Figures from the Insolvency Service confirmed that hospitality sector insolvencies jumped by 46% in August, in a grim reminder of the many challenges facing pubs, restaurants and hotels. An average of thirteen hospitality companies a day failed that month.
The financial and commercial havoc wrought on hospitality by the pandemic is well documented, but now it is coping with rampant cost input inflation, endemic staffing issues and the impact of the cost of living crisis on customer numbers and spend.
Customers are cutting back their spending
The vital festive season is just round the corner. Without a successful Christmas, many hospitality businesses will struggle to survive. With this in mind, it was very mixed news that the latest consumer credit/debit card data from Barclays showed spend on dining out plunged by 10.8% month-on-month in September, which followed a 5.8% drop in August. Takeaway spend also fell by 6.5% in September. Less spending now may perhaps mean more later, but the overall impact on revenues could well be negative.
More cost pressures are likely
The CPI inflation figure from the Office for National Statistics for September was a distinctly ‘sticky’ 6.7%. Wherever this key statistic goes from here, especially in the context of the Middle East crisis, it has already done enormous damage to the prospects for many hospitality businesses. It will be the basis for the re-calculation of business rates from April 2024, which it is estimated will add £2bn to costs across the economy, with UK Hospitality warning that £1bn of this will hit pubs, restaurants and hotels.
Smaller businesses are over-indebted
Our hospitality market sector report published last month (read the full report here) identified that while overall borrowings have fallen in the past year, debt burdens have risen significantly since before the pandemic for the smaller and less financially-secure businesses. Even where debts are lower, the sharp rise in interest rates means significantly higher servicing costs except where the loans are at fixed rates, for example under the Bounce Back Loan scheme.
What does your cash flow forecast show?
No hospitality business should ever be trading without having a detailed and constantly updated cash flow forecast to guide it, least of all under the current uncertain economic conditions. If it says your cash resources and borrowing facilities are insufficient, Houston we have a problem.
Look out for the warning signs
In the present situation, business owners need to remain realistic and prudent when it comes to their business’s finances and operations. As the investment guru, Warren Buffet, once advised. Owners must be on the lookout for the warning signs that their business is experiencing more than a temporary hiccough.
Consider carefully:
- Are you making consistent losses?
- Is there a problem meeting the payroll?
- Are you struggling to keep on top of HMRC debt?
- Do you have the headroom to pay the next quarter’s rent?
- Are you having to ask suppliers for more generous credit terms?
- Are you making round sum payments to creditors to hold them at bay?
- Are any creditors taking enforcement action?
- Have you had to miss loan repayments?
- Are key staff leaving?
If the answer to most of these questions is ‘yes’ and if you can’t see a realistic path back to sustained profitability and positive cash generation, seeking expert independent advice should be taken without delay.
Getting outside help
Calling in business rescue experts early is the best options for your business’s future. Few management teams have any in depth business rescue experience and in times of trouble, they are unlikely to have the bandwidth to run the business as well as taking the remedial action required. Many business owners struggle with the psychology of making the sort of tough decisions a successful turnaround often needs, even if they have the skills and experience to identify the solutions. Getting expert help means giving yourself a chance to move your business on from its current challenges.
How we can help
We have extensive experience advising hospitality business owners and management teams, and we will always work with you to find the best solution for you and your business.
One of our Partners would be more than happy to have a non-obligatory confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 0203 995 6380 and we will arrange for a call with one of our Partners.