten, in the prosperous years prior to the recession, people and companies freely spent all of their income to acquire more, and not necessarily pay off, existing debt and assets.
In terms of vacation rentals, I knew many owners who bought into the temptation of rising property values and used all of their equity to purchase additional vacation rentals. Bookings were used to pay mortgages, not to build savings or pay off the existing debt. They over-leveraged themselves. My point? Cash is king. You can have all the illiquid assets in the world, but if you don't have cash when your credit and/or bookings decrease (the economy is cyclical), you won't be able to buy groceries, let alone keep your investments.
If you are achieving high occupancy and are ready to expand, go for it! But pay attention to your bank balance and I suggest not tapping into more than 50% of the value of your existing home(s). This may be conservative... but at least it will always be your home.
This guest post was written by Kris Getzie, Founder & Principal Consultant at Volo. She is a vacation rental expert and author of the recently published Vacation Rentals For Newbies.