5 financial red flags

Red FlagsIt’s important that all of your efforts to maintain an accurate accounting system with well-prepared financial reports which permit proactive day-to-day management are in line. These financial implementations should be made clear from the outset of opening a new operation.

Veterans in the business already know that the hospitality business can be very unforgiving when it comes to achieving profits. Therefore, there are key financial red flags or indicators to be aware of that point to where current problems may lie and where future problems are likely to emerge.

First and foremost, the absence of a well-organized and implemented accounting system is unacceptable. The best types of software for bars, nightclubs and restaurants include a Point of Sale (POS) system, financial software, and the software to integrate the two. Fully-integrated systems can take the burden off operators and help to fully understand their financials. If your venue is lacking a fully integrated system this should be at the top of your to do list.

Once an accurate accounting system is implemented indicators that you should look for are:  

1. Menu items that are inaccurately priced. It’s important to cost and re-cost the items you have on your menu to make sure they are accurately priced. If you base your pricing off your competitors then there is no way to determine what the cost is to make that item, nevermind determining if you are making a profit off of it. A simple excel spreadsheet that tracks and analyzes your inventory will provide a clearer view of what ingredients in specific menu items cost; thus, providing a more accurate pricing strategy.

2. Inventory levels are high relative to sales. This is slightly harder to identify than some of other indicators but still a serious sign of potential financial problems. Ordering and storing too much product can result in excess waste, improper portioning, theft and lost cash. Ideal inventory on average should last only seven days. For more information on proper inventory management strategies take a look at Taking Inventory…of Taking Inventory.

3. Relying on bank balances. If you are relying on your bank account balance to determine the available cash to pay bills including payroll you need to stop. Bank statements only tell you how much cash you have that moment. It does not account for anything that hasn’t cleared. Instead you should be relying on a balance sheet.

4. Inaccurate record keeping of income. Your income includes all cash, debit, credit card and check sales received by the venue. Making sure that you are accurately posting financial reports to the correct accounts is important. Some of the most common errors include receipts including sales tax, comp meals, gift certificates being posted as income incorrectly. This goes for expenses as well. All outgoing expenses should be recorded and filed. A Profit and Loss document (P&L) should be created to keep a close eye on your financials.  

5. Lack of understanding as how to read financial reports. One of the biggest red flags it a lack of understanding how to read and interpret financial statements that you accounting system produces. To be successful as an independent operator you need to make sure that your financial skills are up to par. The three fundamental financial reports you should continuously review and understand are 1. Profit and Loss Statements, 2. Balance Sheets and 3. Statement of Cash Flow. Without these three skills you are not giving yourself the opportunity to succeed.

If you are “flying by the seat of your pants” when it comes to your financials the chances of success are greatly diminished.