There’s no denying that the hospitality industry has been detrimentally hit by the events of the coronavirus pandemic. With the UK’s continuous lockdown measures forcing the part-time closure of hospitality and entertainment venues, the economy is faced with the largest recession since records began. Other than being subject to tightening restrictions limiting the regular functioning of hospitality venues, business have also had to invest more into safety equipment such as PPE for staff, cleaning products, and staff training programmes- causing business revenues to be dramatically impacted.
However, with outdoor hospitality having now opened on the 12th April and all indoor from the 17th May, there is now some light at the end of the tunnel for many. In the wake of the darkest days of the pandemic, when the nation experienced several tough lockdowns, this only highlights the importance of SMEs assessing their financial situation during financial adversity and indeed, in preparation for it, should it happen in the future. It’s vital that finance departments recognise opportunities to increase revenues, save on costs, and forecast potential issues that could occur.
With this in mind, Wisteria Accountants take a look at how SMEs in the hospitality sector could transform their businesses finances.
Fiscal Control and Financial Planning
Throughout the pandemic, the hospitality sector has learnt that they must prepare for every circumstance. Sudden decisions to protect the public are understandable during these adverse times. For example, last year hospitality venues had been restricted by a 10 pm curfew, further reducing footfall in bars and restaurants. This emphasises the importance of financial planning.
Functioning on an operating budget is expected for hospitality businesses. 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.
To help spark ideas as to how expenses could be saved, borrowing budget templates from other industries could help with this. For example, zero-based budgets create an optimistic perspective on 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. In a zero-based budget, department leaders must justify every expense based on their utility and potential to drive revenue.
A 91 per cent majority met or exceeded their financial targets using this approach, according to one survey. 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.
Purchase management and cost control
For most sectors in the UK, the pandemic has caused revenue losses. However, this is especially detrimental to hospitality industries. 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.
With this said, understanding the balance between a reflective cost and a fair one for your products and services is important. While most businesses will want to offer customers a fair price for food and drink, the finance department should identify the true cost of your service. A reflective cost breaks down expenses.
For instance, it would be important to consider the processes that are used to create your service and how much they cost when setting rates for a hotel room. 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
It’s a given that other expenses could be discovered too. But understanding how these costs are reflected in your price makes it easier to maintain a healthy profit margin.
To help reduce costs that ensure contracts are reliable and effective, a purchasing manager is advised. 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.
Reviewing your payment methods
When it comes to private sector employment, the hospitality sector is the third-largest sector 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’s important to remember that the sector is broad and variable. Many industries offer different experiences with the unified aim to deliver good entertainment, service, and reception.
However, it’s the expenses and how consumers pay that highlight how the industries differ. For example, you may expect a hotel to receive credit card payments more than a restaurant, who 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 your 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 your finances may be affected.
For instance, it is a priority that your business reviews if the correct interchangeable fees have been paid after using VISA or Mastercard processes. 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 your finances.
To help gain a better understanding of the best practices in the sector and to find out what other businesses are paying, companies should speak to their audit accountant. While auditors will not breach other company’s confidentiality, they will be able to aggregate their knowledge of what is going on in the sector and assist you immensely.
It’s vital that SMEs re-assess their finances since there is so much uncertainty as to how the hospitality sector will financially recover from the events of the pandemic. 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. Your finance department should at the forefront of your business, guiding it through this difficult period.