Bed and Breakfast Entrepreneurs

 I tell the following story against myself and as a warning to others.

Scams seem to be becoming more sophisticated.  The most obvious scams on the internet are those of the Nigerian scammers who tell you that the Americans have gone and left $20,000,000 in the country, the person who works for the Nigerian government only requires you to give them your account details and you can have half.  Despite the crass nature of the scam, the Premier of Queensland, Anna Bligh, commented recently that she was surprised at how many Queenslanders were caught in these.  The other well known ones are messages informing you that you have won the lottery and requiring an account in which to deposit your winnings.

Small scale hospitality operations, like my own Bed and Breakfast business, are targeted sometimes by people wishing to book for extended periods of time by a group attending a particular conference eg medical.  They can tie you up, waste time and I usually either delete them or send a quotation at such an outlandish price that they never contact me again.

A new approach caught me out a few weeks ago.  I received an email from a Dr. Lily Jones who was organising a party to come to Brisbane.  Her English was poor which should have been a warning in itself as we know a doctor’s handwriting may be illegible but at least they are usually literate.

She asked if I would accept a cheque which I agreed to; no harm in that I thought, as these people usually want a bank account number.  The cheque duly arrived for 3,300 pounds sterling; still cautious I took the cheque (from a well known British Bank) along with the emails to my local bank.  I asked if there was anyone on the premises who knew about fraud and they replied that there wasn’t.  The counter assistant then held the cheque up to the light (as they do in all good movies) and said that whilst the emails were worded a bit strangely, the cheque looked fine.

I paid it into my account and on conversion to Australian $’s it became $7339.86.  Three weeks later I received a letter saying that the same cheque had been dishonoured - no great surprise there I thought, but what then caught my eye was that my account had been debited for $8003.38.  I had lost out on $663.52 because when the cheque had been dishonoured it had been cashed back at the exchange rate for that day. 

The scam was to leave me holding the baby of $663.54 debt due to the changing exchange rate.  Quite ingenious I thought, what these people could achieve if they just put their efforts into something constructive!

There is a happy ending to the story.  By taking my case to the Banking and Financial Services Ombudsman, my bank, the Commonwealth Bank of Australia agreed to refund the money.  I am obviously grateful for this because it does say quite clearly on the bottom of the original transaction summary slip ‘The selling rate applicable on the day of the Advice/Receipt of dishonour will apply’.  Beware! because if a scammer catches you, your bank may not be so generous.

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Intrinsic value is a term used by two key investors, Warren Buffett and Robert Kiyosaki, so it is obviously worth thinking about.  I shall go through their four elements and then add one of my own specifically for Bed & Breakfast.  They look at intrinsic value as separate from price although both would see price as important upon purchase of an asset as price determines the return.  Kiyosaki in particular would say that the price of a property cannot be controlled and could go three ways: up, down or stay the same.  As a variable, the price of real estate is uncontrollable because it depends on cycles, population growth, popularity of location etc.

Intrinsic value on the other hand is value that can be controlled because it is within the business and can be mined further.  To be able to spot this when you buy as well as develop the intrinsic value during your time with the B & B will give you an added advantage over those who just buy because the property looks pretty.  The four parts of intrinsic value are:

Income (cashflow):  should be a positive cashflow after all expenses are paid including the business/home loan i.e. revenue should be higher than total costs;

Depreciation (phantom cashflow):  depreciation appears as an expense and is shown as an expense by your accountant according to a depreciation schedule.  It can also be seen as income which comes from a tax break.  It is phantom because it is income you do not see;

Amortization:  payment of your home/business loan by your tenants/guests.  I use the term guests as per the usual hospitality protocol although guests could be seen as tenants of your rooms on very short term agreements, who are paying off your home/business loan during their stay;

Appreciation:  your tariffs will rise over time because of inflation and should anyway, if you add to the guests’ enjoyment with depreciatory expenses such as en suites, air conditioning, jacuzzis etc.; you can refinance and borrow your appreciation out as tax free cash i.e. returning to the bank with the figures demonstrating an improved bottom line which will encourage them to loan you further money for more development.  Your guests pay for the amortization of the new loan  during their stay and provide a further tax free cashflow.

And now to my contribution: 

A fifth source of intrinsic value unique to B & B is a virtually free roof over your head when you live on the property.  You will often see separate family accommodation advertised as part of the deal when buying a B & B in Australia.  Separation from the guests leads to greater happiness for both your family and the guests as both of you need your own space.  You will only have to contribute a fractional amount to rates, electricity, telephone etc., the fraction depending on the size of your living quarters as a ratio to the size of the guest quarters; the remainder of the bills will be classed as business expenses to be claimed against tax.  Breakfast and dinner (if you offer it) are yours for free because you just help yourself, plus an unlimited supply of tea and coffee.  This cuts down everyday household expenses considerably, particularly when you buy in bulk.

References

Trump, D.J. and Kiyosaki, R.T. (2006).  Why we want You to be Rich.  Rich Publishing:  LLC. 

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 “The friendly and generous treatment of guests or strangers”   Oxford Dictionary.

Hospitality would seem a good topic for the festive season and was associated with welcoming, caring and feeding in New Testament times.  So what has this to do with B & B, particularly when the assumption from New Testament times would be not to charge or make a profit from your hospitality and the whole purpose of owning a B & B would be to do exactly the opposite?  It is the words welcoming, caring, feeding and generous that are important.

Welcoming means making sure that you have good booking procedures in place so that you are not caught by surprise when the guest arrives or worse to be fully booked when the guest arrives.  Overbooking may be a reasonable practice in a large hotel but can be dangerous when you only have three rooms.  A large manual diary is sufficient when you have such a small number of rooms as you can divide each week into three columns, one for each room. 

Remember to keep the diary clear and up to date, crossing out cancellations as they arise and do not have it stuffed full of too many pieces of papers or Post-It notes.  I mention this because the worst mistake I have made in not being prepared for someone was due to the fact I had accidentally stuck a Post-It note over their name with a message regarding something else.  This practice does nothing to improve relationships with your partner in the business and is difficult to laugh off even with lines from ‘Fawlty Towers’, such as, “I made a mistake. I am so sorry I am not perfect.”

Caring means looking after the party, finding out what they want to eat, any extra considerations such as more pillows, blankets, towels, details of local attractions with directions and approximate driving/walking times, pointing out if a floor has just been mopped etc.  Whilst the last one comes under your legal ‘duty of care’ the emphasis should be on the satisfaction of doing a good job rather than legalism.

Feeding is an extension of caring with particular attention to be paid to any special dietary requirements.  People will generally tell you if they have an allergy to nuts etc. but it never hurts to ask if there is anything they do not like.  The food needs to be well presented whether in a basket or set out on a dining room table.

Generosity is the garnish to leave a particularly pleasant taste with your guests; always provide good value for money, rather than try and squeeze every cent out of them.  People do not mind paying as long as they perceive that they got good value for their money.  If they drive away with that memory the chances are they will tell others to come and stay.

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You have to have washing powder, surface cleaners, bleach etc. anyway.  I first came across ‘anyway money’ in a book by Price (2005), entitled ‘Household Gold’. He talks about the fact that all households have household equity in the shape of  washing powder, cleaning supplies, vitamins, supplements, make up and beauty products which you have to keep buying anyway.

He likens household equity to equity in your home which can be leveraged for investment properties, development of your B&B business etc.  Just as a lot of people are unaware of the potential finance which they have locked up in their own home, so people are generally unaware of the money locked up in their household equity.  They give their ‘anyway money’ to the large supermarket chains who become wealthier at their expense.

This is not only true for private households but even more so for a Bed and Breakfast business where you probably double the amount of washing powder, surface cleaners, bleach etc. of any private household in no time at all.  Even if you buy wholesale from a supplier of cleaning products you are giving them your ‘anyway money’. 

So what does this mean?  It means the possibility of forming your own co-operative with other B&B owners and making savings for everyone across the board or utilising a ready made co-operative.  I have joined Network 21 as a co-operative and found the purchase of concentrated washing powder Amway SA8 and surface cleaners an excellent savings.

Let’s look at the details.  3 kg of concentrated SA8 gives you approximately 250 washes if you use it correctly with the scoop provided.  You can compare this with a popular brand from the supermarket such as Omo. 3 kg. of SA8 is equivalent to 15 packets of Omo (1kg.) because of its concentrated form. Today’s price of 1 kg of Omo is $5.98 (as of 10/12/07 at Woolworth, Springwood, Qld.) whereas today’s price of 3 kg. of concentrated SA8 is $68.95.  If 3 kg. of SA8 costing $68.95 is equivalent to 15 packets of Omo costing $5.98 x 15 = $89.70, a saving of  $20.75 is made using SA8.

I joined the network and have been purchasing concentrated products through Amway ever since.  It provides you with a double win; not only is it cheaper because you get more washes due to its concentrated nature but you are able to claim the cost against tax.  What other benefits does it give?

SA8 powder is biodegradable which means it is safe to water your garden and plants with.  Some people in Queensland are finding that their grey water can actually finish off their prize blooms.  It cannot be the water component so I suspect it must be the washing powder;

It makes your clothes, washing machine and the guest sheets smell fresh;

On a front loading washing machine you save two thirds of a scoop in comparison to washing with a standard top loading machine, more on a bigger load;

It is delivered to the door of your business.

We have started a small co-operative of likeminded B & B owners in the Brisbane and Mt Tamborine areas.  We hope to add to these numbers in Queensland, the rest of Australia and eventually in other parts of the world.  Please write in if you wish to join and I will forward the vision, mission and values statement for the co-operative.

References

Price, S.W. (2005).  Household Gold:  How to convert Household Expenses into Household Income and Own Your Own Life in the Process.  INTI:  Tampa, Florida. 

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Pricing a room can be difficult to start with.

Price the room lower rather than higher as it is easier to put up your prices rather than have to suffer loss of face and drop them.

Have a look at the tariffs charged by local hospitality operators and get to know the owners at the same time.  These are useful connections to form for the future when any of you are fully booked and you can recommend each other.

Search the internet to see the standard of room, packages offered and tariff.  Be realistic about what you are offering and where you are located when you are looking for equivalence.  A standard room will sell for a lot more in a city suburb rather than one in the bush.

Types of tariff:

Nightly

• Double e.g. $110
• Single e.g. $90
• Family e.g. $140

Weekly

• Consider a discount in off peak periods
• One night for free

Packages

• Honeymooners weekend package
• Special events e.g. Thai cooking weekend, wine appreciation etc.

Specials

• Midweek 2 -3 nights at lower rates to attract people at quiet times
• Short term stays of 4 weeks or more usually attract a lower rate

To discount or not to discount?

Some people love a bargain and will try for further discounts all the time.  You have to decide how to play this.  At times there is a pregnant pause on the other end of the telephone line when you state your tariff.  You have to decide whether to jump in and offer a discount.  Whether you decide to or not, do not do it too quickly.  You are not a mind reader and the person on the other end might be trying to remember their holiday dates or whether to bring Grandma.  If the tone is still one of hesitation after a reasonable amount of time (I cannot allocate seconds to this, you will know with practice) you may offer a discount. 

A number of B & B owners believe that you should never offer a discount as the word gets around and it does not stop.  I have never really found that as I only offer the discount after the pregnant pause and I am a believer in the fact that your accommodation only has a 24 hour shelf life and when that is gone there is no way to get it back; as long as costs are covered and there is some element of profit, a little revenue is better than none at all.

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Hospitality textbooks tell you to answer the telephone within three rings which is fine if you are by the phone; if you are gardening and have to leg it across half an acre, up the stairs, dodging the dog, then you are probably lucky to get there before they hang up.  You should always have a friendly recorded message telling them to leave their number and you will get back to them. 

If you do make it in time up those stairs then you offer the usual greeeting of Good Morning/Afternoon/Evening, name of the property, ‘Chris {appropriate name of course} speaking, how can I help you?’ This dialogue gives the enquirer the information that they have rung the correct number, a greeting and your first name to allow a personal interaction.

Good start, now is the time to look for selling clues.  A lot of people ring your establishment asking for the tariff, type of accommodation, proximity to key areas, freeway etc. and it is easy to never hear from them again.  The problem is that you provide plenty of information describing the accommodation in a positive light, the swimming pool, local walks and facilities, whether you are pet friendly etc., but then fail to take the booking; a mistake I have made several times.  People often need a bit of prompting.

Here are some suggestions to get the enquirer to commit:

Can I take your booking now?

Can I make a temporary reservation for you now whilst you discuss it with your partner and you can confirm later?

Is there any more information that you need before you make a booking?

The dates you are requesting are free and seeing it is for several weeks you would be entitled to our special weekly rate.

We are fully booked for the dates you request but we sometimes get cancellations and if that happens and you leave a contact number I can get back to you.

Yes we do offer a special weekly/monthly rate.

Seeing that you are local, why not come round and have a look at the accommodation, that way you will know if it is suitable for your mother-in-law.

Yes I can organise car hire, wine tour etc.

Remember that once they are gone off the phone they are probably gone for good, and their next call is quite possibly to book in somewhere else!

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I mentioned exemplars in the previous entry and I want to show how this idea from learning theory can help you in business decision making, particularly when looking for a property to buy.  The ideas come from my background in teaching and my study of cognitive theory.

Teachers talk too much; I should know because I am one when I am not running Jacaranda Lodge Bed and Breakfast.  The reason we talk so much is because we are often trying to explain concepts to students but the danger is that all our talk turns out to be just that; talk.  Concepts are in fact based on real things called exemplars and by looking at exemplars we can understand concepts more easily and maybe not have to listen to so much talk, which my Professor of Education at Liverpool University, U.K. (the late Professor Stones) used to describe as often no more than ‘carefully modulated puffs of air’ delivered to the students.

Take the example of assets and liabilities.  Accountancy textbooks give conceptual definitions but what the entrepreneur needs to know is that an asset puts money in your pocket whilst a liability takes it out.  In the world of investing and business, entrepreneurs need to view all financial propositions as either the positive exemplar of an asset putting money in their pocket or the negative exemplar of a liability taking money out of their pocket.  I am indebted to Robert Kiyosaki for the exemplars given and I wonder if his success with the Rich Dad Poor Dad series is in no small part due to him supplying these straightforward exemplars rather than a lot of academic definitions which people often find difficult to understand.

Kiyosaki sums up what I am saying about words not being enough i.e. teacher talk about concepts when the key thing is what the words are telling you i.e the exemplars.  Here is a short quote from Rich Dad Poor Dad:

” In accounting,” rich dad would say, “it’s not the numbers, but what the numbers are telling you.  It’s just like words.  It’s not the words, but the story the words are telling you.”  (Kiyosaki 1998, p.59)

You are looking for the story from the numbers demonstrated through financial statements presented by an owner of a B & B who is trying to sell you the property.  The exemplar and determining whether it is positive and will put money in your pocket or negative and will take money out of your pocket is the story you are looking for - with, of course, the help of your accountant.

References

Kiyosaki, R.T. (1998).  Rich Dad Poor Dad.  TechPress:  Scottsdale, AZ.

Stones, E. (1994).  Quality Teaching:  A Sample of Cases.  Routledge:  London.

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I mentioned in the previous article, ‘The left hand side of the quadrant’, that Robert Kiyosaki of  Rich Dad Poor Dad fame, would place a Bed and Breakfast business in the left hand side of the quadrant under S for self-employed and not in the B quadrant on the right hand side.  Why is this?  Because he sees a B business as much larger than a single Bed and Breakfast; B business would be a large franchise chain. A Bed and Breakfast could only make it to the right hand side through franchising the operation.  Of course this can be done and I believe it already has to some extent in Tasmania and New Zealand.

But there is more that is truly revolutionary.  B business owners can walk away from their businesses for 12 months or longer and find them still operating when they get back as efficiently as when they left or more likely bigger and better.  If you are anything like me your first thought is likely to be but that is impossible or the man is crazy.  If I walked away from my Bed &Breakfast business for 1 month, never mind 12 months, it would be in disarray by the time I got back.  Could this be why the Bed & Breakfast is classed as belonging to the left hand side as self-employed whereas a B business is a completely ‘different kettle of fish’?  Yes, it is just that, and most of us do not realise this.

A large B business would be McDonalds or Microsoft which just keep growing.  For most Bed & Breakfast owners it is out of our league unless we franchise or open up another avenue in tandem with the Bed & Breakfast.  It is this avenue which I shall look at now.

Forming a co-operative amongst Bed & Breakfast owners can be a good way of keeping costs down for surface cleaners and washing powder, but it can also lead to much more than that.  As the co-operative expands so you can find yourself with a B quadrant business which will tend to take on its own momentum as more people introduce others to the co-operative.

You can form your own co-operative, as wine producers do in various parts of the world, or plug into an existing one.  I have joined Network 21 which Robert Kiyosaki describes as the best in network marketing businesses and possibly the perfect business for the development of a B quadrant income that you can eventually leave whilst it still keeps growing exponentially.  Something to retire to if you get too old to deal with the breakfast making, cleaning etc. in the Bed & Breakfast.

My wife and I have built a small network of Bed & Breakfast owners around Brisbane and Mt. Tamborine and you can do the same.  It only requires you to go around Bed & Breakfasts in your locale and introduce the idea to the owners.  Network marketing is a part of the new economy and as a business model is growing at a huge rate.  If you wish to join please contact me and I will forward you the values, vision and mission statement of the co-operative; only serious players please.

References

Kiyosaki, R.T.  (2005).  The Perfect Business:  An interview with Robert Kiyosaki.  Momentum Media:  VideoPlus, Inc. Cashflow.

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Robert Kiyosaki’s Rich Dad Poor Dad books are now famous everywhere and well worth reading if the series is new to you. They give any budding entrepreneur or even any budding person a chance to see how money is earned from different angles. There are two sides to the quadrant, the left hand side and the right hand side and the overall diagram looks like this:

Each part of the quadrant can be looked at from different angles but particularly earning potential and tax advantages. E would be limited in earning as the person is usually restricted by a salary or weekly wage and gets a heavy slug from income tax.

Bed & Breakfast would be in the S self-employed square. Kiyosaski says that this is the quadrant where people gather who want to do it their way, like the old Frank Sinatra number. He also believes that the S in self-employed could stand for psychotic as the person often slaves away for hours with little return doing it his or her way, with the reward being that at least you get to be your own boss and the feeling that nobody does it better, again reminiscent of an old number.

This interpretation may be brutal although when you are really working long hours in the Bed & Breakfast it can seem horribly accurate. Yet tax advantages are still better than the E Employee quadrant. Let us look at the tax advantages.

Kiyosaki points out that U.S. tax advantages are not what they once were in the S quadrant and that is probably true for Australia as well. But there are still positives on the tax side for the small Bed & Breakfast owner. You can claim the running of a car or a proportion of its running against tax, depreciation of furniture and fittings, swimming pool maintenance and chemicals, all surface cleaners, laundry powders, lawn mowing, computer rental, internet etc. In other words try and make as many expenses as possible legitimate tax claims against your business.

In Australia you can apply for an income tax withholding variation through the Australian Taxation Office to reduce tax paid on other income by including the loss incurred from a business activity. In other words if you and/or your partner kept their day job whilst running the Bed and Breakfast it is possible to reduce income tax payable from the day job through offsetting loss from the business. Business activity must have an assessable income of at least $20,000 (Section H, Loss Code 1) which should not be a problem in Bed and Breakfast. Certainly you can consider it as a possible safety net because it is during the first 2 years in particular that small businesses struggle to survive and knowing that there is a safety net adds to your confidence.

Further safety can be found under the same ruling where there is loss claimable if ‘the particular business activity has resulted in a profit for tax purposes in three out of the last five years’ (Section H, Loss Code 2); therefore, as long as there has been some profit in the following three out of five years, you have an additional safety net for 2 years of lean times if they come. For full information go to www.ato.gov.au and key 5423 into the search box at the top. This will take you straight to the information.

So what is the difference between the self employed S part of the quadrant on the left hand side and the B Business Owner on the right? As we have seen, Kiyosaki tends to look at each quadrant according to tax advantages and earning potential. The earning potential of the Bed & Breakfast is limited by the number of rooms you have, the number of guests you can attract each year and your own ability to keep going. A B Business is limited by none of those factors. How can this be? Read the next article for a discussion of this revolutionary idea, entitled not surprisingly, ‘The right hand side of the quadrant.’

References

Australian Taxation Office. Instructions for completing the 2008 PAYG income tax withholding variation (ITWV) application. Australia Government: Canberra.

Kiyosaki, R.T. (1998). Rich Dad Poor Dad. TechPress: Scottsdale, AZ.

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 The Gourmet Night

You have decided to branch out and offer a gourmet dinner for 4 of your guests.  You know a good local chef who will prepare the meal for you for a total of $200 ie. $50 per head.  He asks you to purchase the raw food ingredients from a reputable supplier and these cost $25 per head.  You look at the figures from your profit and loss statement, prepared by your accountant and you estimate overheads at $30 per head.  What Selling Price (S.P.) should you charge guests per person to make a net profit of 20%?

Hint:  Look down at the columns from the previous entry for costing breakfast and substitute what you know into the following equation:

S. P.  =  Raw Food Cost  +  Labour  +  Overheads  +  Net Profit

100%    =     $25           +      $50    +        $30      +       20%

Think Back to School:  When you take a term across to the other side of the equation the sign changes, in this case 20% goes from a positive to a negative.

Gather like terms together i.e. %’s and $’s:

       100% - 20%  =  $105

                 80%     =  $105

              100%    =  105    x 100

                                80          1

    Selling Price     =  $131.25 per person

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