Download a copy of the Hostel Financial Model spreadsheet template here.
Let's face it: foreseeing the future is still impossible. When it comes to making business decisions, this can be very scary... I mean, after all, we're putting a bunch of money to work and we don't know what will happen!
But fear not my friend! All is not lost! We can prepare. We can walk through different scenarios. We can see what our future would be like if things played out in different ways. That will empower us to make the right decisions. Maybe Low Season this year is even worse than previous years? Don't wait until you don't have any money in the bank. Foresee it (in your Financial Model) and cut as many fixed expenses as you can before it's too late.
And that's what we're going to talk about today. Financial Models for Hostels. By running the numbers and going through different scenarios, we can understand what the future might hold for us. And that let's us plan accordingly.
I know, I know what you're thinking though - Running the numbers is hard Tim! But, it doesn't have to be. So, after getting countless requests like "help me run the numbers Tim" or "build me a Financial Model Tim" - the time has come. I finally built a Financial model spreadsheet template for you to use! But before you do, make sure you walk through this entire post. You'll be much better off for it - trust me.
A quick note before we continue:
This is a simple version of a Financial Model. At a high level, it's just an Income Statement. I could have built something much more sophisticated that takes into account individual months, with other accounting statements (like the Balance Sheet and Cash Flow Statements), and dive much deeper into every assumption in the model. But, that would defeat the purpose. In this model, we're aiming to understand the high level health of the business. I designed it in this way to take advantage of the 80/20 rule (aka Pareto Principle) to get 80% of the benefit with 20% of the effort.
Having said that, if you're an Excel guru and you're interested in going the extra mile for a more detailed analysis, build off of this Financial Model. Make sure you read through this entire post first to decide where to continue building from though!
So, who is this post for?
This post is for people that:
- Are looking to start a hostel, but aren't sure if it makes financial sense, and people that
- Currently own a hostel, and need help understanding the high level health of their business.
What is a Financial Model, and why do I need one?
So, what is a Financial Model anyway? It's a tool (normally built in Excel or Google Sheets) to help you plan your future financially.
A good Financial Model should let you play with different scenarios to understand how they could affect the business. That could be scenarios like: "What if Low Season I only manage to fill 15% of the beds and my rates end up being 25% lower than expected?".
Thinking about the worst case scenarios and understanding how things would look financially is key to a good night's sleep.
Otherwise, you're just driving blind and hoping for the best.
How do I use this Financial Model?
Pretty easy! Start by filling in the numbers in the yellow spaces on the Assumptions tab. Then, review the Model tab to see what your business's health would look like. It's that easy.
Once you've laid down the groundwork, go ahead and play out different scenarios in the Assumptions tab to see how it impacts in the Model. Here are some ideas:
- What if Low Season is a month longer than expected?
- What if during High Season I'm unable to fill the entire hostel?
- What if I end up having a bigger reliance on OTAs (Online Travel Agencies) than I expected?
Notes on Assumptions
So, what exactly are Assumptions? Well, assumptions! Sure, historical data is relevant, but the future can always be different. So, everything for the future is still considered an assumption.
Even though High Season lasted 2 months last year in your city doesn't mean that will be the case next year. Maybe there is an economic recession, people end up traveling less and that shortens your High Season to only 1 month?
So, remember: Assumptions be assumptions.
Also, understand that every country, region, city and hostel is different. When you're writing in your assumptions, don't use numbers blindly from another hostel without having some reasoning. Make sure you know why those are the most accurate for your case. And definitely don't use those numbers if they are from another country.
If you're using the Model on an existing hostel, then you have some historical data and your assumptions will be much more accurate. You probably have a good idea of what you can charge, how long high season lasts, what is your base occupancy, etc.
But remember: These are still assumptions! Things can change. Economic recessions happen, currency devaluations happen, natural disasters happen, competition happens, and markets change. We can't predict the future, but we can try our best.
If you've got some history or hard data to work with, then you'll be a much better off, and able to make better assumptions.
If you don't know where to start from, here are some places that you should research:
- Seasonality: Google Trends. You can search "hotels in [your city]" and you should see a graph showing search volume over the last few years. If you see a yearly pattern - bingo.
- Rates: Booking.com and Hostelworld.
Structure of Assumptions
Make sure you fill in the entire Assumptions tab before you review the Model! Otherwise, the Model probably won't make any sense. All the sections in the Assumptions tab are equally important.
Let's review each section of the Assumptions tab briefly:
In this section, we're laying down the foundation of the hostel. How many dorm beds do we expect to have? What do we expect to be a "base" occupancy during mid-season?
In this section, we're defining what Seasons we are managing at our hostel. At a high level:
- Low Season
- High Season
- Special Dates: These are dates that are extremely busy (peaks even during High Season). They usually happen inside High Season, although they could happen outside too. Examples of Special Dates are: New Years, festivals, national holidays, big events, etc.
In the Expenses section, we're laying out what our cost structure will be like. I'll admit that it can be very tricky to nail down some of the Semi-Fixed Expenses like Electricity / bed / night.
If you have some previous electricity bills to work from: Try to extrapolate from those bills. Let me explain... So, when your hostel was empty: what was your electricity bill? Set this as your "Electricity base". Then, look for the electricity bill in a month when your hostel was full. Find the difference between that bill and your "base". Divide it by the number of guests at the property and by 30 (number of days in the month) and that will give you a rough estimate of the bill / bed / night!
I also went ahead and built a small calculator to help you with unfolding these Semi-Fixed Expenses! In the Spreadsheet, go to the "Calculator for Semi-Fixed Expenses" tab and plug in the Bill when your hostel was empty and when it was full. The sheet will then tell you your Base and variable costs ;).
If you don't have any experience to work from, try speaking with people in the industry locally...
Structure of Model
So, now that you've filled in the Assumptions tab, you'll be able to take a look at your Model! Let's take a brief look at how it is structured.
Some models are built by week, by month, or even by year. I grouped this one "by seasonal group" as it's the easiest way to see high level if you're making money. This type of analysis also makes it very easy to tell whether it's worth closing during Low Season or not!
This is the money that you're pulling in. It's separated into Bed Revenue and Extras Revenue. If you pay Sales Tax or VAT, I would exclude those amounts as they aren't relevant here.
Bed Revenue is the money you are being paid for people sleeping in your beds.
Extras Revenue is the money you are being paid for extras, like: bike rentals, tours, beer, towels, etc. Basically, anything extra you can sell at the hostel. Generally, this is a very big revenue driver at hostels, so I have included it here, although in a very simplified way.
If you think extras are a super important part of your strategy, I would extend the Extras sections in the Financial Model. Or maybe build a separate model for it. For example, if you are going to have a restaurant or bar, this is another business in and of itself. It definitely merits its own Financial Model. Sometimes these kinds of side businesses (like a bar) in a hostel can be very profitable and there can be a big synergy between them, but it's a tough balance. I would initially approach them as separate businesses with different cost structures and different processes.
These are expenses that vary based on how many people you have at your hostel.
Gross Profit is an important metric in helping you understand how efficient your business is. Your Gross Profit is essentially the money you have to pay your Fixed Expenses. As a formula it is:
Gross Profit = Revenue - Variable Expenses.
Your fixed expenses are the ones that you will need to pay regardless of whether you have guests or not. You'll need to pay Rent every month, regardless of whether you are closed or not.
This is an acronym for: Earnings Before Interest, Tax, Depreciation and Amortization. This is another important metric in helping you understand your operating performance. As a formula it is:
EBITDA = Gross Profit - Fixed Expenses
Think of it as your Net Income, but excluding interest (financing decisions), and taxes and depreciation (accounting decisions). Whether you take on debt is a financing decision. Whether you report higher or lower depreciation / amortization is an accounting decision. Both of them are strategic in nature, but don't have anything to do with the health of your business. That's why EBITDA is a more accurate way to understand the operating health of your business.
Some things to consider!
During High Season, some hostels transform private rooms into dorm rooms to maximize revenue. Then, during Low Season, they transform dorm rooms into private rooms to be more competitive. Play around with this in the model.
If you are starting a new hostel from scratch, you'll also want to look into: "how long will it take to get my money back?". First, figure out what your initial investment will be, the amount of money to get the place up and running, and receiving guests. Then multiply that number by 2 (to be conservative!). To figure out how long it will take to get your money back, use the following formula:
Years to get money back = Initial Investment Amount / Yearly Net Income
I've also included another calculator for you on this as well! Go to the "Calculator for Investment Return", set your investment amount. Based on your Yearly EBITDA, you'll see how many years it will take you to get your money back.
I know this was a dense one to go through! Thanks for sticking it out to the end! As you can tell, it's a very important tool to understand and use. I hope it helps you in your journey.
Questions? Comments? Let me know in the comments!