When you’re running an independent hospitality business, with all the calls on you from staff and customers, it is easy to feel you don’t have the time or energy to give financial matters the attention they really deserve, especially more complicated areas such as tax.
However, it’s vital that you do. Neglecting your bookkeeping will ultimately have serious implications for the business and your own finances. I know this only too well from my experiences at my first business.
Avoiding unwelcome surprises
Cashflow problems are the biggest killer of small businesses, with recent research showing over 70% of SME owners see it as their biggest threat.
Hospitality businesses are typically cash generative, so it is easy to think things are going well because there is lots of money in the bank. But running your business only based on looking at the bank statement is heading for disaster as most of it won’t be yours! The good news is that today its easier than ever thanks to new cloud-based applications and online bookkeeping tools – and many of them are free.
The key to avoiding financial problems is having a regular cashflow forecast, effectively a chart showing, for the next year, how much money you will be paying out and how much money is coming in each month.
A decent cashflow forecast that you update monthly, not once or twice a year, is the number one way for ensuring your business is not heading for the rocks. If you use cloud accounting software, then there should be a cash flow tool to make it a quick process. Pandle, for example, gives real time cash reporting and forecasting so that you can easily spot current or future cash flow problems and react.
A cashflow forecast also lets you model how unwelcome events might hit your finances so you can plan in advance. For instance, what will happen to your finances if a wet summer or roadworks outside reduces custom.
Make sure your forecast includes not just regular payments such as your suppliers, rent and employee salaries, but also big lumpy payments like your annual corporation tax, quarterly VAT and large ad hoc payments. These are particularly important because, if you have not set aside money, you may well not be able to pay them.
It also helps prevents the big cashflow problem that afflicts many smaller owner-managed businesses… owners viewing the money in the business account as their own money and continually dipping into it for life’s luxuries! The end result of this is a big tax bill down the line and an anaemic business that struggles from one cashflow crisis to the next!
Turnover is vanity, cash is sanity, and profit is reality
The second big area to avoid financial problems is through actually being profitable, and many hospitality businesses struggle here by simply not realising they are making insufficient profits on their sales. In the rush to boost turnover and fill rooms or tables, many inadvertently give money away through charging too little to cover their costs and still leave a margin for capital costs and owner’s income.
For instance, viewers of the TV series The Hotel Inspector will have often seen small hotel owners finding to their horror the ingredients of the breakfasts and other meals they are serving are greater than the price they charge!
It is easy with strong competition and the effect of the online booking discounters to want to get customers at any cost. The problem for independent businesses is that you may well get more money in the short term by cutting prices, but higher costs and potentially lower profits if you have not carefully worked out your costs and also where you will compensate by upselling extras. Simply cutting prices to boost footfall means loss-leaders quickly become loss-generators
Having your bookkeeping in good shape allows you to analyse the prices you charge and the costs incurred. It shows where you should charge more, where you should cut costs and where you might cut prices to boost sales. It also allows you to look at your sales per customer and where you should upsell more extra items, as generating more sales per customer is the key to really improving profitability.
The good news is that the wide range of tools available online, many of them free, it has never been easier for small business owners to master this vital area.
Lee Murphy is the founder of Pandle (www.pandle.co.uk) the cloud bookkeeping software specifically for small businesses and the self-employed