The Hospitality Trap

Most hospitality businesses don’t fail because the owners are lazy or bad at what they do, they typically fail when they get stuck, and they get stuck when the fall into a trap.

I’ve mentioned this before but it’s worth going over it again; you’ve probably started your own business so that you can stop working for someone else - maybe they weren’t listening to your ideas, or you thought that you could do a better job than your boss, or maybe it’s that you saw how much was going through the till and thought “I deserve more than this”.

I can’t count how many times I’ve been having a conversation with an owner-operator, and they’ve said something along the lines of “I’m not taking much of a wage at the moment, I want to sort the business first and then I’ll be able to take a bit more”. I had a conversation recently with a relatively new client - they used to work for the owner of the business until they bought him out. They’ve got this mindset at the moment. The funny thing is that I asked them what their thoughts were about the previous owner before and after they bought him out - they thought that they were being “had off” with a fairly shitty wage, but now that they own the place they’re able to see it from his point of view - and they’re beginning to realise how much they don’t know about running a restaurant.

Most owners (both rookies and seasoned vets) make the same three incorrect assumptions:

1.       A full restaurant = a profitable business

2.       Long hours = making progress

3.       Hard work = good decisions

So, is a full restaurant the answer to your problems? We’ve all been there, experienced it, or seen it; you get those periods throughout the day where you’re getting absolutely hammered - you’ve smashed through your prep list, service went well and it was check after check. You’ve then asked a few people to stay on a bit longer to help with the close down (you’ve been really busy after all), and you bump up your supplier orders “just in case” it’s the same again tomorrow. You tell the person who’s working tomorrow to get in a bit earlier as they’ll have more prep to do and a larger delivery to put away, but you’ve been busier today so it’s warranted - besides - you want to get ahead for the weekend. The weekend rolls around and you’re fortunate enough to have a busy service each day, but since you’ve already pulled people in earlier and asked them to stay later, you’re ahead on prep and not a whole lot needs doing. You’ve staffed up for a typical weekend, and it’s going to be an easy service. For once, you’re ahead of the game.

All-in-all, your restaurant has been full, and you’ve had (what seems like) a stellar week.

You check the till system and yep, it has been a great week, but then you get round to paying staff and suppliers the following week... and there’s nothing left. You’re left scratching your head wondering how on Earth you’re meant to make this work - if you’re busier than normal and you’re running out of cash, then how does everyone else seem to do it? You bury that thought for the time being and decide that if you don’t take a wage then you’ll be able to hold a little bit of cash in the bank account as a buffer - but it’s fine, you’ll pay yourself back eventually.

Simple answers are often the hardest ones to find. More revenue does not equal more profit. More often than not, more revenue just equals more expenses. For some reason, we’ve got this terrible habit of compartmentalising our time: in the moment, we view things hour-by-hour, or day by day, and because we’re usually doing our rotas or forecasting week-by-week, we have a tendency to write off the previous week when we come into the next one. I see this all the time; GMs getting excited (which is great) that they’ve beaten their revenue target this week by £3,000, but they seem to instantly forget that the previous week was extremely quiet, and they finished that week £4,000 below target.

Profit (much like cash) is cumulative. In this scenario, we haven’t “gained” anything, we’ve simply recovered part of our loss. But as owners we do the same thing with our rotas and with our stock; “we’re busy right now, so we need more right now”. We don’t view the situation as “we lost money last week, but we’re busier this week, so if we keep it tight then we’ll claw the loss back”, instead, we (sub)consciously increase our expenses in line with our revenue- I’m making more therefore I can spend more.

It’s not just staff and stock that can cause an issue with increased revenue- quite often it’s a menu costing issue: if you’ve got something on your menu that loses you money, then selling more of it just means that you’re losing more money- it’s almost like a “reverse volume” mechanism.

When people find out that I used to be a chef before becoming an accountant, they almost always have the same puzzled expression and they almost always say the same thing “that’s a bit of jump, isn’t it?” Truth be told, no. Hospitality and accountancy aren’t too dissimilar; you work long hours, everything needs to be costed within an inch of its life, everything is on fire, and everyone wants everything right now. There’s one other similarity though - the work never stops. When I was in the kitchen, I’d aim to get through my prep list as quickly as possible and then try to get a jump on the next day’s prep. In my accountancy practice we do something similar - we’ve gotten last month’s bookkeeping out of the way, so we’ll try to make a dent in this month’s so that we can get ahead of ourselves. But much like a kitchen, once you’ve gotten to the end of the day, you’ve got to reset and do the same thing all over again tomorrow.

When I started my business, I applied the same mindset as I did when I was a chef - if I just do a few more hours now, I’ll get on top of everything, and I can start to get ahead. I’d then try to convince myself that working the odd 18-hour day was ok because I could just buy an energy drink and backfoot it tomorrow. But as the song goes, “tomorrow never comes”. It’s just rinse and repeat.

Eventually (and often too late) you realise that you can’t do it all yourself, so you make the decision to hire someone. You put out a job ad, interview people briefly over the phone, pull them into the restaurant and then ask them to do a trial shift (hint, the person that turns up is usually the one that gets offered the job). You’re busy on service, so when the trial shift ends, you ask other people how they think it went, then you offer them the job. The new person starts and they’re enthusiastic, but they’re not great - you try to help with the training here and there, but you’ve got loads of other stuff to do, so you either leave them to it or you ask someone else to help out (if you’ve got someone else), but that “someone else” has had the same level of training that this new hire is getting- there are gaps. Big gaps. So, you figure that you’ll just pull a bit more of their weight whilst they get up to speed. Imagine if your driving instructor took the same approach as you’re taking now- you’d be livid (and possibly in prison).

Time progresses, the business is getting busier, and you’re quickly running on empty. So, you repeat the process hoping that quantity will outweigh quality. It doesn’t. Before you know it, you’re responsible for 5 or 6 other people that you’ve got to look after, clean up after, follow round, chase, train (sort of) and so you decide that what you really need is a manager- someone to look over all these new people. That’ll take the strain off, right?

Wrong. You’ve now got someone in the business that may have been trained on how another restaurant deals with issues, but not how you want issues to be dealt with. So, you start spoon-feeding them information and giving them small tasks here and there. Eventually, you trust them enough to do the rota and some of the ordering - that’s something off your plate at least. But a few months in you notice that your wage bill is getting higher. Without clear targets and boundaries, the new manager has been giving people more hours and instructing the payroll team to pay out some holidays on top of wages - so you either take the rota back off them or you tell them that they’re using too many hours and to “do better next time”. Hmmm, maybe, just maybe, this is starting to sound a little like the last place you worked at before deciding to work for yourself…

Now you’re effectively running a creche with the equivalent of a junior school kid helping out in the Summer holidays. Your payroll bill is going up, your supplier bills have gone up, and you decide again that the only possible solution is to work a bit more yourself, not take a salary this month, and to try to think of ways to increase revenue.

Working harder and working longer is manageable for a short while, but it isn’t maintainable and the impact that it has on your physical and mental health, and the health of your business can be devastating. When you don’t have the capacity to make calculated decisions, you wind up making bad decisions.

It’s all too common to see a restaurant that’s turning over £20,000 a week but is panicking over how they’re going to pay the VAT bill next month and is showing a loss on the P&L. On the other hand, we’ve got some very small clients (£200,000-£300,000 per annum turnover) who pay their PAYE bill to HMRC as soon as we send out the P30 on the 6^th of the month and pay their VAT bill as soon as we’ve sent it to them for signing off. They’re not necessarily “better operators” than others, but they do typically have more time on their hands. More time = more time to think and more time to process before making any decisions meaning that ultimately, more decisions turn out for the better.

I think that some of this is down to the size of the venue, but I believe that it’s also down to the mindset of the operator- there’s a huge difference between “I need to hit £1,000,000 in revenue” and “I need to take home £50,000”. People who focus on top line revenue tend to make faster (not necessarily better) decisions i.e. “I need to hire someone now” versus “I’m thinking of hiring someone, but I’ll have a think about it first”.

The reason that I’ve brought up revenue versus profit in a section on “making bad decisions” is this; when you chase revenue, you fall into a trap - you need more people to do more work, to cover more burnout, to then need more revenue to cover the escalating costs, but those who focus on profit before revenue typically make different decisions and look at the profit and loss account in a different way - they focus on how they can increase profit before looking at how they can increase revenue. They’ve stopped and thought about their decision and realised that the majority of their costs are proportionate and that adding £100,000 worth of revenue into the business might increase their profit by £5,000-£10,000 (before tax), but it will definitely increase their costs by £90,000-£95,000 whereas changing their merchant services provider may save them £5,000 by doing little more than having to send a few emails and make a couple of phone calls.

Whatever your reason for being in business, being profitable still remains the ultimate goal and people with less burnout, stress, and a structured workload tend to evaluate their decisions before they make them - which ultimately leads to fewer bad decisions.

If you're looking for support in your hospitality business, book an appointment and let's chat.