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Why Forecasting is Important as a Seasonal Rental Business
It's not nice to have but a necessity to forecast your revenue and expenses if your rental business relies on income from a few months to sustain you all year. It's not as difficult as it sounds to forecast revenue and expenses. In other words, forecasting is planning.
Forecasting, in essence, is predicting what will happen in the future. In the coming months, you can use forecasts to predict how much your property will rent for, or how many times it will be booked. Various industries use different techniques to make their forecasts because they attempt to map existing trends to future events only by looking at the past.
Why do forecasts exist?
In order to influence the event's outcome more effectively, managers need to know what the future holds in order to make the most informed decisions today. Rental businesses and rental software owners need to know if someone will book their units, as that is one of the most critical things. How soon will you find out if demand this February is going to be down 25% compared to last year? Good forecasts will let you know months in advance. By doing so, you can adjust their pricing, marketing, and promotions in order to partially offset the revenue loss.
Based on your estimate of what would have occurred, you can price the next units more accurately.
If you run a seasonal business, there will be months when your bank account looks like a desert with tumbleweeds blowing through it while others may feel more desert-like. You won't be able to line up your revenue and expenses when you run a seasonal business.
You spend your "off" months investing back into your business, and a few months fund the rest of the year. Forecasting your sales and expenses increases your chances of success.
Short Term Rental Challenges
Forecasting the market for Short Term Rentals (STRs) is both difficult and crucial. Rental businesses are independent markets, unlike other markets. It is impossible to accurately predict the number of rooms in a 300-room hotel or the number of seats in a 180-seat plane. There could be a 10 percent change in hotel room forecasts on Saturday. It would lead to a loss of +/-30 rooms. The rental property will either be 100% booked or it will be 0% booked if you forecast and sell it separately. With this structure, there is not much room for error.
Make an investment in your business:
Making a forecast is useful if you are planning to buy a new laptop or upgrade your equipment. Furthermore, it will tell you when and if you can afford to buy it. If you do not yet need the improvements, but need them anyway, a forecast could help you decide if business financing to fund the purchase makes the most sense.
Get ready for the busy season:
The key to a successful sales season is stocking up, which is why we recommend stocking up on shipping supplies before a busy sales season like Black Friday and Cyber Monday. You need to invest in inventory and supplies when the busy season is the only season of your business.
Expenses must be covered:
Let's get that straight: Running a business isn't easy. But if you earn $5,000 a month and spend $1,500 a month, it's easier to wing it. But if your monthly expenses aren't stable, and you earn $50,000 two months of the year, forecasting becomes crucial.
In high revenue months, it will help you resist the temptation to treat yourself, and it will help cover any shortfalls that occur during the offseason ahead of time. Stocking up before sales start can be planned with your forecast and managed efficiently.
You might decide this year to take on more business financing or get seasonal help. These decisions are easier to make when you have some idea of what your year will look like, how much you already intend to spend, and how much you expect to sell.
Working through a forecast is a good way to make some decisions that shouldn't be entirely outsourced.
For an accurate forecast of your business, you'll want to create a sales forecast as well as an expense forecast. As soon as you complete both tasks, you will have a good idea of how your business is doing financially. You can then make some key decisions based on that information.
Do not worry if you see elaborate spreadsheets and mathematical models in your head: for most parts, forecasting is simply educated guesswork. Creating a sales forecast is not about nailing the exact number you'll sell in a year. It's about making a reasonable prediction.
What is the best way to do that? How much you will sell next year can be determined in several ways.
Data on the industry. Have analysts predicted a certain growth rate for your industry? Is there a consistent rate of growth in your industry?
Peers in the industry. Consult your peers. What is their typical sales period? Amount of sales annually?
The past few years. How much does your business grow every year if you have been in business for a while? What are the sales and growth figures from last year?
Deals signed. You know you'll sell that much already if you have contracts for next year. So you put it in your forecast.
Now that you know what your sales will look like over the coming year, it's time to figure out how much you'll spend. In constructing your forecast, you need to consider two types of expenses: fixed and variable.
Adapt as you go:
As you get more information, you can adjust your forecast accordingly. It's possible that you will notice the right timing isn't right for some of your variable expenses, and you may need to reposition them.
Your sales forecast and corresponding costs for fulfilling these orders might need to be adjusted later, as you receive sales and orders. If you have a business plan already, you'll know how you'll use the money and whether you need business financing or not.
That's all fine.
As a matter of fact, establishing an annual forecast for your seasonal business is the best thing you could do. You will feel more in control of your business finances throughout the year if you can adjust your plan when things change, instead of hoping for the best.