Estimating Income From Accommodation

Bed and breakfast accommodation is providing a useful additional income source for more and more pubs. If the pub has suitable facilities then it could be worth considering. If the pub you are interested in operates bed and breakfast facilities, you need to take into account income you will earn from these. If accurate information is not provided, it will have to be estimated. Here are some pointers:

• Note the total number of rooms.
• Note the room rates (room price).
• Estimate the occupancy rate (ie what percentage of rooms are occupied).

 

The total number of rooms and the rates for the rooms can be easily obtained, the occupancy rate can be more difficult to establish. Occupancy varies depending on the type of accommodation, price, location and other environmental factors. As a guide, major hotels generally run at 65–70% occupancy rates. Pub accommodation is more likely to be in the 25–35% range. Some pubs can enjoy higher levels where they have regular weekly stays from contractors or business people, or are located in a tourist area.

Estimating Running Costs

You will require details of running costs in order to assess a pub’s profitability. If accounts are not available to you, the following table containing industry estimates of annual running costs of a lease will act as a guide:

Note: The percentage figures are shown as a % of sales turnover (excluding VAT):

• Bar staff costs are 8–12% of wet turnover.
• Food staff costs are 20–25% of food turnover.
• Accommodation staff costs are 20–25% of accommodation income.
• Other costs are shown as a percentage of total turnover (including drinks, food turnover, machine income and any accommodation income).

Profit And Loss

Making A Profit

When assessing various pubs you will need to consider whether you can operate the pub at a profit and whether the profit it generates is sufficient to meet your obligations and expectations. To do this you should draw up a profit and loss forecast.

Excluding Vat From Calculations

When drawing up a profit forecast we exclude VAT from all figures. This is because we ‘collect’ VAT on behalf of HM Revenue and Customs and it does not directly affect the profitability of a business. See more details in Chapter 13, Book-keeping and Accounts.

In practical terms, this means we have to remove the VAT element from many of the figures we use (if VAT has been charged on the figures in the first place).

Gross Profit And Net Profit

The terms ‘gross profit’ and ‘net profit’ are used in accounts and financial forecasts. Gross profit is often abbreviated as GP and net profit as NP. It is important to understand the difference between the two. In simple terms, gross profit relates to what you sell, and the profit you make after paying for these. Net profit, is the profit you have left after deducting all running costs.

Gross Profit

Gross profit is calculated as follows: sales revenue less the cost of sales = gross profit.

Calculating Gross Profit Margin (Gp £) On Specific Products

Calculating Gross Profit Margin (Gp £) On Turnover

Factors Affecting Gp Percentages

The main factors affecting GP percentages on products are:

• The price you are able to charge.
• What they cost to buy.

 

Additional factors affecting GP percentages on overall turnover are:

• The types and quantities of product you sell: some products can be sold at higher GP percentages than others.
• Wastage and theft: if you lose stock items due to wastage or theft, you cannot sell them, so make no profit at all on these.

Industry Averages For Gp Percentages

Typical overall GP percentages on wet turnover (based on normal, brewery or pub company list prices, excluding any discounts) are as follows:

Low priced local pub	38–40%
Traditional local pub	40–47%
Quality pub	46–52%
YPV (Young Persons Venue)	45–55%

Freehold properties, earning discounts on their drinks purchases, can make over 60%.

Typical overall GP percentages on food turnover:

Low-priced/quality food	30–40%
Mid-priced/quality food	40–55%
Higher-priced/quality food	60–70%

Controlling wastage is critical in achieving your food gross profit percentages.

Calculating Weekly Break-Even Sales

It is important for you to know the level of sales you require to break even. Break-even is reached when your sales revenue equals your running costs. If your sales revenue is less than your running costs, you are making a loss; if your sales revenue exceeds your running costs you are making profit.

You should work out the value of weekly sales you require in order to break even at your forecasted weekly running costs. The first step in doing this is to estimate your weekly running costs, establish your overall gross profit percentage (GP%), and then follow the steps explained below.

Calculating Weekly Sales Required To Break Even

Weekly break-even sales are calculated as follows:

Weekly running costs divided by GP(%) multiplied by 100 = weekly breakeven sales (ex VAT).

Then multiply by 1.175 (to add VAT) to give weekly sales including VAT required to break even.

Net Profit

Net profit (or net loss) is what you have left after deducting all running costs.

How You Operate The Pub

Any assessment of a pub’s profitability must take into account how you intend to operate the pub. Your vision for the pub may be very different from how it is being run at the moment. You may see opportunities that are currently not being exploited that would have a positive effect on turnover. You may intend to run the pub with different levels of staff, and control costs more tightly than its current occupants do. Your forecasts must also be realistic. It is very easy to overestimate your turnover and underestimate costs. This is easy to do in the excitement of trying to find your pub. A more level-headed approach is to prepare a range of profit forecasts: ‘optimistic’, ‘average’ and ‘pessimistic’. This helps you look at a range of possible scenarios and assess the consequences of each.