- August 16, 2018
- Posted by: Ben Edwards
- Category: Blog, Resources
As the summer slows down, many of us are trying to catch our breath, while other Vacation Rental Manager’s (VRM) are gearing up for peak winter season. No matter whether you’re going into relaxation or ramp up mode, all VRM’s should be thinking about financially preparing your business for 2019. Proactively managing your operation will help increase profit and efficiency in your business.
I suggest starting with creating a Gross Rental Revenue (GRR) budget for the business. In a vacation rental operation, everything should correlate to Gross Rental Revenue (GRR), which is solely rent, prior to calculating owner or management commissions. That is why the revenue budget is so important and the starting point for the budgeting process. We’ll want to start by assimilating historical revenue and property count data for the trailing 12 month period. In every facet of a vacation rental operation it’s important to look at the lowest drivers behind revenue or expenses. In this case, we want to review Gross Rental Revenue (GRR), Occupied Nights and Property Count. By assimilating this data, we can determine the Average Daily Rate (ADR), Occupancy Rate and Project or Budgeted Gross Rental Revenue for 2019.
Average Daily Rate is determined by taking the Gross Rental Revenue divided by Occupied Nights. Please note to only include paying guest nights and exclude non-paying owner or owner guest reservations. For example, the calculation should look like this: $1,871,642 (GRR)/6,778 (Occupied Nights) = $276.13 in Average Daily Rate or ADR.
To develop a Gross Rental Revenue (GRR) budget for 2019, I would start with property count, more specifically, available nights. If a sample business manages 50 properties, then the business theoretically has 18,250 available nights (50*365) to sell annually. However, assumptions should be made for owner-use nights or maintenance blocks. Let’s say for the sake of example that owner-use/maintenance budget nights were 2,250. Please note that this assumption for owner-use/maintenance nights should always be grounded in historical data. Owner-use/maintenance nights for the trailing 12 months should be run from the reservation management system and divided by the number of properties on the program. In our example, owner-use/maintenance averaged out at 45 (2,250/50) nights per property. If the business increased or decreased property count, then so would the owner-use/maintenance nights. In order to get Net Available Nights, we would simply subtract the owner-use/maintenance nights of 2,250 from 18,250 Total Available Nights to get the Net Available Nights of 16,000.
Once Net Available Nights are determined by month, a VRM can make Occupied night assumptions based upon historical occupancy and future projections. Once occupied nights are identified by property, projected Gross Rental Revenue can be determined. If during June 2018, a home produced $5,000 Gross Rental Revenue on 15 occupied nights then the Average Daily Rate would be $333.33 ($5,000/15). The same math can be applied to June of 2019, by making the same or tweaking the assumptions.
Once the Gross Rental Revenue is determined by Property, detail it by month and then consolidate it on an annual basis. Once complete, the expense structure is much more straight-forward and less complicated. That said, creating a Revenue Budget is the first, big step in generating an overall budget. Start 2019 off the right way and created a budget the accurately depicts your operation, strictly adhere to it and drive meaningful profit in 2019.
If you’d like a copy of a template to use at the business level, please feel free to reach out to Ben Edwards at Weatherby Consulting via email at Ben@WeatherbyConsulting.com.