Even though lockdowns are at an end, the business challenges continue for hospitality businesses. Here Andrew Millet of explains how they can adjust their financial processes.
More people are choosing to stay home to stay safe and to save money in the face of the largest recession since records began. Plus, hotels, licenced venues, and restaurants are subject to tightening restrictions, limiting revenue, and increasing expenditure for safety regulation including staff training and cleaning equipment.
During financial adversity, small market enterprises must re-evaluate their finances. A finance department should recognise areas for increased revenue, saving potential, and forecast potential difficulties in the future.
Here we look at ways in which SMEs in the hospitality sector can reassess their finances and transform their business.
Financial planning and fiscal control
The pandemic has proved that the hospitality sector must be prepared for every circumstance. Sudden decisions to protect the public are understandable during these adverse times. Most recently, hospitality venues have been restricted by a 10 pm curfew, further reducing footfall in bars and restaurants. This emphasises the importance of financial planning.
It is the expectation that hospitability businesses function on an operating budget. These budgets include the cost of wages, rent, and products. However, with the volatility of 2020, this budget type may not be thoroughly effective. Businesses have had to find additional money for cleaning equipment and staff training.
Borrowing budget templates from other industries may share ideas on how expenses can be saved. For example, zero-based budgets (ZBB). In a zero-based budget, department leaders must justify every expense based on their utility and potential to drive revenue. This can create an optimistic perspective on the cost-saving processes. Instead of looking for where cuts can be made, this budget allows finance departments and managers to argue why they should spend.
According to one survey of businesses that use this approach, a 91 per cent majority met or exceeded their financial targets. The money saved by zero-based budgeting is often reinvested for growth. However, businesses may want to consider saving for future financial adversity, especially considering the pandemic. Each new period requires a new budget, allowing finance departments to understand the effectiveness of each approach and where further investment can be made.
The hospitality sector is the third-largest private-sector employer in the UK. It employs 3.2 million people, producing £130 billion in economic activity and £39 billion in tax for the Government. However, it also comprises many different industries whose experiences can be quite diverse.
This is reflected in their finances, including how consumers pay. For example, a hotel may receive more credit card payments than a restaurant, which may primarily process more debit cards. A licenced bar or pub may accept more cash than the other examples. These differences have a large effect on their finances. As we move towards a cashless society where card payments are more accepted due to their low contact and hygienic nature, it’s important to understand how finances may be affected.
For example, reviewing that the business pays the correct interchange fees after using VISA or Mastercard processors is a priority. Interchange fees represent 70 to 90 per cent of all fees paid by merchants to banks. For a sector that has relied on cash, it is clear how the pandemic has changed spending habits and how the increase of card payments will affect the finances.
Companies should get a better sense of the best practices in the sector and what other businesses are paying. If they are publicly quotes, they can do this by asking their auditor.
Cost control and purchase management
The gross profit margin of a business in the hospitality sector is usually 30 per cent, making it one of the lowest profit margins compared to other industries. Even industries with lower profit margins, including construction and car sales, can alleviate the low margins with higher gross profit. Hospitality businesses cannot do this.
Therefore, it’s important that the business establish the right balance between a fair cost and a reflective cost for its products or services. This process requires clearly identifying the true costs behind them.
For example, when setting rates for a hotel room, the business should consider all processes used to create the service and how much they cost. This includes:
- Staff wages for receptionist and cleaners
- Electricity and water
- Breakfast services
- Interchange fee
- How occupancy is affected during different seasons
- How it may be impacted by the continuing pandemic
Of course, various other expenses can be uncovered too. But understanding how these costs are reflected in your price makes it easier to maintain a healthy profit margin.
A purchasing manager can help to reduce these costs by ensuring that contracts are effective and reliable. Finance departments should negotiate on your business’s behalf, with a quick understanding of how each contract can affect revenue and profitability. For example, some drink suppliers may provide free glasses but may be more expensive overall than suppliers who don’t. How the cost of glassware affects this profitability should be considered.
With uncertainty mounting over how the hospitality industry can recover from the financial burden of the pandemic, SMEs in the hospitality sector must re-evaluate their finances. They need to assess the most effective ways to increase revenue and profitability. Finance departments can be a useful business partner in creating business strategy, whether they highlight future adversity or give a reflection of current expenditure. The finance team should be at the forefront of your business, guiding it through this difficult period.
About the Author
Andrew Millet BA MBA FCA founded Wisteria in 2002 and is responsible for the Accounts and Audit departments, as well as Business Consultancy. His clients vary in size from £1m to £30m turnover.
After qualifying with Stoy Hayward (now BDO), Andrew moved into industry. Andrew gained commercial experience operating as a CEO and CFO of numerous successful companies in biotech, recruitment, media, technology and marketing.
AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.