Any local business operator in the hospitality industry will be able to relate to the summer holiday period rush. When reviewing the month to month annual profit and loss results, they can usually be displayed graphically as a significant bell-type curve. There is usually no shortage of customers over the summer holiday period and this is almost always reflected in increased sales for the hospitality business, which can be in stark contrast to the winter period. Don’t be lulled into a false sense of security; increased sales do not necessarily translate into increased profits or a better cash flow balance.
All these extra sales are good right?
I will start off by saying yes, increased sales or turnover is usually a good thing for every business. However, increased sales can ‘paper over the cracks’ of a poorly performing business. The business owner thinks things are going swimmingly, only for the cash flow to suddenly run dry when the summer holiday period ends, and turnover drops off. The root cause of this dilemma is usually that the business has lost control of its costs.
Know your main cost drivers and don’t lose your focus
A major cost driver for almost any hospitality business is its wages costs. This includes wages and superannuation paid to employees. This is one of the easiest cost centres to blow out, given the extra demand customers place on hospitality over the summer period. The desire of businesses to service every customer and cope with the demand results in extra staff being employed and/or for longer hours. Quite often the additional wages costs are subject to a law of diminishing returns - only your staff end up with the actual cash benefit of your increased turnover.
Set your targets
Find a turnover figure at which point you know you can make a profit, then set your cost driver targets based on a percentage of this amount. This helps you make sure that your costs don’t overtake the additional income from your increased turnover. Monitor these targets regularly on a daily or weekly basis to ensure that you keep close to your targets for each and every period. If you start to drift from your targets, make immediate changes to ensure your profit doesn’t walk back out the door with your customers or your employees.
Cash flow and cost drivers - where to next?
Having trouble knowing which cost drivers to monitor or what cash flow targets to set? At RSM, we can develop key focus areas for your business to help manage performance and improve cash flow.