Is your guest house a hobby or a business?
Many guest house and B&B owners feel that finance is beyond them and rely on an accountant to assist. Once you know some of the basics, it’s a lot easier to keep an eye on the health of your business.
We asked an experienced accountant, previous guest house owner and NightsBridge user to put together some useful information and tips to help you take control of your establishment’s finances.
In 2004, my wife Gaynor and I built and opened our guest house. We ran a successful establishment for the next seven years. In keeping with our background as commercial accountants we applied the processes and disciplines we had learned from our previous lives to ensure that the guest house ran smoothly and profitably.
In other words, from day one, we regarded our guest house as a serious business and ran it as such.
Hobby or business – what’s the difference?
A hobby is an activity that brings you pleasure, challenge, satisfaction etc, but costs money to pursue. How much money you invest in or pay for your hobby is up to you.
A business is an activity that brings you pleasure, challenge, satisfaction etc, but despite requiring money to set up and run, must ultimately generate more money than it costs. This is known as a profit and, to my mind, is the key element in distinguishing a hobby from a business.
If you do not regard the generation of profit as the most important goal of your guest house, then you, madam, have a hobby, not a business
The good news for hobbyists reading this is that you can stop right here.
For those of you who are definitely running a business, my articles over the next few months will give you insight into what steps you should take to either achieve profitability, or sustain the profitability you have.
To kick off, let’s take a closer look at what we mean by this thing called “profit”.
Everybody knows that profit is the excess of sales over costs (or: your income is more than your expenses). But there’s more to it than that!
Let’s consider the relationship between profit and time:
A profit always goes hand-in-hand with a specific period of time. There’s no set rule – the period could be a day, week, month or year. Or indeed, a number of years.
The time period you choose in order to measure your profit will depend on your needs. If time is not too critical, the yearly profit might be most suitable. If you want to provide investors with a business plan, then three or five years is quite normal.
So, the time period is fundamental to understanding the context of profit. If someone at a dinner party told you that their guest house had made a profit of R100,000 you might be impressed. If they told you they did this in one month, you would be super impressed. However, if in fact they made that amount of profit over a period of five years (in total) you might be less in awe…
As accommodation owners you will be very familiar with the seasonality of your business. You know all too well that some months of the year are great for business and others are pretty dire. If you select just one part of the year in isolation to measure the profit of the business (and therefore its health) you could get entirely the wrong impression. Measuring your profit over a 12-month period would take both the good and bad times into account. This is possibly why an annual profit is so popular and useful.
There is a second aspect in which time influences profit. In this sense, the individual sales and costs that go together to make up the profit number each have a moment or period of time attached to them.
One of the fundamental rules that accountants follow is to always make sure that the time elements of sales and costs are matched.
The smaller the time period for profit measurement, the more critical the need to ensure exact matching. Monthly profits need more matching than annual.
Here’s an example: Say you pay your annual municipal rates in one lump sum. Without time matching, the profit for the month of payment would appear much lower than it really is. (Equally, the profit for the following 11 months would appear higher than they should be). To avoid this problem, the cost of the rates is spread across each month.
Other areas where the need to time-match commonly arises are advertising subscriptions, customers billed in advance, commission paid ahead of or after the date of stay. Basically, any item where the timing/period of the money received or paid is out of synch with the date of the transaction.
This concept is very important because the profitability (or lack of) of your business should be a major factor in how decisions are made in order to run the business. If your measure of profit is not accurate, how accurate are your decisions?
So what do you think? Are you running a hobby or a business? Are there items in your accounts that make a specific month’s profits look lower or higher than it should be?
Next time we’ll look at how different types of profit can be measured and how these can give insight into your business.
By Doug Portsmouth. Doug and his wife Gaynor provide consulting services to B&Bs and Guest Houses via their business called Basics 4 Business. They can be contacted at email@example.com.