Q: I am a CPA whose client is looking at buying an existing bar/nightclub with entertainment on weekends. The club has gone through two quick ownership changes and has done much better under the current owner. That owner says it is because the previous owner was doing about a 50 percent cash business and was seriously underreporting. My question is this: In general terms, is 50 percent of sales being in cash (versus credit cards) even possible for such an operation? The current owner is much more heavily weighted toward credit sales. What is a typical cash/credit transaction mix for a bar/nightclub?
A: It’s quite possible, even likely, that the cash/credit mix could be at or around the 50/50 mark — or even higher. Although many people use credit cards for dining and drinking these days, nightclubs in particular pose many unique challenges to simply opening a tab at the beginning of the night and closing it at the end:
Cover charge – In my experience, this is the most cash-intensive profit center in a club. I’d estimate that 90 percent of covers are paid at the door in cash. Because this profit center is also not directly attached to a cost center (and therefore not expressed as a “Cost of Goods” percentage on a P&L statement), it is also the easiest to under-report. If $2,000 in cash per night doesn’t show up on the books, it is kind of tough to detect unless you have access to accurate door counts.
Ancillary beverage outlets – Things like beer tubs, shot girls and patio stations are typically cash and carry, due to their nomadic nature.
Roaming guests – Especially in large dance clubs, patrons tend to gravitate toward cash so that they can access different outlets easily – this bar, that bar, hail down a cocktail waitress, etc. – as they “cruise” or move about the club. Opening a tab often means they are tethered to one bartender or bar station for all of their drinks. Dance clubs are by nature “prowl-y” places.
Policy – Many owners actually have policies or procedures that discourage the use of cards; having to use the same bartender, for example. The reasons are many. Some operators don’t like to pay the percentages on purchases to the credit card companies (versus actually MAKING a couple of bucks from each transaction on their own ATM machines). Some feel it slows service in high-volume situations. Some just like to “under report.”
— Tim Kirkland, Renegade Hospitality
A. There are so many variables. In a bar, it’s quite irregular to consistently ring-in up to 50 percent cash transactions. It is hard to imagine an on-premise business in this day and age generating so much cash legitimately. With entertainment on the weekends it sounds as if cash collected at the door in the way of a cover charge is a plausible explanation. If that's not the case, then it seems equally plausible that the previous owner(s) purposely setup their operation to generate more cash than credit cards sales. For example, remote outlets, such as beer tubs, servers walking the floor with racks of test tubes, etc., typically are cash-only transactions. The other explanations I can think of are less innocent in design and intent.
— Robert Plotkin, BarMedia
A. Most clubs are lucky to see 15 percent credit card sales, but that is being crazy generous! That's why they need consultants during sales and purchases, but in-short I would say 5 percent-10 percent credit card sales. Also the fact that he is under reporting is not the buyer's concern. He saved in taxes; now he must suffer during the sale.
— Robert Casillas, Monsoon Group