Bed and Breakfast Entrepreneurs

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Why is costing breakfast one of the best kept secrets of the Bed & Breakfast industry?  There is no magic in working out the cost of a continental breakfast, bacon and eggs or an alfresco mixture of muesli, fruits and toast. 

The magic is the fact that breakfast is a cheap meal to make even when you use the best ingredients.  This provides the business owner with a low Raw Food Cost or Kitchen % which in turn generates a large Gross Profit %.  

You will usually find that the kitchen % is in the 20’s for breakfast whereas restaurants and hotels will be operating in the 30’s for lunch and dinner because of more expensive raw materials.

Costing Breakfast

Look at the following example which I am presenting with the headings that your accountant would use except simpler:

The raw food cost is the cost from the supermarket or your supplier and is the cost of the raw materials before any preparation or cooking takes place. $5 is used for ease of calculation and in fact maybe too much depending on the breakfast being served.

Of course you should cost in your own labour as labour cost for preparing and cooking the breakfast; remember that you could be out working somewhere else and getting paid for it and you are foregoing that opportunity.  You are not working for free but it is a separate cost to the raw food cost. 

Overhead costs can be found from your profit and loss statement from which you will need to estimate an amount for electricity, rates etc. and you intend to make a net profit; in this case 25%.  All costs and profit are expressed as a % of sales or selling price.  If you add kitchen and gross profit %’s together you should always get 100%.

You can play around with different raw food costs and associated %’s using the formula:                  

                                 Selling Price = Raw Food Cost x 100  

                                                                         Kitchen %

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Break-even analysis is a useful concept for running a B & B and is the point at which all costs are covered and no profit is made.  Costs can be split into:

• Fixed costs: costs which you have to pay regardless of whether you have any guests or not - rates, council fees, Certificate of Licence (Food Act 2006), bank loan interest etc;
• Semi-variable costs: costs which are somewhere between fixed and variable - labour if you are employing someone part-time to clean, prepare breakfast etc;
• Variable costs: costs which rise and fall in direct proportion to the activity of the business and include such items as food, beverages and cleaning products.

For the purposes of this exercise fixed and variable costs only will be used.

Other pieces of information which you need to know prior to the calculation of the break-even point are:

• Selling price of the room

• Contribution margin/unit.

It is probably best to look at a worked example at this point.

Assume a B & B of 3 rooms with a nightly tariff of $90.  

Total possible room nights per year = 365 x 3 = 1095 nights.

*  Theoretically you could earn 1095 x 90 = $98,550 per annum but it is highly unlikely that you could fill every room every night of the year, apart from the fact that you would be exhausted from never having a rest. 

         Selling price of a double = $90

         Variable cost for providing breakfast and cleaning = $36

          Fixed costs regardless of business activity = $20,000

          Contribution margin/unit       =   S.P. - V.C.

                                                      =   $90 - $36

                                                      =   $54

          Break-even point                  =          Fixed Cost

                                                       Contribution margin/unit

                                                       =    20000      =  370 room nights

                                                                 54

   Occupancy for Break- even        =    370   x 100     = 33.8%

                                                            1095

Further nights are pure profit to you.

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Today I shall look at the standard of accommodation and start up fees.  To get a feel for what others have to offer is always a good idea and going to sites like http://www.babs.com.au/ allows you to see accommodation at B & B’s across Australia, usually with internal shots of the rooms so that you can see the standard of accommodation on offer for the tariff.  Other good sources of information, although this time in print, are the ‘Beautiful Accommodation’ publications by Simon St. John which now cover Queensland, Victoria, South Australia, Tasmania and New South Wales in three coffee table books:

Beautiful B & B’s and Small Hotels; Victoria, South Australia and Tasmania

Beautiful Accommodation in New South Wales

Beautiful Accommodation in Queensland, Australia

You can also log onto http://www.beautifulaccommodation.com/ and join their free club.

The standard of accommodation.

When considering your own property or one which you intend to buy, make a realistic assessment of the following: 

Are you luxury with a resident chef and private art gallery, located on the waterfront with a boat to take guests fishing or economy with a basic room and the wildlife mainly for company?

Are your rooms spacious enough with some able to take a family of 4, offering a self-contained bathroom or ensuite?

Is there space to put ensuites into your rooms?

Do you have the natural ambience of an old Queenslander?

Do you have a beach shack which could provide a more bohemian style of accommodation and of course fishing? For a superb example see Coco Loco Beach Shacks and The Doctor’s House overlooking Bingil Bay in the Mission Beach area http://www.cocolocomissionbeach.com/

Is there an area for a guest lounge which is separate from your living quarters to allow a break for both of you?

Is guest accommodation in a separate building, such as my own business, which gives privacy to guests and family alike?

The start up fees

Start up fees should not be prohibitive but need to be budgeted for and tend to cover the following categories.  I have put in an estimate based on my own experience with the Logan City Council, Queensland, and all amounts are shown in Australian Dollars:

Application for material change of use taking your property from purely residential status to official recognition as a legitimate B & B business in the area (allow $3000);

Hygiene qualification in order to operate a business involving food preparation. Courses can be through a self-paced workbook or face to face, offered by your local TAFE college or Council Health Department ($300-$400);

Professional presentation of the public notice of application for the material change of use sign which appears outside your property. Council often has a list of those sign writers who they recommend as they comply with size of lettering etc. ($200 -$300);

Advertisement in the local paper informing the community of what you intend to do ($150);

Any modifications to the kitchen to comply with hygiene regulations. Can be expensive if Council insists on 2 sinks, new dishwasher to comply with a higher temperature than is usual for domestic dishwashing and a grease trap because you find yourself having to comply with Council restaurant regulations when offering a cooked breakfast;

Safety inspections to make sure that guests can access fire exits easily ($200).

The above are ballpark figures that I experienced when opening my property in Springwood, Queensland. But I want to point out that I did find ways around some of them through negotiation with Council e.g. I discovered from my manufacturer’s instruction book that I could make a simple adjustment to make the dishwasher work at a higher temperature and hence be compliant, saving approximately $1000, and I suggested that my breakfast menu would comprise fruits, muesli, yoghurt, toast, tea and coffee not bacon and eggs, which was acceptable and saved a substantial amount through not having to modify the kitchen.

I hope that the above pointers are helpful because I am here to encourage you not to put you off.  Do your homework but do not let anyone including me steal your dreams.

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Bed and Breakfast and Farmstay Queensland recommend three rooms with a tariff of $150 per night coupled with 50% occupancy as a rule of thumb for making a basic living in Bed and Breakfast.  You would be looking at sales of approximately $82,000 (AUD).  These are good guidelines and a must to take note of for budding Bed and Breakfast entrepreneurs.There are other considerations that need to be looked at as well and I think that there are three important areas when deciding on whether to open as a B & B or not; in particular, the suburb that your property is in, the standard of the accommodation be it luxury, economy or somewhere in the middle, and the start up fees.  Today I shall be looking at the suburb.

It is no revelation to know that the council rates in Paddington, Brisbane are higher than those in Logan and consequently a Paddington property requires a higher selling price per unit of accommodation for the night to cover costs.  But it also means that the $150 tariff recommended by Bed and Breakfast and Farmstay Queensland can be scaled down to $100 per night in Logan or similar suburbs due to the proportionate reduction in the fixed cost of rates and other council fees, whilst you can still remain solvent.  The suburb and locale are also likely to be an indicator of whether people are going to come and stay and what they might be looking for:

An inner city property can be targeted at business travellers who want somewhere close to the CBD, particularly in Brisbane where there is a shortage of beds;

A property in Daisy Hill can highlight proximity to the Daisy Hill forest for the Koala Centre, bikeways, walking and family barbecues, also only 30 minutes from the beaches of Surfers Paradise, 45 minutes from Mt Tamborine.

But it does take thought to decide if your property could be successful in the business of B & B.  I have had a couple of people contact me recently to discuss viability and I think that both would be successful but my advice is always:

Go to council and have a pre- approval meeting (usually free);

Be realistic in what you have to offer and have an alternative action plan if B & B does not work out e.g. homestay or short-term accommodation for all the people coming to live in Queensland;

Make sure you have an income coming in from another source particularly for the first six months whilst you become established i.e. do not give up your day job or do not let your partner give up theirs, unless of course you are independently wealthy.

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