The Hostel Owner's Golden Rule

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 hostels offering their guests an inconsistent product that affects their reviews and staff morale alike. All of this can be avoided if the hostel keeps some money aside for a rainy day. In business terms, money set aside for operations is called working capital, and a good rule of thumb is to keep approximately three months' worth of expenditures as working capital aside. Many hostels run a tight ship, and even the slightest shortcomings from the owner’s expectations can have a large impact on the guest experience. This is particularly true during the shoulder seasons, when revenues are low to begin with. Most hostels experience their shoulder seasons in winter, when other costs, such as heating, can be drastically high. A huge winter storm, a polar vortex, a major protest, or something similar can slow down incoming guests, and soon enough, bills cannot 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 peak season, having some money in the bank is nothing but healthy. Just think of all the bad things that can happen. An air conditioner can break, pipes could burst, bedbugs, water damage, fire damage, a volcano eruption, government inspections, new taxes, the wrath of nature, lawsuits, new competitors, transit strikes, civil unrest, etc. are all unfortunate circumstances that hostels have faced; some have pulled through mostly because they had the funds to support themselves through tough periods as they adapted and found a way to survive.

When an unfortunate circumstance occurs and you don’t have the funds, 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, etc., all of which can negatively impact the guest experience. What makes it worse is that most of these guests have made choices based on recommendations from others and their research on the web, leading to certain expectations that must be met. If not, 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 by sticking to the golden rule. Calculate your costs for the most expensive month and triple it, holding that amount as working capital. Perhaps keep it in a separate account so your partners and investors do 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.