As a vacation rental manager (VRM), your day is filled with responsibilities, most of which, if not all, are operational in nature. Most VRMs do not spend the day reviewing income statements, performing financial analyses, or calculating metrics; rather, we build the relational components and marketing aspects of the business. Frankly, if we all functioned like accountants, we would not have any properties to manage! Although we may all agree that managing the financial results of your vacation rental operation is not the most glamorous part of the business, it is imperative to understand critical numbers to ensure your business remains successful and profitable.
Without tracking and managing certain critical financial components, you cannot make informed decisions about revenue, expenses, or profit. There are always opportunities to increase profit in vacation rental operations, which we’ve confirmed in every business we review.
To help ensure your business is operating progressively and generating a meaningful profit, take time to review and manage these results:
So many VRMs do not have a handle on their trust accounts or overall cash. It’s like flying blind; you’re probably not going to hit anything, but it is generally not a good way to do business. More often than not, VRMs struggle to maintain accurate and reconciled trust accounts. Certain states do not regulate short-term trust accounts, which makes maintaining them properly less of a priority for VRMs. Having a handle on cash allows VRMs to have the confidence and comfort in knowing that they can meet the company’s obligations at any point in time. Cash flow forecasts and monthly reconciliations of the company’s trust account are a cornerstone of vacation rental operation best practices. Performing these functions consistently and accurately is a sign that your business is in the black, grounded in solid financial management, and ready for the unexpected. In short, the business is poised for success.
Net Operating Income (NOI)
NOI is also a good indicator that your business is healthy. Closely tied to cash, a vacation rental business can be profitable on an NOI basis and still go out of business due to a lack of cash. NOI and cash work in tandem, and you should review them regularly to ensure the business has a sound financial footing.
This is also referred to as the profit and loss statement (P&L). Most vacation rental companies operate with a P&L that could use some work. Often, it does not clearly present actionable data or provide accurate results. Understanding your company’s revenue and expenses is paramount to operating a sustainable and successful business. Two of the largest issues with P&Ls in the vacation rental industry are timeliness and consistency. The data is often inconsistent and cluttered among a number of unnecessary or unorganized financial accounts. Again, the key component is actionable financial data. If your P&L does not provide you with the information necessary to make critical business decisions, then it is time for a review.
Gross Rental Revenue (GRR)
Most VRMs track commission income as opposed to GRR. The genesis of that format originates in the real estate industry; commission income is paramount in that field’s revenue process. However, with this model, the lack of visibility into GRR and the relationship between GRR and certain direct operating expenses create inconsistencies throughout the financial management process. This can prevent you from discerning certain drivers of key expense accounts or generating opportunities for further efficiency in operations. Reviewing management commissions as a percentage of gross is an excellent way to maintain the integrity of your commissions. Management commissions as a percentage of gross tend to diminish over time if not properly managed.
Each of these reports individually will present opportunities to create efficiencies. However, managing each of these items in conjunction with each other will greatly propel the business.
If your business is lacking in one or more of these areas, it is important to act quickly to minimize exposure to adverse financial results. In the event your business lacks the resources to properly manage this process, please know that Weatherby Accounting Services handles accounting and financial management for more than twenty-five companies. By outsourcing certain components, or all financial accounting processes, VRMs can get back to more desirable areas of the business and focus on generating needed revenue for the company.