Anyone working in the vacation rental industry – homeowners, cleaners, scheduling service providers, or even guests – to keep track of financial performance accurately. From income to operating expenses, and fiscally organized business owner will have a competitive advantage over one who just goes through the motions without proper strategy. Having a robust financial plan means success in the future. However, it may take some time and dedication. Here are the best ways you can effectively manage the finances of your vacation rental business.
Finances of Everyday Activities
The best way to start is by keeping track of all your income and expenses that occur over a period of time. The best format to keep this information clean and organized is through an income statement. On the most basic level, you record your revenues and deduct expenses. What is considered an income or expense depends on your position in relation to the property. For example, cleaning fees for a homeowner will be categorized as operating expenses. But for the cleaner, cleaning fees represent a source of income.
Keeping track of operating expenses has tax benefits as well. Should you have a certification allowing you to conduct business as a self-employed homeowner, whatever expenses you need to dish out for maintenance, cleaning, and other necessities for “operations” can be itemized for tax deductions.
*Note: it may be important to read how the latest tax overhaul has affected these opportunities.
Keeping a personal balance sheet will help you monitor the true finances behind your business. All balance sheets follow the formula:
Assets = Liabilities (Debt) + Equity
What this means is that, for example, if you have a mortgage valued at $200,000 you must have an equivalent $200,000 worth of assets (this could be in the form of a checking account, cash, etc.). Again, knowing how to categorize certain items is critical. Doing a little research will be valuable information for current and future financial endeavors.
Understanding the direction of cash flows proves this point. Just because you have the rights to a property does not mean it is an asset. If that real estate is producing income (cash inflow) for you such as in the form of vacation rentals, then it can be an asset. However, if you have a mortgage [loan] against the house, then you need to make payments (cash outflows) to that loan; thus, your home is currently a liability.
The same goes for the cleaners and other associates of the homeowners. Of course, you may or may not have a bookkeeper or other professional to prepare this information for you. However, it is still important to understand the concepts to make sound strategic decisions.
- Only spend what is absolutely necessary
- Evaluate equity and asset options before looking towards opening a new credit source for financing
- Don’t buy the cheapest products merely for the sake of frugality and “more savings”; sometimes a slightly more expensive option will give you a better return on your investment*
- Pay off debts first before pocketing any kind of income – the longer you wait to fulfill certain obligations, the more you put yourself at financial risk
*investors use financial ratios such as the ROI of an investment; it tells you the percentage of how much you make based on how much you spent
These concepts don’t just apply to businesses. As a consumer, keeping track of your spending habits and income sources is a great way to create future plans. This will allow a broader range of vacation rental options when traveling; contribution to financial plans such as insurance, education, or retirement; and allow a budget for whatever grand adventures you plan on undertaking in the near future!