How to Create a Financial Model for Your Coworking Space?

Every business requires a budget to gain insights into its breakeven point, and valuation, and to establish a financial model for a coworking business plan.

This article guides you on creating robust and precise financial projections for a coworking space business.

Why do you Need to Create a Financial Model for Your Coworking Space?

Creating a financial model is crucial for the success of your organisation and the efficient utilisation of all the resources. Following are some of the major reasons:

Financial Planning

A financial model helps you plan and project the financial aspects of your coworking space. It allows you to anticipate revenues, forecast expenses, and analyse potential profits or losses over a specific period.

Resource Allocation

With a financial model, you can allocate resources efficiently. By understanding your projected cash flow, you can make informed decisions about where to invest and where to cut costs, ensuring optimal resource allocation.

Risk Management

Identifying potential risks is crucial for any business. A financial model enables you to assess the financial impact of various scenarios, helping you develop risk mitigation strategies and make informed decisions to safeguard the financial health of your coworking space.

Investor Confidence

If you plan to seek funding from investors or financial institutions, a well-constructed financial model is vital. Investors often rely on financial projections to evaluate the viability and potential return on investment. A comprehensive financial model can instil confidence in potential investors.

Decision Making

A financial model serves as a valuable tool for decision-making. It allows you to evaluate the financial implications of different strategies and scenarios, enabling you to make sound and informed business decisions.

Business Valuation

If you ever consider selling your coworking space or attracting investors, a financial model is crucial for determining the valuation of your business. It provides insights into the financial health and potential growth of your venture.

How can you Create a Financial Model?

Following are the major steps involved in creating an exhaustive financial model for your coworking space:

• Project Active Members

The initial step involves estimating the number of active members, which is influenced by the acquisition and retention of members over time. The departure of members is referred to as churn:

Active members = new members – churn

It is advisable to generate monthly forecasts for seasonality; for instance, customer sign-ups for coworking offices may increase post-summer. Additionally, if your coworking space offers different membership plans, assume a distribution among them. For example, anticipate that 80% of members will opt for the “Basic” plan on average, while 20% will choose the “Premium” plan.

Lastly, consider a maximum limit for active members, acknowledging the capacity constraints of the coworking space. Exceeding this limit might result in insufficient seating, which is not a viable scenario.

• Forecast Revenue

As detailed in our previously published article, coworking spaces typically generate revenue through four primary streams:

• Membership Revenue
• Renting Conference and Meeting Rooms
• Virtual Offices
• Events & Workshops

The last three categories can be consolidated into a unified “other revenue” stream within your coworking financial model. Notably, these alternative revenue sources often contribute less than membership revenue, which typically constitutes approximately 80% of the total revenue for coworking spaces, as illustrated below.

Membership Revenue

Calculating membership revenue is a straightforward process. It involves multiplying the number of active customers by their respective monthly fees for each membership plan.

Other Revenue

Estimating revenue from conference and meeting rooms, virtual offices, and events & workshops can be done using the following approach for each:

• Assume a percentage of active members who purchase the specific product or service in a given month. For instance, on average, 10% of “Basic” users subscribe to a monthly virtual office service.
• Assume a price per service. For example, consider that the monthly virtual office service costs an additional $30.
• Multiply the assumed percentage (1) and the service price (2) by the respective number of active members.

By following these steps, you can generate a revenue forecast similar to the chart below. Keep in mind that your revenue streams may vary; for instance, renting conference rooms might constitute a larger portion of your income. The provided illustration serves as a guide to help you visualise how revenue projections might appear.

• Forecast Expenses

When planning the financial aspects of launching and operating a new coworking space, it’s essential to consider various expenses beyond the initial startup costs. These anticipated costs include:

Rent

The rental cost for the premises constitutes a significant portion of the overall expenditure. Similar to residential or commercial properties, the initial cost varies depending on location and space size. If opting for leasing, it’s advisable to research the average commercial rent prices per square foot in the chosen area. To have some idea about rent in Pune, look for Office on Rent in Pune.

Salaries

Allocating funds for employee salaries is another substantial expense in establishing coworking spaces. The total cost hinges on the number of full-time and part-time staff required. For instance, using the average annual salary of a WeWork Community Manager at $72,945 can provide a benchmark.

Utility Bills

Monthly utility bills, covering water, electricity, and internet, are recurring expenses. Larger coworking spaces naturally incur higher utility costs.

Marketing and Paid Advertising

Effective marketing is crucial for attracting a reliable customer base. Allocating a budget for marketing and advertising is necessary, with costs varying based on the chosen medium and target audience. Initial expenses are typically higher in the first six months of operation to promote the coworking office before relying on organic growth.

Cleaning Services

Maintaining a clean workspace is essential for customer retention. The cost of janitorial services depends on the office size and additional services like lawn maintenance and kitchen upkeep.

Bookkeeping Fees

Like any other business, proper bookkeeping is essential for coworking spaces. This involves using bookkeeping software (such as QuickBooks) and hiring an accountant. A monthly allocation of $250 to $500 for bookkeeping is a reasonable estimate.

Insurance

Before commencing operations, coworking spaces must secure appropriate insurance coverage. This includes General Liability Insurance, safeguarding against property damage and covering medical costs for injuries that may occur on the premises. The average monthly cost for General Liability insurance for a coworking space is approximately $500.

By accounting for these various expenses, a comprehensive budget can be developed to ensure the smooth and sustainable operation of the coworking space.

• Develop Your P&L and Cash Flow

Once we have projected revenues and expenses, we can systematically construct the profit-and-loss (P&L) statement, outlining the journey from revenues to net profit. This process aids in visualising crucial metrics derived from your financial statements, as depicted below:

In contrast, the cash flow statement must encompass all cash-related items from the P&L and additional cash movements, such as capital investments (referred to as “CapEx”), fundraising, debt, etc.

A cash flow forecast is essential as it provides insights into the amount of funding required, whether from investors or financial institutions (e.g., SBA loans), to initiate and sustain your own coworking space.

In the following chart, we present an illustration of the typical costs incurred by a coworking office, spanning from rent and marketing to salaries:

Conclusion

Crafting a robust financial model is not merely a procedural step but a strategic imperative for the success of your coworking space.

This meticulous process of forecasting revenues, managing expenses, and projecting cash flows serves as the financial compass guiding your business journey. From attracting investors and securing funding to making informed decisions and mitigating risks, a well-constructed financial model is the cornerstone of sound financial management.

Always remember that it is not just a document; it’s a dynamic tool that empowers you to navigate the complexities of the business landscape and pave the way for the sustainable growth of your coworking venture.