The recent reinstatement of a 20% VAT rate is likely to cause severe financial difficulty for many hospitality and leisure (H&L) businesses at a time when costs are rising and many enterprises are still recovering from COVID lockdowns and restrictions. To stay afloat, they must carefully manage expenditures and keep a tight eye on cash flow.
The government’s temporary cut in VAT rates, which had been implemented to help one of the pandemic’s hardest-hit industries, came to an end on April 1st. However, the reintroduction to 20% VAT (from 12.5%) has come at a difficult moment for H&L businesses, whose financial condition has been strained for a variety of reasons.
H&L businesses, which may have big premises and restaurant kitchens, are especially sensitive to rising energy prices due to a number of inflationary factors that are contributing to increased costs for products and services. Inflation and labour shortages are driving up wage expenses, while continuous supply shortages, such as those created by the Ukraine conflict, are also putting a financial strain on businesses.
According to UK Hospitality’s research, the industry is facing a 95% increase in energy prices, a 19% increase in labour costs, and a 17% increase in food costs. Businesses may also have to repay Coronavirus Bounce Back Loans that were taken out to assist them survive the pandemic, while consumers may have less disposable income for activities like eating out due to the cost-of-living crisis.
Businesses have two alternatives when it comes to minimising the financial impact of the VAT increase.
- On the one hand, they have the option of passing on cost increases to their customers in the form of higher pricing for their goods and services.
- The alternative is to accept lower margins or cut costs in other areas of the organisation as an option to absorbing the VAT rate hike.
With many consumers already feeling the pinch, the decision to increase prices is reliant on customer goodwill and driving costs too high could result in companies losing market share. As a result, businesses should adopt a broad overview approach to cost reduction, evaluating ways to improve the organisation’s efficiency. For each line in their profit and loss account, it is critical to analyse whether it’s actually contributing to the success of the business and identify areas where they may not be achieving value for money. For example, can they negotiate with suppliers to gain more favourable contracts, achieve economies of scale through their purchasing practices or drive down overheads by installing solar panels or heat pumps, or outsourcing certain activities?
Restaurants and hotels should also think about how to improve their buying processes and cut down on waste. Intelligent software is now accessible, allowing businesses to gain a better grasp of critical sales data, such as which products provide the highest profit margins. This can assist businesses in enhancing menu planning and making the most of each cover while also improving efficiency levels.
Improved cashflow management should also be a priority for decision-makers. In the short term, this should entail taking advantage of supplier payment terms. If they offer 30-day payment terms, for example, then consider making payment on day 30. Thinking ahead to when rental and staff payments are due, as well as performing cashflow projections, will assist them in planning ahead and ensuring they can repay any arrears. In difficult circumstances, it may be advantageous to obtain short-term loans, such as an overdraft, to help the company get through a difficult phase. In addition, HMRC has demonstrated more leniency in recent years when it comes to establishing payment plans to help businesses catch up on their tax payments if they’ve fallen behind.
In the long run, tools like three-way forecasting, which combines data from a company’s profit and loss account, balance sheet, and cashflow, can help businesses acquire more certainty by evaluating the financial impact of a variety of scenarios on their business model. This may be a huge recruitment push or the opening of a new restaurant branch, for example. Finally, decision-makers should take a step back and consider if the business is truly viable long-term, and seek expert advice if the answer is no.
With H&L businesses facing a perfect storm of cost-related challenges, the VAT increase could prove the last straw if they don’t take action now. By implementing effective cashflow planning and investing in a thorough cost reduction drive, businesses stand a better chance of improving their profitability and withstanding current and future challenges.