In recent years we have been approached by many pubs, bars and cafés and asked to advise them on their financial infrastructure.
This includes implementing systems and controls as well as advising them on defining their KPIs, managing tax and ensuring liquidity through proper cash management. So, here are our 5 top tips for hospitality accounting.
What are the problems?
In an industry that is increasingly competitive and difficult to succeed in, it is important to afford yourself every advantage available. Knowing how a particular venue or branch is performing in real-time will make your decisions more effective and give you a sustainable competitive advantage.
There is really only one big problem but it permeates through the business and often requires a commitment to organisational change best implemented from the top down.
Three common cash uses
Many hospitality owners love the idea of cash. They operate under the assumption, that if not banked, it can’t be traced and therefore has certain advantages over money that hits a formal account.
What hospitality owners don’t realise is that cash that can’t be found in the bank, in a safe or sitting in the till, leaves a hole in the balance sheet. Whilst many owners will be able to estimate where that cash has gone, they will not be able to provide proof which means most of that cash gets classified as drawings. Such treatment can have significant tax consequences at year-end and on audit in respect of both corporate and personal tax.
Moreover, HMRC can and will access the records of your merchant service provider and they will make an assessment of your cash takings based on your credit sales. This could leave you with an assessed tax debt summing millions of pounds so it is always best to have formal systems of controls around cash that capture the origin and final destination of cash transactions.
1. Petty cash expenses
Members of staff are authorised to use the petty cash in the till to make small everyday purchases and they then replace the cash with a receipt, so that a reconciliation of the till can be completed periodically. This is a suboptimal solution that ignores the added value the right software application could bring.
2. Labour expenses
Hired a DJ? Or a friend of the bar manager to cover a shift? Need to pay the doormen? Or has a formal member of staff asked to be paid cash in hand this week? No problem…just take it out of the till right?
Cash does have its appeal, it feels nice in your hand, it’s a tangible and satisfying manifestation of your successful efforts and it’s easily spent. Many hospitality owners don’t realise that at some point all that cash has to be accounted for somewhere.
Any hole in the balance sheet of an organisation consisting of petty cash is often going to be booked against their drawings at year-end.
Our Top Five Tips For Hospitality Accounting
It’s not easy and it certainly isn’t without effort and it will not make you popular, which is often a hard pill to swallow for people in the hospitality sector.
But putting controls around cash, performing regular reconciliations and holding staff to account is critical to the successful financial operation of any business.
1. Pick an EPOS System that integrates with your accounting system
This is more important than many people realise but life is so much easier when periodic sales are exported from your Epos system and raised in your accounting software auto ‘magically’.
2. Treat merchant providers like banks
When you’re setting up your accounting software you will be able to set up bank accounts, this is made particularly easy by Xero and their myriad direct integrations. Take this opportunity to set up your Merchant Account as a bank account, be it Paypal, WorldPay, Cardnet, iZettle, Square or Stripe.
3. Reconcile your bank account, merchant account and till
- Your integrated software will bring in sales periodically, perhaps daily, weekly or monthly.
- When sales are made, funds are deposited either into the till or with your merchant account provider, these funds are then transferred into the business’ current account.
- You can use the reporting functionality in your online merchant account to understand exactly how much money was received in credit sales for the period. You can then mark the sales invoice as paid into the merchant account in the correct amount and the balance paid via cash and the till.
- Any transfer of money into the current account from the merchant account or depositing cash from the till at your bank should be marked as a transfer from the till or merchant account to the current account.
- By doing this you’re tracking the real journey of funds through your business and developing a deeper understanding of precisely how and where discrepancies arise and in doing so are accounting for sales, purchases and fees, not just cash.
4. Stop using cash
- Instead of allowing employees to use cash out of the till to pay for small expenses, use the Xero expenses app. Tell the manager on duty that small expenses have to be paid for personally and will be reimbursed when an expense claim is made via the app. It’s inexpensive and incredibly efficient, demonstrating to any third party that you have enforceable controls around cash.
- Not only will this mean that you’re not reconciling dozens of petty cash expense receipts back to the cash balance in the till but there also won’t be a number of small transactions to account for. Instead, you’ll have an organised and documented expense claim, sitting in the cloud, awaiting your approval, that will be paid as one transaction from the current account, the entire process is controlled and documented. Not to mention you might find people are more careful about what they’re buying on your behalf if it is coming out of their pocket to begin with.
5. Get an invoice
- If the DJ or any other casual worker needs paying, make sure they send a proper invoice and put them on seven-day credit terms so you can pay them via the bank.
- Other people’s desire to avoid tax by being paid cash in hand is not your concern, you must protect yourself and make sure everything can be documented and tracked. This is to make sure that if anything ever happens, you are not liable for cash going out of the business.
Don’t be scared change is hard but good
Finally and in summation don’t be scared. People will follow where you lead.
Many hospitality owners are frightened that they won’t get the staff if they’re forced to make expense claims, or they won’t get the entertainment or other casual labour if they insist on an invoice and paying by bank transfer.
Have the confidence of knowing, that wherever we have implemented the above, the results have been frictionless and fruitful and that there is of course always scope for flexibility.
We look at the drivers of change in two ways.
1. If your goal is to make a comfortable living then you need to know that you can do this without crossing your fingers and hoping HMRC never come knocking with questions over cash. Moreover, as the world moves closer to a cashless economy you will be less and less able to rely on this strategy. It is therefore better to start building a business now that can deliver on your personal requirements.
2. If you are looking to build a business that can be acquired then you need to build a proven track record of sustainable success and you need to minimise the risk that disclosures and indemnities will come back to haunt you. Implementing controls and best practices as described above will help you build a business that has documented value above and beyond the everyday.
If you’re interested in learning more about the changes you can make in your business, drop us a message on our ‘contact page‘.