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The 3 Biggest Financial Mistakes You're Likely Making in Your STR Business & How to Fix Them

accounting bookkeeping Oct 23, 2020

The 3 Biggest Financial Mistakes You're Likely Making in Your STR Business & How to Fix Them

 

As I was drinking my morning coffee and enjoying the sunrise on my patio outside, I had some thoughts swirling in my head that I wanted to share that I think may be useful for everyone and their businesses.

 
This has been one of the most challenging periods we've faced in our business since we've started, but looking back on it now, I can only imagine how much worse it could have been if we hadn't implemented a few key financial strategies long before this all began that made a MASSIVE difference in our business.

 

And it's because we used these strategies that our business emerged relatively unscathed even through the worst portion of the downturn. In fact, they worked so well that while some hosts were looking to throw in the towel and give back their keys to their landlords, or worse, be too scared to even begin their business, we managed to GROW our portfolio during this period and as of yesterday, we picked up 2 more units from one of our partners with a simple email and this will bring us to 18 units in total in the next couple months.

 

Now, this is by no means a brag post because the 3 financial mistakes I'm about to share were some of the best lessons I've learned as an entrepreneur as I've made literally every single one of them. So, here they are and here's what you can do about them.

 

 

Mistake #1: Not Having A Financial Dashboard

 

Let me ask you a question... Do you know how much money your business made last month? And no, I'm not talking about the number of bookings your Airbnb account says you made, I'm talking about how much money dropped to the bottom line of your P&L for each and every door in your portfolio as pure PROFIT.

 

If you had to think for more than a few seconds about this or don't have a place you can go and quickly pull up this number with a few clicks of a mouse, then you're running your business with blinders on and aren't being as efficient as you could be and should be.

 

This problem gets even worse if you have multiple properties. As you grow your business, you will begin receiving larger payments from Airbnb.  But here's the issue: they will send you these payouts as a lump sum instead of breaking it out individually for each property. Without having a proper way of tracking this, how will you know each unit is cash flowing and whether or not each unit you bring on is even profitable?

 

Someone once told me that "revenue is vanity, but profit is sanity". As a business owner, you have to know your numbers and understand how to read your financial statements. But if you don't have a system in place to produce financial statements to begin with, you won't know if your winning or losing, not until it's too late.  Fortunately, this is a simple problem to fix.

 

Solution: Have an Accounting/Bookkeeping System and Keep Track of Your Numbers

 

In our business, we know, down to the penny, how each of our properties is doing at any given moment for each and every month, because we run a separate profit and loss statement on every single unit in our portfolio. This may sound like it's hard to produce, but I can access this information with a couple of clicks of a mouse.  How?  By having a financial dashboard.

 

The moment we started tracking this in our company, everything began to change. There were months we thought certain units had absolutely crushed it, but when we dove deeper, we found there were certain units that were actually LOSING money.  Once we could see what was going on, then we could quickly make adjustments, know what we had to do to increase revenue or reduce costs, and seemingly, overnight, we dramatically improved our profitability across the board.

 

To do this, you need an accounting/bookkeeping system to keep track of your numbers. We personally use Quickbooks in our business which is a software that directly pulls your transactions from your bank account, but you could also use a similar system like Xero, as well.  If you have an accountant, you'll want to use software that your accountant works with.  So, ask.

 

Regardless of the system you use, the most important thing is that you use something.  This way, you'll know your numbers inside and out.

 

Mistake #2: Running Your Business Out of One Checking Account

 

If you're like most short term rental operators, you're likely running your business using what I call "bank balance accounting," meaning you measure your results by simply logging in your bank account and seeing if there's any money in there (note:  this is not a real accounting practice).  If you have enough in there to pay your bills, you relax.  If you don't, you panic and make hasty decisions.

 

But here's the problem with that seat-of-your-pants system:  as a business owner, you have additional responsibilities and financial obligations you are accountable for, particularly when it comes to paying taxes. This, unfortunately, was a lesson I had to learn very viscerally (Uh, oh).

 

Earlier in my career, we had a business that was selling physical products internationally.  While we were making multiple six-figures in sales, we didn't account for the sales taxes that were set to be due on this revenue. Long story short, the government came knocking and hit me up with a back tax bill of more than $50,000.

 

When my CPA told me this number, my jaw nearly hit the floor.  I remember feeling completely furious and pissed at my accountant, saying things like, "How can that be? This is highway robbery!"

 

But anger soon turned to fear and fear to panic.  The reality was, all of our cash was tied up in inventory and we had very little liquidity.  Because we didn't plan properly for this, by having a separate account setup, this ultimately collapsed our business and ended up being a very painful lesson.

 

So, if you're running your business with only one bank account, here's how to fix that.

 

Solution: Have Proper Account Infrastructures to Manage Your Cash Flow

 

To prevent this from happening to you, manage your cash flow properly by setting up multiple accounts at your bank, each with a specific purpose.  You may want to read (or listen to) the book, Profit First before you do this.  Mike has a foolproof method for the accounts you should set up and explains very clearly exactly what each will be used for.

 

Without getting into all the details of this, you should be setting money aside for taxes, your operating expenses, and for you, the business owner.

 

The moment we created this plan and stuck to it, we never worried again about our tax liability or the bills for our business because the money for these was set aside first. 

 

 

Mistake #3: Not Having a Reserve Fund For Your Company

 

Have you heard the phrase "cash is king"? Well, until you run into major financial difficulties with your business, you won't fully appreciate how important it is to have some cash on hand.  Cash is not only necessary for any emergencies that pop up but you will need it if you want to be able to quickly take advantage of opportunities that may come your way.

 

We have all been told how important it is to have an emergency fund for our personal finances.  The rule of thumb is usually 3-6 months of your living expenses.  What is stunning to me, though, is that most people don't apply this lesson to their business and they should.  Because they don't, when a challenging time shows up, they either have to put their own money into the business to keep it afloat or they are forced to close up shop.  Neither option sounds good.

 

Solution: Set Aside a Percentage Of Your Profits in A Separate Bank Account as a Contingency Fund

 

Here's an interesting question to consider: If your bookings and revenue stopped entirely for a prolonged period of time, how long would you be able to stay in business and remain solvent?

 

If your answer is less than 3-6 months, then this is something you need to get a handle on FAST.

 

In our business, we set aside a portion of our profits in a separate account for this reason.  This account is meant to be left alone until we build up enough reserves to cover all of our operations for many months.  Once that emergency fund is covered, then we are able to use any extra to make strategic moves when opportunities present themselves.

 

Having this cash in place bolstered our business during the downturn and enabled us to remain calm and relaxed, knowing that our bills were covered even with less revenue coming in.  More importantly, it allowed us to capitalize on some amazing opportunities that helped our business expand while most hosts were running for the exits.

 

I heard someone say once that you're smart if you learn from your mistakes but you're a genius if you learn from other people's mistakes. Believe me, you don't want to learn the painful experiences I had to go through in order to learn these lessons.  If you're currently making any of these mistakes, you still have time to recognize them quickly and make the changes necessary to protect you and your business.  This way, you can avoid any or all of the consequences I mentioned and reap all of the benefits, too.

 

Hopefully, these tips are helpful to you and make your Short Term

Rental Business more profitable than ever before.  We wish you good luck!

 

 

Combined authors, Michael Stead & Katrina Rossol

© The Authors, used with permission

June 2020

for Short Term Rental Revenue

 

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