“The biggest mistake that new hostel owners make is not being prepared well enough for the bookkeeping and accounting aspects of their business.” – A response I received in my latest survey.
Many aspects of operating a hostel can be learned by simply doing it. However, bookkeeping is typically the last thing aspiring hostel managers think of when they start a hostel.
To make matters worse, bookkeeping challenges often arrive during times when you are already stretched thin in terms of time and energy.
Don’t worry. In this article, you’ll learn 13 sanity-saving accounting tips to preserve your peace of mind.
Without further ado, let’s get to the meat.
#1 Open A Separate Business Bank Account
As soon as you’ve registered your business, you should open a separate business bank account. The sooner you have one at hand the better.
Whenever you make a business-related purchase or receive income, make sure you’re using this account. Otherwise, it can become a nightmare to untangle business expenses and revenue from your personal ones.
This might not seem important from your perspective since it doesn’t really matter to you where the money came from, right? Well, the taxman cares a lot about it since there are different applicable laws for both sides.
Hence, make sure to separate them.
Furthermore, you’re able to get instant feedback from your bank account about your current cash flow by checking your account balance if you do so.
#2 Bookkeeping: Keep Accurate Records
The process of keeping systematic records is called “bookkeeping” and is part of the overall process, aka “accounting”.
There’s little room for error when it comes to bookkeeping. Hence, you gotta make sure your records are bulletproof. Now, what should you be tracking?
- 1) Your revenue: It’s safe to assume that all the money you earn from your hostel business is subject to taxes.
- 2) Your expenses: All the money you spend in order to operate your business even if you only use parts of it.
Obviously, you only have to pay taxes on the profits you make and not the entire revenue you generate. Hence, make sure you don’t forget any expenses that decrease your overall tax burden.
Pro-Tip: Hire an accountant for 1-2 hours and drill him with questions WHAT exactly you can and should track and HOW to do it. Furthermore, ask him for the most common “special rules” that apply to your business.
This investment will pay for itself within your first year.
In most countries, expensive things that are typically used for a long time cannot be deducted in a single year. Instead, you’ll have to depreciate them over a predetermined period of time.
Your new MacBook that cost $3,000 is categorized by the tax office as an item that is typically used for 3 years.
Hence, you’ll have to deduct $1,000 for 3 consecutive years.
Similar expenses are furniture, washing machines, fixtures, property, major repairs, etc.
Another common rule is that you’re able to deduct the costs of your car by using a generic fixed amount per mile or kilometer you drive.
For every mile you drive for business in the US, you can deduct $0.58 in your tax return.
Hence, if you drove 10.000 miles, you’ll be able to reduce your taxable income by $5,800.
Lastly, if you use a thing you bought partly for business and partly for your personal life, you’ll be able to deduct it in parts.
The MacBook you bought is used 70% for business and 30% for your personal life.
In this case, you typically can deduct 70% of the costs.
Again, there are a lot of specifics you should know BEFORE you spent a lot of money. Otherwise, you’ll literally leave thousands of dollars on the table.
DISCLAIMER: I am not a tax accountant. The above examples are for illustration only.
Read my full disclaimer here.
#3 Never Keep Income Off The Books
When a walk-in pays you cash, you might be tempted to keep the income off the books to save taxes.
By doing so, you commit a crime. This can come with abnormally high fines or even several years of imprisonment. No, I shit you not.
You also distort your own stats that will no longer give you a clear picture of how your business is doing financially.
That said, I’d argue the biggest reason to play it safe is to keep being able to look at yourself in the mirror. After all, by doing something illegal, you’re subconsciously telling yourself “I’m the kind of person who does…”.
Furthermore, just think about who you’re stealing money from. After all, what does the tax office do with all this money? – They help you and other people. They build the infrastructure you need to make your business successful.
It is on you.
By the way: Forgetting to deduct expenses is usually considered okay from a legal perspective since you only hurt your own wallet.
DISCLAIMER: I’m not a lawyer and this is no legal advice. Read my full disclaimer here.
#4 Make Use Of Property Management Software
Hands down. Hostel owners who use property management software (PMS) have an unfair advantage over the ones who use spreadsheets to manage their reservations.
If you’re not familiar with PMS, I highly recommend reading my ultimate guide about property management systems for hostels.
Cloudbeds PMS is BY FAR the most commonly used software among hostel owners to manage their business. It’s also one of the most sophisticated software solutions when it comes to financial reports.
In a matter of a few clicks, you’re able to download up to 28 different reports that are generated automatically. Now, not all reports are relevant for your tax return. This is something you should ask your accountant about.
Furthermore, you’re able to export the reports to Excel or PDF. It couldn’t be more intuitive.
Imagine you’d have to create these reports with Excel: Not only would you have to generate them manually, but also for all the different time periods (monthly, yearly, etc.).
Another critical component of using property management software is that it’s cloud-based and automatically gets backed. Hence, there’s NO realistic way that you could lose data.
On the other hand: If you have excel files that are stored on your computer, what do you do if your computer dies and all the data is lost?
Even if you have them stored in Google Sheets (which is definitely safer!), how do you prevent a hacker from deleting your files irrevocable? There’s no customer service that will help you fix that…
The taxman knows no mercy.
If you haven’t chosen your property management software yet, you might be interested in my comparison between Cloudbeds PMS and BananaDesk.
However, the big advantage of Cloudbeds is that it’s well known among accountants who are familiar with accommodation businesses. Hence, they will tell you exactly which report is needed.
By using this link, you get a 10% lifetime discount and a $50 starter bonus for Cloudbeds PMS – which is an exclusive TheHostelHelper deal.
#5 Categorize, But Don’t Over-Categorize
There’s no right or wrong when it comes to the number of categories you create to stay on top of your records. That said, most hostel owners go through 3 stages:
- Stage #1: You get started and have too few categories because you don’t know exactly what kind of costs to expect.
- Stage #2: You create category after category for each and every thing
- Stage #3: You don’t understand your own categories anymore because there are too many and so you reduce them to a “healthy minimum”.
Skip what others learned the hard way in stage #1 and #2 by keeping categories with the following level of detail:
- Salaries and wages
- Room rental
- Gift shop sales
- Food revenue
- Beverage revenue
While categorizing is an evolving process, don’t go crazy with it. There’s no need for overly complex structures.
#6 Make Use Of A Tax Accountant
Being a hostel owner is like having 15 different jobs at once: You’re a marketer, handyman, project manager, carpenter,… etc.
Fun fact: As I’m writing this, I’m sitting in the “Travellers Oasis” in Cairns – Australia’s #1 hostel for the past 5 consecutive years. And guess what: The owner Gabriel is working on his construction site where they’re currently expanding their hostel.
That said, accounting is a topic where I think you should get professional advice. Why is that?
- 1) Tax laws are ever-changing: An accountant makes sure you’re always on track.
- 2) Severe consequences: There’s little room for mistakes when it comes to accounting. Otherwise, juicy penalties can occur quickly. An accountant will give you peace of mind.
- 3) Saves time: An accountant will make sure that you can focus your time on the one thing you’re best at – accommodating travelers!
- 4) Accounting is more than bookkeeping: A good tax advisor will give you further tips for your specific situation to save taxes that you otherwise wouldn’t be aware of.
That’s the kind of advice you’ll receive if your accountant is really into it:
“Hey Kevin, are there any upcoming investments you already planned for the near future?
It would be great if you could invest $2,800 till the end of next month to stay in your current tax bracket. This could save you another $4,000 in taxes.”
An old colleague of mine used to say:
If you don’t have an accountant, you either have balls of steel or you’re simply stupid.
So, how do you find a great tax accountant?
- 1) Only hire certified people. The names are different for each country. In the States, this is called a Certified Public Accountant (CPA)
- 2) Look for someone who’s familiar with the lodging industry and hostels
- 3) Ask other innkeepers for recommendations
- 4) Be picky!
Regarding the last point: When I hired my first accountant for my business, I took the first recommendation I received from a colleague. However, it didn’t work out.
He was approximately 30 years older than I and wasn’t able to explain things in a way that I understood. He also couldn’t really relate to my situation even though he was familiar with the industry. Oh, and I never received any answers upon my emails…
After one year, I switched to someone who’s my age. While I don’t think he’s as competent (yet) as my old accountant, he’s super eager and engaged. Whenever I write an email, I receive a fast answer in plain English!
Hence, my recommendation: If you catch up with someone who’s not able to explain things in a way that you understand, don’t hesitate to switch.
Lastly, even with an accountant, you can’t simply lean back, thinking everything will be in apple-pie order. There’s still work for you to do and you should never give away all your responsibility.
#7 Store All Your Receipts At A Safe Place
Back when I was running my financial consulting business years ago, I told my clients to relentlessly keep all their receipts and invoices – and they did!
The issue was, they just tossed it into a shoebox to the point that it looked so overwhelming that they procrastinated to enter them into their books.
So yes, keep all your receipts – even the small ones – but categorize them right away! Furthermore, make sure you only use your business bank account for any payments.
The old saying “cash is king” isn’t true when it comes to accounting. Hence, try to avoid paying cash.
By paying everything from your business bank account, you will make your life much easier. It not only serves as additional evidence for your purchase, but you’re also able to use your account balance as a tool to measure your cash flow.
#8 Ditch The Paperwork & Go Digital
In my travels, I saw many hostel owners with literally dozens of folders that were neatly organized with colored labels. In my opinion, that’s like putting lipstick on a pig.
Seriously. Having everything digital is so much less work and will make your life SO MUCH easier.
In retrospect, it was the best decision I ever made when I decided to digitize my life in 2017 – 100% of it. Whenever I buy something offline, I take a picture of the receipt and drop it with just one click into the right category.
I use and recommend Evernote.
Evernote is a free tool that allows you to capture any information in a cloud. Hence, you get access to all your data from any device. With over 225 million users, it’s by far the most popular tool for this task.
However, the real power is its sophisticated search function: Evernote is able to find text in PDFs, pictures and even handwritten texts!
I can’t remember a single time that I had to spend more than 10 seconds to find the right file even though I’ve got thousands of different documents safely stored there.
While there’s a free option available, I personally use the premium version to be able to make use of additional features. However, this is optional.
With this link, you get a FREE premium month to check it out for yourself.
#9 Make Use Of Accounting Software
Here’s another thread that I found:
The limitations of Excel or Google Spreadsheets are one of the many advantages of proper accounting software:
- Connect your bank account to automatically keep your records
- Get further insights into your financial health with easy-to-understand reports
- Create automatic payrolls for your staff
- Generate your Profit & Loss (P&L) statements within seconds
The reports it creates are partly what your accountant would have to create manually. Hence, by using accounting software, you’re making his life easier and can save hundreds of dollars each year in hourly billing costs.
There are only two major criteria to consider when choosing your accounting software:
- 1) It should meet the needs of an accommodation business (a standard software won’t do the job)
- 2) It should be compatible with your property management software
IMPORTANT: Your PMS has priority. Choose it FIRST before committing to accounting software.
The most popular accounting software among innkeepers is called “QuickBooks” by a software company called “Intuit”.
Quickbooks is primarily tailored towards small and independent businesses and includes all necessary features needed for hostel accounting.
It’s also compatible with a whole bunch of property management software – including Cloudbeds PMS. Hence, it can pull all the necessary data automatically without having to export or import anything!
Furthermore, most accountants are familiar with the software and can tell you exactly what they need from it.
Watch Danny DeVito explaining “Quickbooks” in 15 seconds
I love it.
Quickbooks offers a 30-day FREE trial.
I recommend you make a go of it and click through its interface. It couldn’t be more intuitive in my opinion. In addition, there are many step-by-step tutorials that show you everything you need to know in an efficient manner.
After that, the starting price is $4 USD per month for its cheapest package. Compared to an accountant, the ROI is much larger.
With this link, you get access to the exclusive TheHostelHelper deal.
#10 Keep Your Records Long Enough
In case your hostel gets investigated, which is called a “tax audit”, you need to make sure you keep your tax records for quite some time.
Obviously, the laws differ from country to country, but it’s typically a period of 5-7 years. However, do the research in your specific country to play it safe.
That’s another strong argument for going digital to prevent you from storing dozens of folders.
#11 Schedule A Monthly “Bookkeeping Time”
Setting a fixed time for your bookkeeping every month pays off twofold:
- 1) It makes your yearly tax return much more pleasant without feeling overwhelmed
- 2) You don’t forget any irregular expenses that took place during the last 30 days
A few years ago, I used to do this on a weekly basis. However, I soon noticed that I made up excuses to postpone it to the next week…
After that experience, I switched to a quarterly schedule. Well, it turned out that it’s harder than I thought to think about all the irregular expenses that occurred 10 weeks ago.
For me, the sweet spot turned out to be one month.
As a reminder, I create a task on Todoist. This free tool allows you to organize all your to-dos with dates, times, priorities and even recurring dates (e.g. every 2 weeks).
This is what it looks like:
(The smiley is meant to boost my motivation 😅)
#12 Remember & Stick To Tax Deadlines
In my opinion, you can’t be too obsessive when it comes to following the tax laws.
If there’s a specific deadline to which you have to lodge your tax return, then for god’s sake, don’t start one week prior to creating it!
If you’re late, it’s not uncommon to receive juicy fines that are based upon how many days you’re late.
Again, a simple yearly reminder in Todoist will do the job.
#13 Become An Accountant Yourself
Don’t worry, you don’t need to turn into a math geek!
However, getting a basic understanding of your profit & loss statements is KEY to making improvements in your business. It basically gives you a snapshot of the financial health of your hostel.
After all, only numbers tell you the truth.
The easiest and most effective way to make use of your P&L statements is to compare entire years (e.g. 2019 vs. 2018) and specific months (July 2019 vs. July 2018).
It will shed light on the development of all areas:
- What improved?
- What got worse?
- Where are you treading water?
After this, it’s on you to figure out the WHY – why did the numbers change? What did you do differently?
DISCLAIMER: The above information is for informational and educational purposes only. It does not constitute financial or legal advice and does not establish any kind of financial-client relationship with me. The information provided has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider its appropriateness for your situation. I am not liable or responsible for any damages resulting from or related to your use of this information. Read my full disclaimer here.
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