As we head into a new financial year and budgets are being finalised, the challenges hospitality has faced over the last two years continue, so our advice is to plan with diligence and some degree of caution.
In this post we’ll be discussing the current landscape, as well as the specific areas hospitality businesses should focus on in your planning.
Why you need to proceed with caution
The current trading environment is a perfect storm of the rising cost of living, rising interest rates and increased wages, as well as limited and increasing costs of goods. Even the high cost of construction plays a role, as renovation and development costs impact the profitability of the hospitality venues. These conditions are unlikely to change and may potentially worsen in the short term. Especially with the new uncertainty of the energy market and rising costs of heating, lighting and cooking.
In some ways, the current challenges are a reversal of recent fortunes with exceptionally low interest rates combined with extreme pent-up demand following COVID-19 lockdowns. Even though the hospitality industry has traditionally weathered recessions well with some commentators calling it recession-proof, there are still no guarantees.
Of course, we can’t predict the future, but analysing historical data and correlating it with potential outcomes can take us some of the way there. With this in mind, here are some of the areas hospitality should be focusing on as we head into the new financial year:
5 Areas to focus on for FY23
1. Forecast normalised demand
The recent surge in business demand, created by freedoms post-lockdown are likely to diminish. Identification of the increase in demand specific to your venue will help predict a baseline level to expect and predict for future revenue.
2. Estimate the true cost of capital
While the actual numbers for the increases in interest rates are unknown, it’s possible to estimate. You’ll want to know this as it has a direct relation to the cost of borrowing which can impact capitalisation rates and return on the value of assets.
3. Increase efficiency
The more efficient you are this year, the better. It increases profit margins and reduces unnecessary costs and the best way to become the most efficient is using technology. Hospitality solutions like those we provide at Quantaco can help you to manage margins, automate processes and provide you with accurate up-to-date information.
4. Limit the impact of discretionary spending
The gentrification of many pubs has brought them closer to a fine dining experience, but this makes them more susceptible to impacts on discretionary spending. Understanding the demographics of your patrons and ensuring the offer is in line with their expectations will better protect against cuts to spending.
5. Manage the balance sheet
Where cashflow drops and increasing costs are a likely outcome, now is the time to pay particular attention to the balance sheet. Reviewing covenants (the terms and conditions of a loan made to the lender), loan-to-value ratios, and interest rates are all critical first steps to maintaining a healthy balance sheet.
Having access to experts in their field with a deep understanding of hospitality can help you proceed into the new year cautiously and diligently.
If you want to leverage our hospitality-focused turn-key solutions, get in touch here: https://www.quantaco.co/contact-us/