The Key Performance Indicators in Hospitality

By Peter Cox, a CPA with over three decades of experience in financial management for the hospitality industry. His website www.petermcox.com.au has a host of free financial management tools to increase the profitability and cash flow generation in your venue.

What is the real key indicator of financial performance for your venue?

The most important calculation is not sales per person or even return on investment. They are important, but to get a quick gauge on how your business is performing, you should measure risk. That is, the “Margin of Safety” ratio.

It is calculated as follows (go to your profit and loss statement to get the numbers)…

$Net Profit divided by $Gross Profit x 100.

This simple calculation can allow you to check how risky your hospitality venue is. The result gives you the percentage of sales you can afford to lose before you cannot cover your overheads.

In simple terms, it is the benchmark for your survival. The great thing about this ratio is that it can be calculated monthly. So where should your venue be placed?

I would look for a result between 20 per cent and 30+ per cent. If your result is less than 20 per cent, it is important that you begin to plan to improve your result. In reviewing the calculation, the result is driven by $Gross Profit and $Net Profit, therefore any strategies to improve margin and control expenses will improve your Margin of Safety.

Gross Profit Strategies

1. Reduce customer and staff theft through technology and checking stock levels;
2. Ensure you only pay for what you receive;
3. Check the freight bills;
4. Pick up settlement discounts when you can;
5. Increase staff product knowledge and selling skills to make the add-on sale and on selling other venue profit streams;
6. Reduce uncontrolled and unauthorised discounting;
7. Reduce damaged stock;
8. Check your pricing.

Your venue is in an industry that has long been recognised as highly competitive and in some locations, over serviced. The Margin of Safety is the most important statistic for your business, especially in a changing market where price is used as a weapon against you.

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