There are a surprising number of hostels that operate while ignoring the most basic rules of business practice. This rule, when followed, can lead to golden success, and when ignored, can lead to failure with the hostels offering their guests an inconsistent product, affecting their reviews and staff morale alike. All of which can be avoided, if the hostel just keeps some money aside for a rainy day.
In business terms, money put aside for operations, is called working capital, and a good rule of thumb is to keep approximately three months of expenditures worth of working capital aside. Many hostels run a tight ship, and the slightest of shortcomings from the owner’s expectations can have a large impact on the guest experience.
This is particular for the shoulder seasons, when revenues are low to begin with. Most hostels have their shoulder seasons in the winters, when other costs, such as heating, can be drastically high. A huge winter storm, polar vortex, major protest, or something of the like can slow down incoming guests and soon enough, bills are unable to be paid. This is just asking for trouble. A properly run hostel expects to lose money in the shoulder season, only to make it back during the peak.
Even in the peak season, having some money in the bank is nothing but healthy. Just take into mind all the bad things that can happen. An air-conditioner can break, pipes could burst, bedbugs, water damage, fire damage, volcano eruption, government inspections, new taxes, wrath of nature, lawsuits, new competitors, transit strikes, civil unrest, etcetera are all unfortunate circumstances that hostels have faced and some have pulled through mostly because they had the funds to support themselves through the tough period as they adapted and found a way to survive.
When a unfortunate circumstance happens, and you don’t have the funds, then you have to compensate by changing the breakfast, letting a staff member go, offering fewer activities, cutting back on heat/AC, charging for internet access, etcetera, all of which can have a negative impact on the guest experience. What makes it worse is that most of these guests have made a choice based on recommendations from others and their research on the web, and they have certain expectations to be met. If not, then bad reviews will result, starting a downward spiral that will only change when cash flow is good once again.
You can avoid that whole situation but sticking to the golden rule. Calculate your costs on the most expensive month and triple it, holding it as working capital. Perhaps keep it in a separate account so your partners and investors will not confuse it for profits or revenue. Top off the account every month before determining what to do with the rest of the revenue. This way you’re well prepared for what lies ahead.