5 minute read
Balancing the Scales: Costs vs ROI
If I had a Euro for every time someone said to me, “You must be raking in the cash,” or when a person who has zero business experience thinks that ‘all business owners are rich’ – then I may have a nice, bonus piggy bank!
Glamping accommodation is not a budget stay for many, it is an industry that is known to charge high value nightly rates compared to that of some other accommodation providers. However, it sure doesn’t mean it is making you rich. In fact, running a glamping business can be quite the opposite when you calculate every single item cost, plus time spent running the business (whether that’s doing it yourself or employing staff). The hours can be long and unsociable in hospitality, compared to that of standard office hours across many other industries.
My response to those who swiftly comment and calculate in their minds what turnover is potentially made from the nightly rates and occupancy is, “Have you also calculated the costs?”. Often, the facial expressions tell me: no, they haven’t.
Unfortunately, this is where many people fail in business or never last longer than three years, because they are quick to calculate the potential sales turnover without actually calculating what all the potential costs are. The first importance is to know your costs so you can calculate your margins, otherwise you aim to fail before you even begin.
To put things into perspective, more than 80% of business failures are due to a lack of cash, with 20% of small businesses failing within a year, and almost 50% failing within five years, according to Forbes.com.
Fail To Prepare, Prepare To Fail
That all important fire in the belly for a new business venture can soon be extinguished if you do not make it a priory to understand all your costs by doing a financial forecast which lists potential turnover vs costs. Costs should always be overstated to allow for any unseen events, economical and technological changes. A simple SWOT (Strengths, Weaknesses, Opportunities & Threats) analysis can very useful here to determine risk factor costs, which a rainy day fund can be put set aside for.
The second most commonly cited reason for business failure is not having enough capital.
Glamping investment isn’t the same as bricks and mortar investments that often increase in value year on year. Instead, glamping accommodation is similar to a car in that the day you take it out of the showroom, the value depreciates. Depending on your country, this can be a depreciation of anywhere between 10-15% per annum – check with your accountant! If your long term strategy is to build to sell, this must be taken into consideration.
Accommodation structures may be your biggest initial investment so it’s also important to consider the lifespan for each unit and when you will have to potentially replace each unit. Good maintenance (at a cost) is imperative to ensure longevity.
Factor in potential weather damage or damage caused from guests – although these are not fixed running costs, they are risk factor costs which many people fail to consider. If a structure or room is badly damaged, the loss can have a significant negative impact should you be unable to take reservations as well as find the capital to replace a structure (until hopefully insurance covers the costs). Glamping is exposed to all weather elements and therefore it’s imperative to cost in the wear and tear.
Capital
The second most commonly cited reason for business failure is not having enough capital. This isn’t so surprising, given that more than a quarter of small business owners say they aren’t able to obtain the funds they need to operate their business, according to a National Small Business Association study.
Whether you start the business with your own hard-earned cash, borrow from family and friends, take a loan, or bring in an investor – the start up capital will need to be returned. It is said ‘you need to have money to make money’, so often start up capital (especially if it’s from your own personal finances) may take longer to make a return on investment. This is also the case if you wish to continue growing the business because what you could draw back as ROI can also be used for further growth investment to reach an even higher turnover. However, those who offer loans or investments to help you get started are more unwilling to wait for their ROI, for which you must forecast this as a cost.
Ensure that cash flow is always king to cover the expenses before you can take advantage of any the profits – not forgetting the all-important taxes to pay. ‘Gross’ is an acquaintance, whilst ‘Net’ is your best friend.
Remember The Money Is Not All Yours
The most common costs to all businesses are Variable costs, Fixed costs, Indirect (Operational) costs and Direct costs.
Understanding every individual cost including the smallest items, such as tea bags, sugar sachets, and candles, will help to determine what your minimum nightly rates need to be set at in order to make a decent margin.
Variable
Utilities, catering, linen, room stock replenishments, casual contract employees, taxes, machinery maintenance. These will all very much depend on occupancy.
Fixed
Phone contracts, website fees, annual subscriptions, affiliate marketing subscriptions, fixed salaries.
Indirect
Overall operational costs such as maintenance, electric, reception staff, pool facilities and other services that are costs-related, to overall daily operations – not just per accommodation unit.
Direct
Items required per structure which become a direct cost per unit/room to be deducted from the bottom line. E.g. Some units have a hot tub which is a direct cost, whilst other units may not.
