In the wake of the UK’s cost of living crisis, hospitality and leisure business owners find themselves at the epicentre of a series of financial challenges. In this post we will examine the impact of spiralling costs and, more importantly, offer some suggestions as to how to respond.
The steep rise in operational costs, including a staggering 12.1% increase in labour expenses, a c. 15% surge in the prices of sale items, and an astronomical hike in power costs which seem to be at around a 200% increase for many operators, presents a daunting scenario. General inflation, affecting everything from utensils to décor, further compounds the problem, which can lead to some businesses needing take an additional 37% in gross revenue just to maintain the same profitability level as in prior years. This is a challenge that, for many, seems insurmountable.
Understanding Labour Woes
How to Respond
1. Budgeting for Survival
To navigate these stormy waters, businesses must develop comprehensive budgets. This involves meticulous planning, considering revenue, cost of sale, labour, and fixed costs. A broad goal for the Hospitality and Leisure sector is to keep both labour and cost of sale (COS) percentages below 30%, ensuring that these significant expenditures are well-controlled. Of course, some business models will be able to perform even better than this, and some worse – this doesn’t mean they’re inherently wrong, just different! However, if we need a starting point guide, these numbers will provide a good target.
If you are unable to make the revenue vs labour figure realistic within these targets, and considering that there will likely be fixed labour costs, the only option may be to remove staff or trim operating hours. However, it is important to take a long-term view, applying awareness of seasonal trends which allow for a loss during quieter times which is offset when your centre is busier.
2. Real-Time Tracking and Reporting:
Staying ahead requires real-time tracking and reporting. Waiting for monthly or quarterly reports is a luxury no business can afford in this climate. Weekly (or even daily) calculations of gross profit percentages and labour expenses against budgeted amounts are crucial. Immediate action can then be taken if discrepancies arise, ensuring financial leaks are sealed before they become floods.
Success in this area is dependent on you having the cash reserves to carry you through weeks where there is overspend, although proper forecasting can help to prevent this.
The practical steps:
- Write a costed rota, including NI for qualifying staff.
- Compare the costed rota to the forecast revenue. If it isn’t under the labour % you set then you’ll need to trim hours or work out a way to take more money.
- Track labour % daily and respond quickly to increases.
- Identify where savings can be made across the week – it all adds up.
3: Creating a Flexible Team
In the same way that your financial structures need to bend and flex to respond to the current climate your team are another resource which benefit from being agile. Cross-training your staff can reduce your reliance on temporary staff and ensure continuity when responding to absence. Staff who are competent across the business give you the flexibility to recommission staff to respond to pressure points when you are busy, improving customer service.
4: Work on Staff Retention
Recruitment is expensive and time consuming, so making efforts to keep your quality staff is worthwhile. Whether that be through offering flexible working hours or through boosting moral via team activities, rewards and bonuses or publicly celebrating staff achievements both inside and outside the workplace creates a sense of community. You can read more about this via our blog post: Keeping your good staff – principles of effective team management
Labour costs, often overshadowed by power and sale item prices, are a massive concern. In the face of a competitive labour market, businesses are compelled to pay higher wages to retain their workforce. However, this, coupled with increased Employers National Insurance and pension costs, leads to a significant financial burden. Even a modest pay rise results in a substantial uptick in overall business costs, making profitability harder to maintain.
Other Significant Areas to Pay Attention To:
Cash Flow Management:
In times of crisis, cash flow becomes king. Effective cash flow management involves predicting money inflows and outflows accurately. This proactive approach prevents unpleasant surprises, allowing businesses to prepare for VAT bills and other financial obligations, maintaining stability even in uncertain times.
Attention to detail can make a world of difference. Ensuring efficiencies across the business, not just with your labour and CoS, enable you to flex the business as required. This includes:
- card processing – should be no more than 1% all in. Don’t be lured by seemingly low fees on individual transactions.
- cleaning – should be done cheaply and efficiently e.g. hot soapy water & a scourer not spray cleaning fluids and blue roll.
- cellar cooling – ensure the room is only the size you need, deal with deliveries quickly and minimise wastage.
- electricity – only use energy saving lamps where possible, clean equipment vents regularly (especially on cooling items), use timers – but not on your cellar cooling!.
- Suppliers – review your rates with supplies & negotiate better terms.
- printing – use evergreen posters in frames, utilise tv screens for advertising.
Recognizing the limitations of traditional accounting services is crucial. Accountants, while essential for compliance and structuring guidance, are not sufficiently experienced, nor resourced, to be able to provide strategic or tactical guidance on profitability management. In the main, all day-to-day reporting should be managed in-house as using an accountant is very expensive and will not be timely. Engaging an experienced accounts controller with a background in hospitality is an investment that can pay substantial dividends should you not have the skills within your team.
The Road to Resilience
In this challenging landscape, resilience is the key. Adaptability, meticulous financial planning, and a proactive approach to cost control are the cornerstones of survival. By understanding the intricacies of your business’s finances, embracing real-time tracking, managing cash flow effectively, optimizing overheads, and seeking expert guidance, you can not only weather the storm but also emerge stronger and prepared to take full advantage of the economic upturn we hope to see around the corner.
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