Stocktaking, Cost Saving and the 87/13 Rule

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Stocktaking, when done correctly, and combined with purchasing and accounts payable can be a powerful tool for making strategic decisions in hospitality. It was noted from a Failte Ireland study published in 2012, that in the hospitality sector, there are no profiteers. The margins are so tight, most organisations only get to keep between 10 and 13 cents for every euro made. The overall cost components of running a business are about 87/13 for most. Therefore, it is very important to watch profit margins closely. The split of 87/13 can quickly head towards 90/10 and so on until your business is in a loss scenario. This is why so many hospitality businesses fail within a few years.

Why do they fail? Most small to medium business don’t have the resources to have a full-time accounts/purchasing department. Owners and managers can’t be all things to everyone. If you split the business between front of house and back of house, they can end up concentrating more on one side while the other suffers. And in that, when the back of house suffers the 87/13 split can quickly shift, leading to a barren bank account! I would describe the front of house as customer service, quality, staff issues etc. and the back of house being profitability, stocktaking, accounts, bookkeeping etc.

If you watch your main sources of income, through stocktaking, once every month, it gives excellent peace of mind. There’s no point being told bad news by your accountant twelve to eighteen months later. The key to running a successful business is what action is taken with the stock results. This information can be used for strategic purchasing and to monitor profitability. If you don’t know what your monthly gross percentage margins are, then, it is recommended to hire a professional stocktaker. A good stocktaker not only conducts the stock audit, but can then offer follow on consultation to assist and resolve any issue that can arise. By keeping a tight control on your main sources of income you’ll be surprised how many other things fall into place.

How often should you conduct a stocktake? As the hospitality sector is so transient it is recommended you stocktake a least one a month. A stocktake should always add value to the business and should never be considered a cost to the businesses. The fee should only be a fraction of the net savings brought in by the increased profits.

Post-recession a lot of good practices were lost in the industry including the practice of keeping good paperwork. Delivery dockets and invoices including all those smaller receipts need to be treated like gold. Keeping good records can be difficult when all your focus is on the front of house. But you can make a lot of money by sitting down and reviewing cost prices, delivery dockets and invoices. When the monthly stock control process is streamlined and running efficiently, this then compliments purchasing and accounts payable. Paperwork is matched off correctly and in that, the whole transaction process is reduced, thus saving time and resources at the later end of the chain. Cost prices change and need to be monitored every month.

Written by Oli Gleeson
Profitwatch

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