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Projecting Your B&B Expenses

July 20, 2008

by Kit Cassingham

A typical U.S. bank wants to see a five year projection of your expenses. While I find that to be an interesting exercise I don't find it useful because there are too many variables in a business and society that moves to fast. The changes caused by all those variables make projections beyond the first couple of years. Your expense categories will probably be different than what I illustrate here, but the concept transfers to whatever approach you take.

Making money in your bed and breakfast is so much fun! And it's the money you make that pays the bills, right? So you better be good projecting income before buying a B&B or expanding the one you have. Here are some pointers on doing just that.

% Est. Category
5.00 Advertising
2.00 Auto expenses
1.00 Commissions and bank charges
1.00 Dues and subscriptions
6.00 Food
2.00 Insurance
40.00 Mortgage
1.00 Professional (legal and accounting)
9.00 Savings accounts
8.25 Supplies (cleaning and office) and Maintenance
3.25 Taxes and licenses
2.00 Travel and entertainment
7.00 Utilities
12.50 Wages
100.00 Total

These expenses are based on a four-guestroom B&B inn that is about four years old. You use these percentages to project expenses until your research reveals actual expense numbers. Once you have "real" numbers wired into a spreadsheet you can use these percentages to evaluate your cash flow's strengths and weaknesses. You can also use these percentages to analyze an existing inn's expenses to help evaluate its business. Don't project beyond the first year with these values because I've budgeted 100 percent of your income. You won't see that profit on paper if you use these percentages continuously; reality takes over after the first-year projections.

Following is an explanation of what I have lumped into each category. Note: I've consolidated my usual categories to keep this article brief, but the concept is the same regardless. It doesn't really matter where you put an item as long as you account for it. Some folks like detailed accounting forms while others like very basic. That's a personal issue -- go with your style.


  1. Advertising -- phone book ad, brochure, web site, letterhead, business cards, postage, web site, amenities
    [This is the last budget item to cut when you are trimming costs. You have to keep the word out there you are in business and what your guest experience is. If you trim this budget item you’re trimming your chances at success.]

  2. Auto expenses -- gas, insurance, and maintenance
  3. Commissions and bank charges -- commissions to travel agents, online reservation services, and RSOs (reservation service organizations), bank fees on credit card charges and for your account use
  4. Dues and subscriptions -- join the chamber of commerce, hotel/motel association, a local (community and/or state) B&B association, and PAII.
    [To join an association is to acknowledge "No man is an island" and that there is strength, comfort, and support in groups. Be involved in as many levels as your budget will allow: local, regional, state, national, and international. Being in an association makes a statement about you:

    • you are making a contribution to your community -- not just taking.

    • you are a professional who cares and wants to be at your best.


    An association has the power to shape state legislation for B&Bs, a benefit to everyone in the state, member or not.]
    Subscriptions maybe for your professional development or magazines for your guests.

  5. Food -- guest food.

  6. Insurance -- for the inn and business (this doesn't include medical or life).

  7. Mortgage -- includes any debt service you are paying for the purchase of your inn: purchase loan, investors, and miscellaneous loans.

  8. Professional -- accountant, attorney, consultant(s).

  9. Savings accounts -- you want savings accounts for the unexpected, like the boiler breaking the day after the warranty expires, the new roof years (?) down the road, and for the expected like improvements, decorating, and furnishings
    [No other B&B consultant talks about this or the Capital Expenses budget item. I include it as much as anything to remind you these are real expenses you will encounter. You may choose to not budget the money now, and use that money elsewhere, but you should at least be aware of the fact you’ll need to have money for these contingencies — like a line of credit. Awareness is a lot of what this is all about.]

  10. Supplies and Maintenance — cleaning supplies are for rooms, laundry (or laundry charges specifically), and yard; toilet paper, tissues, soap and shampoo; office supplies like pens, paper, postage, paper clips, computer supplies, staples, note pads, copier paper; maintenance items.

  11. Taxes and licenses -- total taxes; business, property and employee taxes (do not include sales tax in this line item!), and all licenses; business, food, liquor, sales.

  12. Travel and entertainment -- done for professional growth and education: association meetings, networking with other B&Bs, seminars, and even local dining establishments to stay up-to-date on guest options.

  13. Utilities — water and sewage, phone, heating fuel (gas, propane, coal, oil, wood), electric, trash, cable/satellite dish, Internet access, ...

  14. Wages -- this covers staff wages and contract labor payments.

As you work with these numbers you will start to see that your cash flow isn't consistent each month. If you find your average annual income is $120,000, you won't see $10,000 monthly because of the variables in the formulas. The variables include occupancy rate and the number of days in a month.

For example: you have four rooms, an average room rate of $100, a 15 percent occupancy rate, and 28 days for February. Your income will be $1,680. But if February is one of your busy months then your income would go to $9,520 with an 85 percent occupancy rate. Change the month from February to January and your income at 15 percent is $1,860 and at 85 percent is $10,540 -- adding three days increases your income $180 or $1,020. Now play with the room rates and number of rooms and you have a truly helpful tool in determining how to approach your B&B concept. Since the initial expense projections are based on a percentage of income, your expenses will vary until you have hard numbers to plug into the spreadsheet.

And you thought this would be easy! Actually it isn't difficult, just involved. This is a great project to assign to your computer's spreadsheet program. As you prepare your cash flow projections, be prepared to calculate numbers for at least the first three years. The first year's projections should be monthly, the second and third years can be quarterly. Some banks may even require a fourth and fifth year of projections. Annual projections tend to be fine for this.

[NOTE: Sales tax collected on occupancy and gift shop sales is neither an income nor an expense item. You are only a conduit for the various government agencies who require those taxes. Do not budget for it!]

Don't forget purchase costs and expenses. Based on a $500,000 B&B inn purchase, you can anticipate the following (these numbers are based on my Colorado experience).

Pre-purchase:Purchase (you could opt to pay points also):Capital Injection:Personal:
appraisal $5,000
earnest money $10,000
inspections (building, water, septic) $500
loan application $500
professional (legal and accounting) $4,500
Sub-Total $20,500
insurance $2,000
loan origination (1%) 3,500
other closing and recording fees 1,000
sales tax (7% of personal items) 2,100
title insurance 2,000
transfer tax (1/2 of 1% of real estate) 1,875
Sub-Total $12,475
advertising $2,000
deposits (gas/electric, phone, water, trash) 500
fuel (propane, wood, coal) 500
licenses, permits, transfer fee 500
operating inventory (food, supplies) 2,000
Sub-Total $5,500
moving $7,000
travel 2,000
Sub-Total $9,000
Grand Total $47,475

You may also get into costs of repairs and renovations to bring your inn to a style that fits your desired market niche, or at least freshen it to your standards. These costs could run into tens of thousands of dollars. On top of all of this money we've talked about don't forget to include your down payment. In this example of a $500,000 purchase price, anticipate a $150,000 down payment. Before renovation costs are factored in, you could need as much as $197,475 for this purchase to get this change of lifestyle.




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