How to Start a Bed and Breakfast

how to start a bed and breakfast

This article is part of our Bed and Breakfast Business Startup Guide—a curated list of articles to help you plan, start, and grow your bed and breakfast business!

It’s an image that puts you in an instant state of relaxation—a roaring fireplace in a cozy rural bed and breakfast, sharing stories with fellow travelers while enjoying a glass of brandy or your favorite red wine.

The romantic notions so closely associated with a bed and breakfast have made owning one a popular dream for many people. This is one of the reasons the bed and breakfast (B&B) industry has grown so significantly in recent years.

Do you sometimes drive by a historic property and find yourself fantasizing about turning it into a bed and breakfast? Do you imagine spending your mornings preparing a hearty meal for tourists from around the globe and your afternoons filling the place with the intoxicating aroma of fresh-baked cookies and muffins for when they return?

If this is something you have given serious thought to, starting your own bed and breakfast can be a rewarding and profitable venture. But be sure to go in with both eyes open, as it also requires constant hard work and attention to detail, which might not be a keen interest for everyone.

This article offers step-by-step information on what goes into prepping for and launching your very own bed and breakfast business. To provide an inside perspective on what it takes to run and maintain a successful B&B, I interviewed Kathleen Karamanos, owner and operator of Fundy Heights Bed and Breakfast in Saint John, New Brunswick, on Canada’s scenic East Coast.

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What is a bed and breakfast?

If you’ve never had the unique pleasure of staying in a bed and breakfast, you may easily confuse it with other small, privately run inns and motels.

A bed and breakfast is a hybrid which blends the luxury and comfort of an upscale hotel with the atmosphere and décor of a beautiful private residence. Often they are older historic properties which people seek out for the experience of centuries-old hospitality. In fact, 36 percent of American B&Bs have received some kind of historical designation by a preservation society.

Whether the property is historic or not, what makes the experience different from hotels and motels or vacation rentals is the personal attention guests receive from the owner. Playing the role of host, chef, and meal companion, the B&B owner is fully immersed in the guest’s experience. As the name would suggest, the nightly fee includes a hearty, home-cooked meal the next morning.

It’s worth noting that the lines between vacation rentals and traditional bed and breakfasts are ever more blurry, thanks to Airbnb. Prior to 2017, Airbnb was much more focused on the vacation rental experience—meaning your guests check in and it’s likely that you might not ever seem them, and even more likely that breakfast isn’t part of the deal. But these days, you’re more likely to find B&Bs listed alongside regular rentals on Airbnb. 

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The state of the B&B industry:

In the United States alone, the B&B industry is expected to top $5 billion in 2020, with more than 19,000 establishments across the country. Unlike major hotel and motel chains, bed and breakfasts are typically not owned by corporations.

According to the latest figures, B&B ownership in the United States breaks down as follows:

  • 72 percent of owners are couples
  • 18 percent of owners are individual females
  • 5 percent of owners are individual males
  • 5 percent of owners are non-couple partnerships
  • 79 percent of owners live on the premises

The average American bed and breakfast has an occupancy rate of 43.7 percent and an average daily rate of $150. One way to stay on top of B&B and lodging trends is to connect with industry associations like AIHP, the association of independent hospitality professionals.  Bed_and_Breakfast_Divider

Step 1: Questions to consider before committing:

Are you a people person?

This more than anything can be a deciding factor in whether your bed and breakfast venture is a pleasant dream-come-true experience or a daily grind which will wear you down in no time.

According to Kathleen Karamanos, being able to interact with your guests is a key aspect of the job. “You have to make sure you enjoy being in the service industry,” she says. “If you don’t genuinely enjoy meeting new people and finding out where they’re from and learning all about them, this is not the business for you.”

There is plenty of anecdotal evidence of bed and breakfast owners who mistakenly thought they could simply check their guests in and then not interact with them again until they checked out, as though they were running a conventional hotel or vacation rental. This approach is a recipe for failure in an industry that relies on word of mouth and social media recommendations.

Do you have a sufficient business background?

The bed and breakfast industry is a common haven for those looking to get out of the high-stress, corporate lifestyle. While there is no question that great relaxation and satisfaction can be found in the decorating, baking, and cooking that will fill your day, there is still a business element that cannot be neglected.

A successful bed and breakfast owner will need to know how to:

It is probably no coincidence that nearly three-quarters of all bed and breakfast establishments in the U.S. are owned by couples. Not only is the workload demanding for only one person, but often it requires two people with very different dominant skill sets. It is very common to see one person handle all the hospitality duties while the other focuses on the business responsibilities.

Are you looking to get rich quick?

There’s nothing wrong with wanting to make a huge amount of money quickly, but you will likely want to look for alternative business opportunities if this is the case. That said, running a bed and breakfast can be a profitable and sustainable business. Many couples use it as a way to provide steady income while maintaining a lifestyle they enjoy. However, it is not the type of business that will provide a huge cash infusion over a short period of time.

There may be special events (conventions, festivals, and so on) which will keep your bed and breakfast booked solid for a stretch of time, but in the long term, occupancy rates will ebb and flow depending on the season. It is practically unheard of for a B&B to be at maximum occupancy all year round. So while you can make a steady profit, you will not “get rich quick.”

Are you prepared to give up weekends and holidays to run your business?

If getting away during holidays and long weekends is important to you, it should not come as a surprise that running a B&B might not be the best business venture for your lifestyle. Your busiest times will be all those occasions when you would normally be enjoying a relaxing get-away yourself. Committing to running a B&B means making peace with the fact that you will be working when the rest of us are traveling and playing.
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Free bed and breakfast business plans

Step 2: Create a bed and breakfast business plan

Every new business can benefit from writing a business plan. You’ll definitely need one if you’re planning to seek funding in the form of a bank loan or investment (more on that in the next step). 

If you’ve never written a business plan before, check out our free library of hotel and bed and breakfast sample business plans. You can also download our free business plan template to help you get started. 

Don’t get bogged down in the process. If you don’t need to seek funding, write a Lean Business Plan instead, and use it as a tool to strategically manage your business as it gets up and running and starts to grow. 

Using a tool like LivePlan that has business dashboards that connect to your accounting solution built right in can help you stay on top of your finances and even model scenarios for growth. 

Like, what if you were able to exceed the industry average of less than 50% occupancy? What if you added a second location? What if you increased prices by 10% or hired someone to cook breakfast? Reviewing your financials regularly and especially understanding your cash flow can really help you when it’s time to make a major financial decision. 
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Step 3: Consider your startup financing

Many older couples sell their home or business in order to invest in a bed and breakfast which will serve as both their residence and primary source of income. If this is not an option for you, there are several funding options, including finding private investors, getting a small business loan from a bank, or finding other business support programs. How much money needed to get the project off the ground will depend on whether you are inheriting a ready-made B&B or converting a property into one.

If you are converting a residence into a bed and breakfast, a suggested rule of thumb is $20,000-$40,000 per guest room for a small property and $35,000 to $50,000 for a larger one. This factors in costs for remodeling to meet regulations as well as brand new bedding, towels, appliances, fixtures, and decorative effects for the room.

Always factor in maintenance costs, both preventative, and emergency. Even in the best-case scenario, you are still going to pay for regular upgrades and maintenance to the exterior, plumbing, and electrical. You’ll also have to be prepared for the worst-case risks when a plumbing pipe bursts or an entire section of the building needs rewiring. If these costs are not factored into the startup financing, you can find yourself in an operational bind before you know it.

Additional resources to help you fund your business:

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Step 4: Choose your location

While it is true that almost any private residence can be converted into a bed and breakfast, not every residence is well suited to being a B&B. To be successful and stand out amongst the competition, there should be something unique and attractive to the building you plan to use. Spend some time on choosing the best location before you buy your property

Many bed and breakfasts use a historic angle to draw guests. Often a Victorian home can give travelers a sense of what it would be like living in the area in the late 1800s. Others may use proximity to the waterfront or other notable features as a way to entice guests to stay there.

Kathleen Karamanos believes the convenient location of her bed and breakfast is a big selling point for her business. The Fundy Heights B&B is close to downtown as well as to the major highway, which brings travelers north from the New England States, Southeast to Nova Scotia and Prince Edward Island, and West to Montreal, Ottawa, and Toronto.

Other key factors to consider when choosing a location include:

Zoning and regulations:

You’ll want to study up on all local and state or provincial zoning by-laws. You may have the most beautiful, well-maintained vintage property that seems perfectly suited for bed and breakfast conversion, but if it is in a strictly residentially zoned neighborhood, it may be over before you begin.

Check to see if a business license can be granted for the property at your preferred location. Because a B&B is not an industrial operation, it should not be too difficult to get the necessary clearances, but you cannot take it for granted. Without the green light from the zoning commission, you will not be able to move forward.

Then, be sure to find out what other specific bed and breakfast regulations are in place in your jurisdiction. There was a time when it was common for multiple guest rooms to share a common bathroom. 

If this is the plan for your bed and breakfast, you would not be able to operate in the Province of New Brunswick, for example. Kathleen Karamanos is required to have a separate bathroom for each family unit who stays there. Half of the rooms have a private bathroom while the other half have stand-alone bathrooms assigned to each room. Make sure you are aware of all local regulations for running a bed and breakfast as they vary from jurisdiction to jurisdiction.

The right local economy:

Like any other part of the hospitality industry, staying at a bed and breakfast is really a luxury which is not available to everyone. It is crucially important that your B&B is located within a community that has a proven tourism track record and a local economy that can support it.

Don’t give yourself an unnecessarily tough row to hoe by opening up a bed and breakfast in an area that doesn’t have the tourist draw to support it.

Additional resources to help you choose a location:

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Step 5: Take care of permits, licenses, and certifications

You’ll need to make sure you have all of your business license and certifications in place. This goes well beyond simple zoning clearance and covers all the regulatory requirements in running this type of hospitality service.

One comprehensive checklist for all the business licensing and support requirements is as follows:

  • Conditional use and sign permits (if required)
  • Business license
  • Business name and/or DBA registration
  • Certificate of occupancy
  • Account for transient/lodging taxes
  • Sales tax account (seller’s permit)
  • Federal and State Tax ID
  • Business checking credit accounts
  • Merchant account (to process credit cards)
  • ServSafe food certification (if required)
  • Health Department inspection
  • Fire Department inspection
  • Liquor license, if applicable
  • Insurance (business, liability, property, and liquor liability if applicable)
  • Property management/reservation and accounting software

Step 6: Develop your marketing strategy

Very few industries are more reliant on word of mouth to attract new customers than a bed and breakfast.

It would seem the best way to get new guests through the door is to keep your current guests more than satisfied with their stay. Especially since the modern day “word of mouth” is a travel site review, where a bad review can be a permanent stain on the operation’s reputation.

Use email templates to help streamline your communications with guests and your staff to save you time and increase guest satisfaction. Keep your website up to date, and consider whether it makes sense to use listing platforms like Airbnb. And always follow up and ask for reviews 

Kathleen Karamanos launched a specific strategy to establish strong ties to the travel sites and local tourism boards. That strategy has since proven to be very successful.

“We received a certificate of excellence from Trip Advisor in 2015 and since I took over in 2014, I was able to raise our Canada Select (National accommodations rating program) score from a 4 to a 4.5,” she explains.

Kathleen believes you cannot overestimate the importance of travel advisory ratings in attracting guests. Despite being in a demographic known for their comparatively sparse use of technology, most of her guests find her bed and breakfast and make their first assessment online. But don’t panic if you get a bad review. It’s an opportunity to improve going forward. 

She also strongly recommends getting involved with local travel boards and groups, as indirect marketing of your establishment can be very effective in increasing your occupancy rate.

Typically, a B&Bs target market consists of the following:

  • Tourists
  • Business travelers
  • Couples on a romantic getaway
  • Locals in need of extra bedrooms

Start thinking of special promotions and offers that would appeal to each of the above segments.

For example, partnering with a local spa to offer a reduced rate on a couple’s massage to guests who stay at your bed and breakfast is a great way to attract more business and it is benefiting more than one local business. Find other win-win partnerships and it will go a long way to strengthening your B&B’s long-term prospects for success.

Additional resources to help you with your marketing:

Step 7: Hire your staff

Perhaps you are part of a couple looking to open up a bed and breakfast and you plan to divide the chores and responsibilities among yourselves. This is not at all uncommon. But before you decide to join their ranks, you should have a complete picture of precisely how labor intensive running a B&B can be.

Susan Poole is the owner of the award-winning 40 Bay Street Bed and Breakfast in Parry Sound, Ontario, and serves as a bed and breakfast coach for new and prospective owners.

She outlines the daily and hourly commitment to keep the place up and running this way:

  • Breakfast takes three hours from starting preparation to finishing the clean-up
  • Each bedroom and bathroom plus laundry take an hour
  • Ensuring that rooms are booked takes up a lot of time as well

All of this is on top of the other weekly chores that must be done, such as grocery and supply shopping. If you are not fully prepared to take on this workload yourself and be fresh to interact with your guests, you will want to bring in hired help.

Each owner will have to decide which responsibilities they want to take on themselves and which ones they want to delegate to employees. Kathleen Karamanos decided to take a culinary course in New York prior to taking over her B&B and believes it has made a huge difference in the quality of service she is able to provide to her guests.

Additional resources to help you with hiring:

Resources:

Below you’ll find a list of resources that can help you find out more about what you’ll need to do to start your successful bed and breakfast business venture.

Websites:

Free Bed and Breakfast Business Plans: The Bplans library of free sample business plans includes a section of four sample business plans exclusively for those interest in starting a bed and breakfast.

BedandBreakfast.com: Provides information for aspiring and experienced innkeepers, educational resources, and everything you need to create the best listing for your inn.

The American Bed and Breakfast Association: The American Bed and Breakfast Association is an organization dedicated to the promotion of bed breakfast inns nationwide.

InnSpiring.com: An active forum with some very experienced innkeepers and aspiring innkeepers who aren’t afraid to ask questions to help themselves get where they want to be. This site also contains recipes, resources, and articles.

Books:

“I’ve Always Wanted to Run a Bed & Breakfast”: The Secrets to Starting and Running a Successful B&B by Chris Bengivengo and Michelle Bengivengo

Starting & Running A B&B: A Practical Guide to Setting Up and Managing a Successful Bed & Breakfast Business by Stewart Whyte

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Tony SekulichTony Sekulich

Tony is a freelance writer and editor based out of Toronto, Canada. After writing for newspapers and magazines, Tony wrote for film and television where he was recognized with a Leo Award nomination for Best Screenwriting in an Animated Series for his work on the APTN animated series Animism: The Gods Lake. You can follow Tony on Twitter here: @TonySekulich



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5 Things Startups Can Learn From Angel Investors

what startups can learn from angel investors

Startups and high-growth businesses can learn a lot from angel investors, regardless of whether you’re seeking funding to grow your business or not. And if you pitch and get turned down, their feedback can be really valuable in helping you think about what you need to do next to meet your funding goals.

I’ve seen this over and over in my dealings, both as an angel investor on my own and as a member of a local angel investment group. Most angel investors don’t just reject startups—we explain why. And we don’t just say yes either; we explain what else is needed.

What we did at the Willamette Angel Conference (from 2009 to 2017) was the rule, not the exception. We took a $100 fee for submissions, and what we offered in return was real feedback. To see what I mean, take a look at the blog posts and videos available at Gust and do a web search for AngelList.

Angel investors are individuals willing to invest their own money to fund new startups. Most of them have made money with startups; they’ve been through the wringer, they’ve succeeded, and they are in a position to share. They can teach you a lot. So if you’re a startup, always focus on listening first.

angel investment not all businesses are good investments

Lesson 1: Not all good businesses are good investments

One of the most common misunderstandings is the assumption that angel investors invest in startups that will become strong, independent businesses.

However, the angel investors don’t make money from their investment until they can sell their ownership for actual real money—that is, until an exit, such as the business being acquired by a larger business, or registering for public stock sales. So, somewhat paradoxically, investing in a startup that becomes a healthy small business, generating its own cash and profits, can be a loss for investors. If that business never gives the investors a way to sell their ownership for actual money, then there is no return. No matter how good your business is, if it doesn’t offer investors cash out at some point, it’s a bad investment.

If the investors end up with a minority share in a healthy business, one that never sells out, then they never get their money back.

I think of it like the diagram here below—many really good businesses are not good investments:

This explains one very important point for your startup: If it has the potential to start, grow, and be healthy without needing outside investment, you could be better off without investors.

Keep in mind that when you take investment, you’re giving the investor a part of your business. When they have a stake in your company’s success, they have a vested interest in influencing your day-to-day operations for profitability. Never seek investment when you don’t need it.

Read more of my articles on seeking investment:

angel investor lessons not all metrics are useful

Lesson 2: Don’t sweat meaningless numbers

My personal favorite in the “pure nonsense category” is the IRR, the internal rate of return, something that was interesting for about one hour as part of the MBA curriculum, but which has no relevance in the real world.

Combine a wild guess on future growth for several years, add in a wilder guess about future valuation prices and exit opportunities, and then pretend that the combination means something. It really only means that you haven’t recovered from your MBA years. Forget it. You’re out of school now.

I have to admit, I’ve seen some judges of graduate-level business plan competitions care about IRR, but never an actual angel investor during actual due diligence.

A close second is projecting stupid profitability into the future.

Please, get a clue: Real businesses usually turn out net profits in single digits, and only rarely up as high as 20 percent. Angel investors are not impressed by projections of 30, 40, 50 percent or more profits on sales. They don’t think that means you’ll be profitable, but rather that you don’t understand what you’ll need to spend. If your sales forecast is reasonable, then you are probably underestimating costs, expenses, or both, in your expense forecast, budget, or projected profit and loss.

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And it gets worse—a lot of angels, in a lot of tech business markets, prefer high growth and deficit spending to profits. I was told once that my business was too profitable for VC investment. Many investors believe that startups have to choose between profits or growth, and can’t do both at the same time (more on this in lesson 5 below).

Finally, depending on context, those big market numbers can work against you. Not that bigger markets aren’t everybody’s goal—the investors’ as much as yours—but because top-down market numbers are annoying. Angel investors hate projections of sales based on some small percentage of a huge market, as in “if we get just one-quarter of a percent of this $20-billion market.”

Read more of my articles related to meaningless numbers:

angel investor lessons know how to scale your business

Lesson 3: You have to be able to scale up

Good investments need growth, and growth requires what investors refer to as being “scalable.”

This is a very important concept: Scalable means a business can ramp up, increase its volume enormously, without increasing its fixed costs proportionately.

Can you jump from selling 10 to 100 to 1,000 to 10,000 without a proportional jump in headcount and overhead? Product businesses usually can. Some web service businesses can. But a lot of businesses can’t. This is why investors don’t usually like service businesses. They tend to depend on the people more than the product. Key assets walk out the door every night. They can’t scale up.

Investors use the term “body shop” to refer to the many service businesses that depend on people doing specific things for each unit of sales. They will ask “do the assets walk out the door at the end of the working day?” Professional services such as attorneys, accountants, consultants, and design or product development companies are classic body shop businesses that can’t scale. Rand Fishkin’s book, “Lost and Founder,” gives some interesting perspective on a company that transitioned from an unscalable consulting business to a SaaS product. Fishkin is pretty frank about the pros and cons of scaling his business and taking on investors.

Read more of my articles on what investors want:

angel investor lessons your business needs a secret sauce

Lesson 4: You need a secret sauce

Angels want you to have some way to defend your business against competition.

They’ll ask, “what’s proprietary?” They’ll ask, “what’s to prevent a competitor with a bigger budget from jumping into your market and taking it over?”

They’ll talk about whether or not you have a so-called secret sauce that sets you apart from the competition. All that is about defensibility, also called barriers to entry.

Sometimes, this discussion is about patents. Patents can protect inventions, formulas, and algorithms. In a perfect world, having patent protection would be a good answer to concerns about defensibility. In the real world, although patents are always an advantage, patents alone aren’t enough.

Investors look for what the patents cover and ways competitors will work around them. Not all patents are enforceable and not all patents rule out ways to work around them, getting to the same market without violating the patents.

The world of startups is littered with the carcasses of businesses that were protected by patents in theory, but not in fact. Patents require active legal budgets to protect aggressively against infringement.

There are other factors that make startups defensible. Trade secrets, effective branding, differentiation, and first-mover advantage can help. What investors will teach you is that you don’t want to identify a great market without having the resources to grow fast and seize market share before others do.

angel investment advice it costs money to grow your business

Lesson 5: Rapid growth costs money

Consider this the two sides of a single coin: First, angel investors want companies that grow fast and exit. Second, companies that grow fast are going to present both the need for more investment and the growth potential to justify more investment.

Therefore, companies that can fund their own growth are less interesting than companies that need to raise more money later to finance continuing growth.

Normally, attractive growth takes investment. It doesn’t fund itself.

The scalable defensible company that has a shot at increasing sales 300 percent per year for a few years needs to invest in marketing expenses, working capital, employee ramp-up, product development, infrastructure, and other factors that support that growth.

Product companies, for example, need to spend on product development and materials and prototypes before they launch, and they have to buy inventory to build products. Then, if they sell through channels, they have to wait months to get paid by distributors or retailers. All that absorbs cash resources. Web companies, as another example, need to develop the product offering in code, and test, before they launch.

Most of which boils down to: Listen and get a clue

If you’re working a startup and dealing with angel investors, it’s not up to them to understand your story and believe in you; it’s up to you to have something they want to invest in.

If they don’t get it, first listen carefully to what they have to say. Their most powerful tool by far is the simple use of the word “no.”

And, don’t expect angels to give uniform advice.

I’ve seen many times how a startup pitching a focused targeted ramp-up strategy, using a narrow market as a beachhead, will be told by angels that it’s too narrow—so the entrepreneurs change the pitch to go all the way to the huge market instead, to get turned down as “too broad,” or “too many moving parts.” Angels don’t do that on purpose to drive you crazy; they’ll have different opinions.

Read this article on unsuccessful pitches:

And one final word: If you pitch repeatedly for angels and nobody is interested, get a clue.

You might not have a good investment to offer. Revise your business plan, do something else, or maybe you have one of those good businesses that isn’t a good investment.

The only general rule? There are no general rules.

Editor’s note: This article was originally published in 2015. It was updated in 2019.

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Cash Flow 101: The Basics

what is cash flow

This is the first installment in our Cash Flow 101 series—our ultimate guide to help you understand and manage your business’s cash flow, and prevent future cash flow problems.

What is cash flow? A definition

Cash flow measures how much money is moving into and out of your business during a specific period of time.

Broadly speaking, businesses bring in money through sales, financing, and returns on investments—that’s cash flowing in.

And they spend money on supplies and services, as well as utilities, taxes, loan payments, and other bills—that’s cash flowing out.

Being cash flow positive means that more money is coming into your business than is going out of your business.

Being cash flow negative means more money is leaving the business than you have coming in.

The easiest way to think about cash flow is to think about the total amount of money that moved into or out of your business checking account during a month. If you finish the month with more cash in the bank than when you started, your business is cash flow positive. If you have less cash at the end of the month, your business had negative cash flow.

Why monitoring cash flow is important for small businesses and startups

Running out of cash is the number one reason that small businesses fail. Even if you are making plenty of sales, if you don’t have enough cash in the bank, your business won’t be able to pay its bills and stay open.

When you measure your business’s cash flow, you are keeping track of how much actual cash is moving in and out of your business so you can ensure that your business is staying healthy. If you’re the type of business that invoices for your work or product after you’ve delivered and there’s a lag time while you wait to get paid, keep in mind that accounts receivable (money you are owed) isn’t the same thing as cash until you actually have those dollars in hand.

Why cash flow forecasting is key

You’ll want to monitor your cash flow monthly so you can start spotting trends in what’s actually happening with your cash inflow and outflow. But it can be even more important to forecast your cash flow so you can anticipate when your business might run low on cash in the future.

You can then plan ahead and open a business line of credit or find other loans and investments to help you cover that point in the future when you’re going to need a little extra cash.

It’s a lot easier to get help from a bank or investor before you’re actually in a crisis where you’re not sure you can cover your bills. If you wait until you’re really in trouble to take action, lenders may see you as too much of a risk and turn down your request.

Your cash flow forecast can also help you plan the best time to make a big purchase, like a new piece of equipment or a company vehicle.

Don’t forget to account for the unknown, though. Business owners can’t predict the future—particularly when it comes to any unforeseen expenses they might incur (e.g., a truck breaking down prematurely and needing replacement, or a data breach resulting in a forced increase in IT spend). And they also can’t know for certain that their clients will pay their bills on time.

So, when you’re forecasting or looking at your actuals for the month on your cash flow statement, remember that having some buffer is a good thing. You don’t want to be in a position where you’ve allocated every single penny, to the point where you can’t accommodate unexpected expenses.

Part of reviewing your financials, like your cash flow, should be thinking about risk, and the effect an unexpected expense will have on your available cash—and ultimately, your ability to pay your bills.

Cash versus revenue and profits

It’s possible for your business to be profitable but run out of cash. That may not be intuitive at first, but it’s because cash and profits are very different things.

The difference between cash and profits:

  • Profits can include sales (revenue) that you’ve made but haven’t been paid for yet, also known as accounts receivable.
  • Cash, on the other hand, is the amount of money you actually have in your bank account. If you can’t use it right now to pay your bills, it’s not cash.

For example, if you’re making a lot of sales but you invoice your customers and they pay you “net 30,” you could have lots of revenue on paper but not a lot of cash in your bank account because your customers haven’t paid yet.

If the money your customer owes you hasn’t yet made it into your bank account, it won’t appear on your cash flow statement. It hasn’t flowed in our out of your business yet. It’s still in your customers’ hands, even though you’ve invoiced them for it.

Meanwhile, you can only pay your bills with real cash in your bank account. Without that cash in hand, it’s going to be tough to fulfill orders, meet payroll, and pay your rent. That’s why keeping track of cash flow is so important. To keep your business afloat, you need to have a good sense of what comes in and what goes out of your business on a monthly basis.

Ready to skip ahead and create your own cash flow statement? Download our free cash flow template now.

Free cash flow template download

How to analyze cash flow

When you’re analyzing your cash flow, you’re looking at the amount of real cash you have on hand at the beginning of the month, compared to your cash at the end of the month. You can also look at it on different time frames, like quarterly, but a good rule of thumb is that look at your cash flow more often is better.

Positive cash flow

Positive cash flow is defined as ending up with more liquid money on hand at the end of a given period of time compared to what was available when that period began.

Let’s say you started with $1000 in cash at the beginning of the month. You paid $500 in bills and expenses, and your customers paid you $2,000 for your services. Good news: Your cash flow is positive, at $2,500 for the month.

If you have positive trending cash flow, it’s easier to:

  • Pay your bills. Positive cash flow ensures employees get checks during each payroll cycle. It also gives decision makers the funds they need to pay suppliers, creditors, and the government.
  • Invest in new opportunities. Today’s business world moves quickly. When cash is readily available, business owners can invest in opportunities that may arise at any given point in time.
  • Stomach the unpredictable. Having access to cash means that whenever equipment breaks, clients don’t pay their invoices on time, or new government regulations come into effect, businesses can survive.

Negative cash flow

Negative cash flow is when more cash is leaving the business than is coming in. When cash flow is negative, the amount of cash in your business bank account is shrinking. This might not be a problem if your business has plenty of cash in the bank. But, it does mean that your business will eventually run out of money if it doesn’t become cash flow positive at some point.

Let’s say you started with $1,000 in the bank at the beginning of the month. You paid $1500 in bills and expenses, and even though you did plenty of work and invoiced your customers for $3,000 worth of services, your customers only actually paid you $200. You’re still waiting for the rest of your payments to come in. Your cash flow is negative: $-300 for the month.

If you don’t have any reserves, your rent check might bounce. If you have a line of credit already established, you might have relied on that to pay part of your bills. Maybe you forecasted your cash flow, and you knew that you were going to be short, that month, so you made a plan to be able to cover your expenses.

One month of negative cash flow won’t necessarily tank your business. But when you start to see a trend, and you don’t do anything to reverse it (or when you’re unpleasantly surprised because you haven’t been tracking your cash flow), that’s when your business is at risk. 

New businesses and startups often have negative cash flow when they’re first getting started. They have lots of bills to pay while they’re getting up and running and there aren’t a lot of sales yet. As revenue from sales starts to come in, hopefully, cash starts to flow into the business instead of just flowing out. This is why new businesses often need investment and loans to get started—they need cash in the bank to cover all of the negative cash flow that happens during the early days of the business.

Negative cash flow can also happen when a business chooses to invest in a new opportunity. The business could be betting that investing in a new opportunity now will pay off in the future. That investment could cause negative cash flow for some time, so it’s important to keep a close eye on cash and have a solid cash flow forecast in place so you know if your business is on track to stay in the black.

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Editor’s note: This article was originally published in 2015. It was updated in 2019.

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Buying a Business | Bplans

how to buy a business

There are some benefits to buying an existing business if you’re not as interested in starting from scratch.

For one thing, when you purchase an existing company, someone else has probably already done a lot of the startup legwork, like verifying that there’s a market for your product or service, establishing a customer base, hiring employees, and negotiating a lease.

The key to buying a business is doing the right research so that you can be confident that what you see is what you’re going to get.

Decide what type of business you want to buy

The kind of business you should buy depends on the types of work you’ve done in your life, classes you’ve taken, or perhaps special skills you’ve developed through a hobby.

It’s almost always a mistake to buy a business you know little about, no matter how good it looks. Not only will you have to struggle up a big learning curve after you buy it, but you might not know enough about the industry to determine whether a particular company is a good value or if it has the potential for high growth.

Beyond choosing something that you know and understand, even better if you can land on something that you love. It’s less difficult—and a lot more fun—to succeed in business when you enjoy the work you’re doing.

Find the company you want to purchase or ask a business broker for help

After you’ve decided what type of business you want to buy, you’re ready to begin your hunt for the perfect company.

Consider starting your search locally—close to home. For instance, if you’re currently employed by a small business you like, find out about the present owner’s circumstances and whether she would consider selling the company.

Or, ask business associates and friends for leads on similar businesses that may be on the market. Many of the best business opportunities surface by word of mouth—and are snapped up before their owners ever list them for sale. Other avenues to explore include newspaper ads, trade associations, real estate brokers, and business suppliers.

Finally, there are business brokers—people who earn a commission from business owners who need help finding buyers. It’s fine to use a broker to help locate a business opportunity, but it’s foolish to rely on a broker—who doesn’t make a commission unless he makes a sale—for advice about the quality of a business or the fairness of its selling price. You’ll need to do your own due diligence.

Do due diligence on the business’s history and finances

When you find a company you’re interested in, you’re going to want to find out as much as you can about it well before you make an offer.

Request and thoroughly review copies of the business’s certified financial records, including:

  • Cash flow statements
  • Balance sheets
  • Accounts payable and accounts receivable
  • Employee files, including benefits and any employee contracts
  • Major contracts and leases
  • Current or past lawsuits or debts, and other relevant information

This review (lawyers call it doing “due diligence”) will tell you a lot about the company you’re buying and will alert you to any potential problems. For instance, if a major contract doesn’t allow the current owner to assign it to you without the other party’s permission, you should enlist the owner to help you obtain the other party’s consent.

Most importantly: Don’t be shy about asking for information about the business.

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Questions to ask if you’re interested in buying a business:

  • Who holds the title to company assets?
  • Is there any potential or ongoing litigation?
  • Have there been any workers’ compensation claims or unemployment claims made by company employees?
  • Has the company consistently paid its taxes and any potential tax liabilities?
  • Can any commercial leases and major contracts be assigned to the new owner?
  • Is there an up-to-date business plan? How do the company’s actuals stack up against their financial forecasts?
  • Has the company given any warranties and guarantees to its customers?
  • Does the company own trade secrets, patents, or other intellectual property? How does it protect those assets?
  • Does the company hold registered trademarks?
  • Are business licenses or tax registration certificates transferable?
  • Is the business in compliance with local zoning laws?
  • Is there any toxic waste or environmental problems on company property?
  • If the business is a franchise, what will it take to get the necessary franchisor approval of the sale?

This isn’t an exhaustive list; you should review any business records that will provide you with information to help you decide whether the business is a smart purchase.

If the seller refuses to supply any of this information, or if you find any misinformation, this may be a sign that you should look elsewhere for the right business to buy.

If you’ve never run a business before, this is a great time to use your network. Talk to people you know who work in similar industries. If you don’t know anyone in your prospective industry, look for networking opportunities through trade associations, or even a business mentor through an organization like SCORE.

Close the deal: Write up a sales agreement

If you’ve thoroughly investigated a company and wish to go ahead with a purchase, there are a few more steps you’ll have to take.

First, you and the owner will have to agree on a fair purchase price. A good way to do this is to hire an experienced appraiser who can estimate the company’s fair market value.

If you’re newer to negotiating business deals, read up a bit on how to be an effective negotiatorNegotiating for Advantage” by Richard Shell is a good place to start. It’s also a good idea to brush up on the key elements of business valuation, so you’re in a better negotiating position. Price and value points will certainly be different based on whether you’re looking to purchase an underperforming business, or one that’s already demonstrated a steep growth trajectory.

If all goes well, you and the business owner will agree on a fair price as well as other aspects of the purchase, such as which assets you will buy and the terms of payment—often, businesses are purchased on an installment plan with a sizable down payment.

After you have outlined the terms on which you and the seller agree, you’ll need to create a written sales agreement and possibly have a lawyer review it before you sign on the dotted line.

For information on how to create a business plan for a business that you’ve purchased, check out Tim Berry’s article, Planning for Purchasing a Business.

Editor’s note: This article was originally published in 2007. It was revised in 2018.

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Nolo
Nolo

Nolo’s mission is to make the legal system work for everyone—not just lawyers. What we do: To help people handle their own everyday legal matters—or learn enough about them to make working with a lawyer a more satisfying experience—we publish reliable, plain-English books, software, forms and this website.

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How to Set Clear and Actionable Goals for Your Business

setting clear goals for your business

As you look back over this year, how happy are you with your business’s performance? Are you patting yourself on the back, having nailed every goal? Smiling as you look over your long list of milestones achieved? Resting on your laurels?

If the answer is no, then you’re like many business owners who have trouble hitting their business targets. You know exactly what you want—a bigger business, larger per-customer sales, more leads, higher profits—but you struggle to meet your goals.

At Phorest Salon Software, we provide advice to salon businesses on our blog, from setting targets, to financing, managing staff, marketing strategies, and more.

In this article, we’ll show you how to set clear, actionable goals for your business, and how to make the changes you need to power your way through them. Let’s make this the year you hit every business target you set.

get clear on your goals

1. Get clear on the goals you want to prioritize

One of the biggest challenges in any business is that everything needs to be done at the same time. You need to find new clients, keep your existing clients happy, manage your finances, streamline your processes, and motivate your employees—all at the same time.

When it comes to setting your big, overarching company goals for the year, you must know what your top priorities are.

A SWOT analysis is a fantastic way to be crystal clear about what needs to be addressed first. It analyzes your business’s strengths, weaknesses, opportunities, and threats.

Let’s take the example of a beauty salon. You sit down to do a SWOT analysis and identify the following:

example SWOT analysis

Now we can see how to use this SWOT analysis to set priorities. Don’t choose too many goals or you risk spreading yourself too thin.

Based on the SWOT analysis, pick three priorities to create goals for:

  1. Increase revenue from existing clients by selling them new products
  2. Increase client base and revenue by creating targeted marketing for workers in new office buildings
  3. Use Instagram to market your business and build upon your great reputation

If you’ve never done a SWOT analysis before or could use a refresher, you can find a useful template to follow here, and check out the video below.

Please note: These aren’t actually goals yet! They are your key areas to focus on. After you’ve discussed them with your team—which we’ll cover next—you’ll be turning them into SMART goals (specific, measurable goals) to make sure that you’ll take action on them.

2. Review these goals with your team

Every successful business owner knows that the people who work for you are your most valuable asset. This is never truer than when you are defining your business goals.

Your team is out there every day, working on your products or talking to clients. They are the people who can tell you what’s working and what’s not, what’s holding your business back, and where you should be focusing your efforts and setting your business goals for the year ahead.

So, once you’ve completed your SWOT analysis and selected what you think should be the top goals for your business, sit down with your employees and get their feedback.  They may agree, or they may have useful insights which you haven’t thought of.

reviewing goals

Even more importantly, involving your staff in the creation of your business strategy will motivate and inspire them to reach those goals.

As Dale Carnegie put it,

“People support a world they help create.”

By involving your employees in the goal-setting process, you make them feel valued and engaged, while at the same time making sure your goals are realistic and achievable.

3. Make your goals SMART

O.K., so you’ve decided on your three to five business goals. Now it’s time to develop them from the idea stage to the action stage, and create SMART goals:

  • Specific: What exactly are you going to do?
  • Measurable: How will you know if you are succeeding?
  • Achievable: How will you implement the goal?
  • Relevant: Does the goal connect to your overall objectives?
  • Timely: When will you achieve the goal by?

setting smart business goals

Let’s take one of the salon business goals we decided on, and turn it into a SMART goal—say, for instance, our plan to increase our client base and revenue by creating targeted marketing for workers in the new office buildings.

  • Specific: Gain 10 new customers for the salon from the new office building.
  • Measurable: Measure progress by tracking the number of new customers won and profits made, while maintaining our existing customer base.
  • Achievable: We will do this by creating a customized sales promotion, which we will publicize via leaflets and flyers in the office building.
  • Relevant: This will help us to increase the number of new customers, and thus grow the salon business and profits.
  • Timely: We will achieve this by the end of Q2 2019.

4. Set your KPIs

Now that you’ve built your goals with your team and converted them into SMART goals, you need to think about implementing two aspects: measuring your goals and setting timelines.

Remember, as Bill Hewlett put it:

“You cannot manage what you cannot measure…and what gets measured gets done.”

The most common way of measuring whether or not you’re on track to achieve a business goal is to set KPIs.

KPIs (or “key performance indicators”) are numbers you can track that show if you are making progress with your goals or not. They are also great motivators. You’ll already have established the KPIs you need to measure when you’ve ensured your goals are SMART.

To take our example above, a KPI would be the number of new clients won from the office building (which means we’d need to make sure we have a way of keeping track of where our clients were coming from). We might also want to consider setting KPIs for how many flyers we hand out, how many calls we received as a result of the flyers, how much each new customer spent, and whether or not they came back to the salon.

You will also have different KPIs for the business as a whole, such as overall monthly sales targets, as well as setting individual KPIs for every staff member. We have encouraged our clients to set staff targets on the Phorest blog as an important way to motivate your staff to meet company goals.

Research suggests that companies that align individual goals to company objectives have a much higher rate of success.

In our salon example, our company goal is to increase our client base and revenue from a specific target market.

However, this goal might translate into different KPIs for an individual hair stylist, for instance:

  1. Customer satisfaction (to retain the new customers)
  2. Amount spent per customer (maximize profitability)

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5. Build good business habits to help reach your goals

For a business owner, as in life, if you want to make something happen, you need to create a schedule and build good habits around it.

If you want to lose weight, you know you need to include exercise on your schedule, plan time to cook healthy meals, and so on. If you want to achieve your business goals, you need to think about them in the same way. The actions that will achieve those KPIs need to be scheduled.

Automate as much as possible. Use a calendar for both you and your staff, and add reminders. Use online to do list software like ToodleDo to organize tasks, set deadlines, and prompt you for repeat actions. Put key goals on your office wall or in the staff meeting room to keep them visible.

And, crucially, regularly review and analyze your progress, and resolve any issues; review if you have the right KPIs in place, and constantly optimize your processes to improve them, if applicable.

It’s a great idea to put regular (possibly quarterly) business plan review meetings on your company calendar now, so you can prioritize time to review your goals and milestones regularly, not just once a year. This will help you set specific goals and objectives, both short-term and long-term, and revisit them regularly to make sure your KPIs are on the right track.

This might all sound a little overwhelming, but it’s much less overwhelming than the feeling that you’re drowning in work and are nowhere near to achieving your goals.

By identifying and reviewing your key focus areas, setting SMART goals, defining KPIs to track your company and individual progress, and putting systems in place to make sure you are sticking to the schedule, you’ll put yourself in the best position to make 2019 the year your business really starts to shine.

Editor’s note: This article was originally published in 2017. It was revised in 2018.

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Jennifer Quinn
Jennifer Quinn

Jennifer is an online content executive for Phorest Salon Software. She manages content across several regions, and provides helpful advice and tips for small businesses trying to build their company and become more productive and efficient to grow in a competitive industry.

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This Year’s Best Email Newsletters

the best email newsletters

Most of us don’t have a ton of time to sift through everything to find the best ideas on the internet, on top of all our other obligations. And I don’t know about you, but my inbox is more crowded every day.

So, I’m always on the lookout for the best email newsletters—the ones I can rely on to be the right combination of informative and truly insightful, especially for entrepreneurs and small business owners.

So here are the best reads I’ve found this year:

Swipe File

Jimmy Daly, the author of Swipe File, is the marketing director at Animalz. Animalz is a content marketing company for software-as-a-service, tech, and crypto companies. He previously worked with GetVero and Quickbooks in the marketing department.

An experienced marketer, Daly identifies the four best articles he read that week and gives a brief description of each. This one stood out to me.

“In every issue of Swipe File, there is at least one thing that changes the way that I work or the way I think about work,” says Val Geisler, a professional email marketer. “The internet is full of crappy newsletters that deliver zero value. Swipe File is not one of those.”

Anyone with a company involved in content marketing should keep up with Swipe File. Daly gives you several pertinent articles about marketing, saving you time and verifying what tactics will help your business the most. Go here to sign up.

Emergent

“There’s a lot of great content out there, but there’s also a lot of mediocre content,” says Noah Parsons, COO of Palo Alto Software and creator of Emergent. “We’re taking the tact of going a little further and pulling in things that are off the beaten track and hopefully a little bit more surprising and interesting than getting the same genre of content every single month.”

Parsons also wants the Emergent newsletter to share Palo Alto Software’s personality. He wants to make the company more transparent by sharing things employees find intriguing that don’t pertain directly to business planning.

“Our site talks about our products and what we offer, but doesn’t give a lot of insight into the behind-the-scenes of what we find interesting as a company,” he says. “We have a wider interest-set than the more narrow focus of what our products offer.” Sign up here.

Moz Top 10

93 percent of business-to-business (B2B) businesses do content marketing, but only 5 percent feel like their efforts are effective. Moz publishes a semi-monthly newsletter called The Moz Top 10.

When I began my content marketing internship, I immediately subscribed to The Moz Top 10. Twice a month, I get 10 articles sent straight to my inbox, many of which have changed how I write and construct content—useful information for any small business or startup that’s figuring out how to be found in Google search. Sign up here.

Dan Pink

Dan Pink has written many books about business and behavior, several of which are NY Times bestsellers. He continues to write books while publishing a newsletter every other Tuesday—it boasts more than 150,000 subscribers.

Like Emergent, his newsletter has three sections—a changing assortment of tips, suggestions, and recommendations relating to business in different ways. Topics involve articles, podcasts, TV shows, gadgets, and more.

John Procopio, Palo Alto Software’s director of marketing, says: “I don’t always have the time to read all the newsletters in my inbox, but I still want to keep up with business news and trends. Dan Pink’s newsletter gives me the most bang for my buck because the video leaves you thinking—articles can’t always do that.” Sign up here.

The Hustle

The Hustle is a daily newsletter that has a pulse on growing startups and corporate dramas.

“The Hustle really cuts through because they somehow just know how to get to the root of what I’m looking for and they give it to you straight,” says Alyssa Powell, Palo Alto Software’s digital media marketing specialist. “I don’t know how they do it, but the way that they write is just phenomenal. Their branding shows through on all different platforms and communities.”

But it’s not the Wall Street Journal. They’re trying a new model for news-sharing, and it seems to be working, based on their incredible subscriber numbers. Sign up here.

CB Insights

The CB Insights newsletter gives me key reports and takeaways in a graphically pleasing way,” says Edward Silva, a marketing intern turned Stanford MBA student. “Other newsletters don’t necessarily do that. They just provide me knowledge, but CB Insights turns that knowledge and data into interesting and often funny insights.” Sign up here.

But wait, there’s more!

You’ve all probably heard of these three newsletters—there’s a reason why they are three of the most popular for entrepreneurs and small business owners.

Tim Ferriss, author of five NY Times bestsellers about self-help and personal development, is the author of 5-Bullet Friday. Each week is a surprise, but the topics are always helpful for improving your work-life balance.

Entrepreneur Daily is the ultimate newsletter to keep up with trends and breaking news in the world of business. It’s released every day and talks about a few of the biggest events that took place in the last 24 hours.

Lastly, Kevin Rose has created the extremely popular business newsletter: The Journal. His writing is very conversational, a break from the automated newsletters that usually fill your inbox. He, like Ferriss, includes a few random topics that can benefit your productivity and work-life balance.

What’s the newsletter you can’t live without? Tell us about it on Twitter @Bplans.

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Nate Mann
Nate Mann

Nate Mann recently finished his second year at the University of Oregon. He is pursuing a major in journalism, along with minors in business administration and computer science. He is currently a content marketing intern for Palo Alto Software. Outside of school and work, Nate is an avid basketball fan and writes about the Portland Trail Blazers for Rip City Project. He is also a data reporting intern for the University of Oregon’s School of Journalism and Communication.



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