Coworking Space Finances: The Ultimate Beginner’s Guide

Over the last few years, the demand for flexible work has exploded. As a result, new coworking spaces open their doors every day and try to provide individuals and companies with a fresh, collaborative work environment.

But like all other businesses, coworking spaces require sound financial planning in order to survive. As an operator, you need to have a clear and sustainable path to growth and profitability. This requires a good understanding of factors like your revenue streams, cost structure, and much more.

In this guide, we will delve deep into the topic of coworking finances and the key financial factors that contribute to long-term profitability.

Key Revenue Streams for Coworking Spaces

Revenue is the easiest starting point for evaluating your space’s financial health and building a financial model. Specifically, you want to figure out what percentage of revenue is brought in by different parts of your product mix.

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Most coworking spaces generate the majority of their revenue from memberships — the monthly or annual payments made by individuals or companies that use their workspace.

There can be tons of versatility here, with some memberships offering dedicated desks, private offices, more meeting rooms, and so on. In fact, diversifying your memberships can be a fantastic way to generate more revenue for your space.

Besides memberships, coworking spaces can also:

• Rent out individual desks, meeting rooms, and event spaces on an ad-hoc basis. These activities can contribute to your bottom line but they’re usually not as stable and predictable as memberships.
• Sell additional services. Think printing, gym areas, office relocation, mail handling, reception, food and beverages, and so on. Again, if you’re selling these, don’t forget to include them in your financial model as they can prove to be an important piece of the profitability puzzle.

Expenses and Overall Cost Structure

Once you get a good understanding of your revenue streams, it’s time to do the same for your expenses. For most coworking spaces, the overall cost structure is made up of 6 components:

1. Rent: This is the most significant expense for most coworking operators. One way to change its fixed nature and tie it to your profitability is to use a management agreement instead of a lease.
2. Payroll: Depending on the size of your team, labor costs can also be a big chunk of your overall monthly expenses.
3. Utilities: Think electricity, water, heating, internet, and so on.
4. Amenities: There could be a bunch of items listed here, like coffee machines, filters, printers, paper, ink, and other supplies that your members expect in your space.
5. Marketing expenses: This can include any promotional activities you use to attract customers, like designing and printing flyers, running online ads, organizing tours, hosting events, and so on.
6. Repairs and other maintenance activities: Make sure to take into account both regularly scheduled maintenance and spontaneous repairs in your financial model.

Check out the must-have coworking space financial benchmarks here.

Break-Even and Profitability Projections

At this point, you should have a good understanding of your revenue and expenses. The whole goal of this exercise is for you to determine the number of memberships and additional services you need to sell to break even and generate a profit.

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Doing this will let you set realistic targets for your sales and marketing activities, as well as find an optimal pricing strategy for your business.

You can perform this analysis by taking into account:

• Fixed costs, like rent and basic utilities, which remain more or less constant regardless of the number of members.
• Variable costs, like amenities and payroll, which will naturally go up or down as the number of members fluctuates.
• Average revenue per member or type of member based on the membership plan.

With that information, you can calculate your breakeven point (BEP) with the following formula:

BEP = Fixed Costs / (Average Revenue per Member – Variable Costs per Member)

This metric is essential as it helps you make an informed decision about growth targets, expenses, and financial sustainability.

Additionally, you want to take into account two other metrics when doing these projections:

• Retention: Retaining existing customers is much easier and cheaper than attracting new ones. As a result, boosting retention can massively improve profitability, so you need to take this metric into account in your financial model.
• Occupancy rates: Memberships are directly linked to your occupancy rates, so you want to keep track of your occupancy and find ways to improve it.

Check out this Workbar success story to learn how one of Massachusetts’ finest coworking spaces used the right coworking management software to manage their financial operations.

Emergency Funds

Bad weather, natural disasters, city protests, or economic downturns can all affect your business. Since you can’t do anything to prevent these situations, your best bet is to set aside some money in case they occur.

For example, it may be a good idea to reinvest 5-10% of your profits into an emergency fund to help you navigate challenging times without reducing the quality of your service (or worse — closing down your space).

Financial Forecasting and Planning for Coworking Spaces

Financial forecasting and planning are the cornerstones of running a successful coworking space.

This process involves creating realistic financial projections, budgeting effectively, and managing cash flow to ensure the business can sustain operations, invest in growth, and ultimately become profitable. In this section, we will build upon that.

Creating a Realistic Financial Forecast

A realistic financial forecast is essential for planning the future of your coworking space. It helps in making informed decisions, securing financing, and managing risks.

• Start with Revenue Projections: estimate future revenues based on current membership rates, occupancy levels, and potential market growth. Consider various scenarios, such as best-case, worst-case, and most likely scenarios, to account for market volatility.
• Estimate Operating Expenses: include fixed costs (e.g., rent, utilities) and variable costs (e.g., marketing, maintenance) in your projections. Ensure to adjust for expected changes, such as increases in rent or utilities.
• Incorporate Capital Expenditures: plan for future investments in facilities, equipment, and technology that will require significant one-time costs but are essential for long-term growth.
• Adjust for Seasonality and Market Trends: Account for seasonal variations in occupancy and any anticipated market trends that could impact your revenue and expenses.

Budgeting for Operational Efficiency

As we already mentioned, a well-structured budget is crucial for tracking and controlling financial performance, ensuring that your coworking space operates within its means.

• Create Detailed Budget Categories: Break down your budget into detailed categories to better track and manage specific expenses.
• Regular Review and Adjustment: Review your budget regularly (at least quarterly) to adjust for unforeseen changes in revenue or expenses, ensuring that your financial planning remains accurate and responsive to your business’s needs.
• Use Budgeting Software: Leverage budgeting software to streamline the budgeting process, improve accuracy, and provide real-time insights into your financial performance.

Managing Cash Flow Effectively

Cash flow management is vital for the day-to-day operation of your coworking space. It involves monitoring and optimizing the timing of cash inflows and outflows.

• Maintain a Cash Reserve: Keep a reserve of cash to cover unexpected shortfalls or opportunities, ensuring your coworking space can withstand financial volatility. It’s very similar to the emergency fund we already mentioned above.
• Optimize Billing and Collections: Implement efficient billing and collections processes to minimize payment delays from members, improving your cash flow. Software such as OfficeRnD Flex can immensely help with that.
• Manage Payables Strategically: While maintaining good vendor relationships, manage your payables by taking advantage of credit terms and negotiating better payment conditions where possible.

Setting Realistic Financial Goals

Setting achievable financial goals is essential for guiding the strategic direction of your coworking space and measuring its success.

• Align Goals with Strategic Objectives: Your financial goals should reflect the broader strategic objectives of your coworking space, whether that’s growth, stability, or a particular market focus.
• Use SMART Criteria: Goals should be Specific, Measurable, Achievable, Relevant, and Time-bound to ensure they are clear and actionable.
• Monitor and Adjust Goals: Regularly review your financial goals against actual performance. Be prepared to adjust your goals and strategies in response to internal performance and external market changes.

Effective financial forecasting and planning empower coworking space operators to navigate the complexities of the market, anticipate future challenges, and seize growth opportunities. Coworking spaces can build a solid foundation for long-term success and profitability by focusing on these financial management practices.

Get Your Coworking Space Off On The Right Track With OfficeRnD Flex and Flex Academy

Running finances for a coworking space is a complex, multi-tiered task. Taking into account the factors we outlined above will give you a great starting point for tackling that task and getting a good understanding of what you need to do to turn a profit.

However, finance is just one part of success in the coworking world. For more tips on marketing, increasing revenue, and boosting operational efficiency, check out the rest of the resources in our Flex Academy.

Flex Academy is our collection of articles and other materials for starting, running, and growing coworking spaces. Here are a few additional resources you might be interested in:

• How to Improve Your Coworking Space Operational Efficiency With A Better Tech Stack
• How to Create a Strong Product Mix for Your Coworking Space
• How to Generate More Revenue For Your Coworking Space

In addition, don’t miss out on checking out the OfficeRnD Flex Startup Program which gives you amazing discounts on our coworking management software.