Financial performance
There are two types of Financial Performance to consider when you are looking at the performance of a business – firstly there are the standard metrics that are used to measure just about any business Turnover Growth, Gross Margin, Net Margin, Debtors and Creditor days, Expense rations, Financial Gearing etc. There are normal ranges that you would most likely find businesses within a sectors conforming to – for example, supermarkets have low margins whereas luxury goods have higher margins…supermarkets base their Financial model on a stack ‘em high and sell them cheap formula relying on swift stock sales whereas luxury goods are more difficult to compare against each other – they tend to have specific design features that few other companies copy. The goods in this category have significant pricing power are highly aspirational and therefore tend to sell at high margins. The second type of metric is those particular ratios and stats that a business uses to try to set targets and operational standards for to manage near term performance. Sometimes referred to as KPI’s or key performance indicators these tend take the overall performance standards mentioned above that a business is trying to reach and subdivides them into more micro measures that can offer more detailed information and earlier indicators of whether a business is likely to reach its desired performance standards or not.
Turnover Growth
One of the facts of business life if you like is the fact that the owners of a business must have an almost relentless desire to grow the business otherwise it will in the medium term stagnate and possible fail. What rate of growth is deemed to be acceptable can depend on a number of factors such as the ambition of the business owner, how much resource he or she has in terms of funding and people to support that growth, the owner’s experience in business and what type of sub-sector of the Hospitality Industry the business is in. Often a business positioned in an edgy sector of the market….gourmet burgers or lifestyle festivals may meet that sort of criteria currently are positions thus to make rapid growth and take advantage of a current trend for those goods or experiences. However, Turnover growth may not be seen as the be all and end all – someone who has made money previously in life may just want to create what is sometimes referred as a lifestyle business…one that just provides a certain standard of living or a small income for the business owner.
Margins are a very good way of comparing businesses within the same industry or market space. There is also a very good reason why so many coffee shops have sprung up in the past few decades…the main reason is that the core product the production of coffee from coffee beans is known to be a very high margin equation. The basic cost of the coffee in most cups is a mere few pennies. Obviously this increases as the sophistication of the type of coffee increases too but high margin products and businesses have a specific appeal to current and potential future investors in a business as they have as was previously described pricing power such that they can still be highly profitable if the price of the product is reduced. The same clearly cannot be said if the business or product is operating from low margins. The trend of urbanisation or more people moving towards cities is also a boon to food and hot drinks operators in these cities. People often skip traditional breakfasts in favour of picking up someone in these outlets on the way to work and the footfall (the number of people entering the outlet) increases as more and more people need to come to cities to work.
Financial Metrics
Other Financial metrics that are of relevance or not in the Hospitality industry are Gearing and Debtors/Creditor days. Pubs, Hotels, convenience food stores, and Restaurants although they do have to outlay on various input costs before they make a sale at least do not have to wait substantial timescales until after the good or service has been bought by the customer before receiving payment. Hotels for example often insist on payment in advance of any use of the room for example and most successful pubs and food outlets are highly cash generative. Gearing is a measure of how much of the capital provided to set up the business is loan capital, from banks or friends and family for example, or the actual savings of the starting company Directors and Shareholders. It is usually expressed as a percentage and can tend to be a measure of how much risk the owner of the business wants to take (more highly borrowed or geared the business is the more risky it tends to be). There is also the problem of getting significant amounts of loan capital as most banks and lenders will not do so on the basis of the owner putting a low level of their own capital into the business and will often insist on personal guarantees or ‘charges’ being out over owners non business assets before lending such monies. However high levels of gearing can also be a pure result of circumstance – the business owner(s) may not actually have a high level of savings or personal capital on opening the business.
Key performance indicators must be carefully selected depending on the nature of the business and some form of Management Information system must be in place to collect and analyse operational data. However most business owners will want to, at some point when looking to substantially grow the business, understand what an acceptable percentage of rooms to let nightly in a hotel is or what the average spend per customer in a bar or a fast food outlet is. Ditto the input costs of individual dishes in a restaurant will be one determinate of what price can be charged for that dish and how many need to be sold to recover costs – both those directly involved in making the dish but those indirect costs too such as the share of gas and electricity is being used up. One over-riding metric that is difficult to measure but vital over time to consider is the lifetime value of a customer. It is accepted that in just about every business it is easier to sell more to an existing customer than find new customers and the more ‘sticky’ a customer is (how long they stay buying from the business) and what further products that they can be persuaded to buy (cross-sales) after the initial purchase as a key part in managing the customer’s experience with the business hopefully over repeated purchases.
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