Starting a hospitality business requires a combination of hands-on skills, a passion for working with people, and adequate funding to get off the ground. But ultimately, a key ingredient in your sustained success and profitability will also depend on having sound accounting practices in place to manage the financial and legal side of your business.
For the hard-working hospitality business owners out there, this article will give you the information and tips you’ll need to handle your accounting, achieve financial stability and maintain customer satisfaction.
So what is the role of accounting in hospitality?
Accounting and bookkeeping practices play an understated yet critical role in the financial success of any bar, hotel or restaurant. These practices offer numerous benefits, such as optimised use of funds, readily available capital, and compliance with Australia's intricate business tax laws.
To properly manage your business's finances, you'll need to focus on key functions such as cash flow management, budgeting, tax compliance, record-keeping and many others.
By keeping track of your business's performance, reducing costs, and proactively identifying potential issues, you can set your establishment on a path towards long-term financial stability.
1. Use accounting software
Our first tip is perhaps the most important, and it’s one that we recommend to all of our clients.
Utilising the online accounting software now available is such a helpful tool for in control of your finances and cutting down on time spent looking after the financial side of your business. This is particularly relevant for hospitality business owners who often face serious time constraints managing other parts of their business.
When selecting the accounting software for your hospitality business, it's important to thoroughly research each option to ensure you choose the right solution. Make sure the platform you choose allows you to perform the tasks that are essential for your business.
If you’re with a platform like Xero or Quickbooks Online, there will be hundreds of online tools that you can integrate with your account. This will allow you to perform and automate a range of accounting functions from wherever you are, including the following:
- Invoicing: Creating invoices for clients and monitoring payment progress.
- Expense Tracking: Accurately recording and monitoring all business expenses.
- Financial Reporting: Preparing comprehensive financial statements, including balance sheets, profit and loss statements, and cash flow reports.
- Tax Compliance: Accurately calculating and filing business taxes.
- Inventory Monitoring: Keeping track of stock levels, sales, and purchase orders.
- Payroll Management: Calculating and administering employee payroll.
- Customer Management: Keeping detailed customer information, including contact details and purchase history.
- Multi-Currency Functionality: Handling transactions in multiple currencies with ease.
- Tool Integrations: Seamlessly integrate with e-commerce platforms, payment gateways, and other business tools.
- Data Security: Ensure secure storage and access to all financial data.
We personally use and recommend Xero as our accounting software partner due to its ease of use; however, there are many other platforms that will also be able to meet your specific needs.
2. Build an effective strategy for bookkeeping
Unfortunately, being a business owner isn’t all fun and games; there are many tedious responsibilities that come with it.
As a proven and effective method of tracking and analysing business performance, proper bookkeeping practices can prevent serious financial difficulties. Alternatively, a lack of focus on your bookkeeping can make it hard to identify problems and unpleasant surprises at tax time.
To avoid this, make sure your business is performing the following duties:
- Keeping records of every transaction your business is involved in
- Bank reconciliation
- Managing your payroll
- Processing your accounts payable and receivable
- Generating financial reports
Having access to all of this financial information will allow you to make informed business decisions and minimise your tax bill at the end of the financial year.
Once again, accounting software will be a crucial tool when bookkeeping and will help automate many of these functions for you. You should also consider using a bookkeeper or accountant to reduce the time you spend meeting your bookkeeping responsibilities.
3. Make sure you’re meeting legal requirements with your employees
As an employer in the hospitality industry, there are many complicated rules and regulations regarding your staff. Failure to adhere to these rules can lead to dire consequences, as we have seen in many high-profile cases over the years.
Depending on factors such as the age, position and roster of each employee, you are required by law to ensure that certain conditions are met during their employment. It is your duty to research the relevant awards that apply to your staff and create a system that complies with these requirements.
In Australia, the Hospitality Award covers employers and employees in the hospitality industry who meet a certain criteria. Some of the conditions of this award include:
- Employees cannot work more than 10 consecutive days
- Meal breaks must be taken within the first 6 hours of a shift
- Penalty rates apply to all employees and include working between the hours of 7pm and 7am
- Employees must have at least 10 hours rest between shifts
You can find out more about this award here.
4. Carefully review your expenses
In accounting, costs can be categorised into two main types: fixed and variable. Understanding the distinction between these two types of costs is important for effective financial management.
Fixed costs are those that remain constant from week to week, such as rent and loan repayments. Variable costs are expenses that can fluctuate, such as ingredients, supplies, staffing and taxes.
Whilst your fixed costs are likely to be set in stone, you should run a comb through each of your variable costs to see if there are any areas where you could reduce your expenditure. This might mean cutting down on staff costs during quieter periods, reducing food waste or finding cheaper alternatives for certain supplies or ingredients.
Reviewing your expenses will not only increase your profitability, but it can also help you forecast your cash flow and establish an effective budget.
5. Figure out your break-even point
After reviewing your expenses, you should have a clearer understanding of your weekly costs and the profit margin of each sale.
From here, you can establish your break-even point - if you haven’t already.
Your break-even sales value is a pivotal metric for hospitality businesses as it indicates the minimum sales revenue necessary to cover all costs, including direct costs such as supplies and wages and indirect costs like overhead expenses. Determining your break-even point is essential for ensuring the viability of your business and avoiding operating at a loss.
The break-even point can be calculated by dividing your total fixed costs by your gross margin per unit. For instance, consider a bar with fixed monthly costs of $5,000, including rent, utilities, and loan repayments. With an average gross margin for every drink sold is $8, you can calculate the break-even point by dividing $5,000 by $8, which equals 625. This means you must sell at least 625 items per month to avoid incurring a loss, with every sale over that adding to your gross profit margin.
Ultimately, understanding your break-even point provides valuable insight into your business's financial performance and helps set realistic goals for future growth.
6. Outsourcing accounting
When starting a new business, you’ll understandably try to cut costs wherever you can. Whilst you may be reluctant to hire an accountant at first, it will be an inevitable step as your finances become increasingly complex and time-consuming.
There are many reasons why using a qualified accountant can be beneficial to your business, not least to make sure your business remains compliant with the complicated tax and legal requirements hospitality businesses must operate under. Outsourcing tasks like payroll, tax compliance, BAS statements and cash flow management will free up time that can be invested in your customers and your business.
Ultimately, a successful hospitality business requires more than just culinary skills, great customer service and solid marketing. Effective accounting practices, including tracking expenses, inventory, and revenue, is crucial for achieving profitability.
To take control of your financial picture, follow these hospitality accounting tips and enjoy the rollercoaster ride that is being a business owner.
For help tailored to managing your specific business’s needs, get in touch with one of Elephant Advisory’s hospitality accounting experts today.