What can I do if my business is not profitable?

It has indeed been interesting times of late. The first question on the lips of most of the hospitality operators I deal with has been: ‘How are the other businesses you deal with going at the moment?’ I’m sorry to report that I’m not getting much good news at the moment.

All the different sectors of the industry seem to be doing it equally hard. The common complaints revolve around falling sales and escalating costs. Margins are being squeezed everywhere — not only in hospitality, but right across our economy.  The only people who seem to be doing well at the moment are the accountants who benefit from the taxation complexity and insolvency practitioners who are gleefully rubbing their collective hands as companies fail one after another.

Don't expect a cheap manager to sort out your business

If you don’t change your direction, you will end up where you are headed

Are you losing money or not making much?

What can you do to insulate yourself against financial difficulties? Thankfully there are a few things that you might like to think about, and they broadly fit into two different families depending on whether you are losing money or making money at the moment.

If you are losing money then the situation is as urgent as the amount of your cash reserves dictate. We’d all like to have the luxury of just sitting on our hands and riding out the bad times, but for some of you this is not the case — more money is not available and reserves are getting low.

You have limited ways to stop losing money

If you fit into this category then you have no real choice but to radically cut costs to the point where you stop losing money and stabilise your business. Unfortunately the only real place you can cut substantial amounts of costs quickly is from your wages and salaries. You can’t stop ordering food and beverage, and you can’t sell your equipment, or stop buying cleaning chemicals, or cancel your advertising, etc. without seriously damaging your business — so you don’t have much choice — you have to reduce labour costs somehow.

It’s not as hard as you might think. The hard part is getting over the psychological barriers — like the feeling that you are taking a step backwards, or throwing away all that you’ve gained by hard work; or having to go back to being hands-on in your business. One way or another, it’s better than going out backwards.

Reducing full time staff by a couple of people will probably save you in excess of $6,500 per month when you take into account the saving of the on-costs as well as the wages. You may only have to lift the productivity of your existing staff by 10 or 15 percent and do a bit yourself to cover for the staff you have had to remove to protect your business.

If you are not losing money you have a bit more time to restore profitability.

The Law of Diminishing returns

The Law of Diminishing returns

If you have taken a financial hit but are still making money you have the luxury of time. Your business is not in imminent danger, but you are probably working for next to nothing. In this case I urge you to work on building your income as your main priority rather than cutting costs. Cost cutting is a process fraught with potential problems like forcing you into conflict with the Laws of Diminishing Returns — which states that for every

percent you save, the next percent is twice as hard, until you reach the point where the cost of the savings exceeds the savings made, or by plunging your staff into a fit of depressed morale. Building your income is a lot less traumatic and has no limits, but takes a bit of time and focus.

You already have a customer base. Ask yourself three questions: First, ‘Am I operating the business at a sufficiently high standard to get solid word of mouth referral, so I can reduce my marketing costs?’ Second, ‘Are my staff taking maximum advantage of the customers we do get or is there a large amount of disposable income leaving via my exit door?’ And finally: ‘Are we making the maximum margin we can on the customers we already get?’

The answers to these questions should provide you with a fruitful set of options to improve your financial situation — no matter what kind of hospitality business you run. The trick is in being coldly objective, and recognising the real truth rather than your own biased perceptions of the truth. After 33 years years of customer perception surveying we’ve found most hospitality operators seriously overestimate the general standards of their business, and grossly overestimate the selling and merchandising skills their staff apply during a customer transaction.

As for the margins you make on transactions, we’ve found that these are also commonly overestimated. For a start, are you costing all the food and beverage you sell accurately? Are your costings still valid after time has elapsed and the price of ingredients has escalated? Is your chef producing your food according to strict recipes? Are you selling your products for the right price? Are your front of house staff pushing the high margin items you sell and not recommending the low margin items? Do they know the margins?

The flip side to a difficult economy is that when it is all over and things come back to normal there are usually substantially fewer business competing with you for the dining publics’ money when it is freely available again — and you can also pick and choose replacement staff from a lean and hungry unemployment pool.

Anyway, hang in there; it can’t last forever . . .