Why are insolvencies more likely to affect the hospitality sector?

According to PwC’s outlook for 2024, there will be a significant rise in corporate insolvencies in 2024, just shy of 30,000 with smaller businesses accounting for the lion’s share. However, it further added that industries most impacted are likely to be hotels and catering, along with manufacturing, and transport and storage. So why is the hospitality industry more likely to be impacted by insolvencies?

Henry Page, restructuring partner at Mercer and Hole believes that this sector has always borne the risk of insolvency. He stated that the hospitality sector relies on discretionary spend and that discretionary spend relies on people feeling wealthy enough to go out and spend money. During COVID, the entire hospitality industry shut down and while people still had their disposable income, thanks to furlough, they got out of the habit of going out. However, the problem didn’t end there, according to Page. He says, “Unfortunately, after COVID ended, we then followed that up with the inflation and the energy price shocks in 2022. So as those habits were reforming, people didn’t feel wealthy, interest rates went up, even if not immediately, because of the majority of mortgage holders, nowadays having fixed rate interest products. So while the interest rates were going up, it didn’t immediately affect anyone apart from people trying to get on the property ladder and get that first mortgage, or people whose rates had come up or weren’t aware of that to be renewed.

“Interest rates obviously don’t just affect the discretionary spend, but they’re affecting the debt on the balance sheets of hospitality businesses themselves as well. Interest is very hard just to pass on to your customers and as a result it squeezes your margin directly. On top of that you’ve got the energy price shocks, labour shortages, whether that’s because of Brexit or whatever reason you put on those labour shortages. There’s going to be a bidding war as the bigger chains and the more high end establishments are probably going to be able to pay a bit more than your local small business in a town. So, hospitality is uniquely placed to feel the effects of a recession, inflation, utility shocks and I think that is why, and I think the biggest costs, the rent, it’s hard to negotiate.”

Rosalind Catto, business advisory partner and Inverness office head, at Johnston Carmichael also says: “For those businesses in the hospitality industry, many feel like they are being squeezed on all fronts. Not only are they facing increased borrowing costs, energy price increases, staff shortages coupled with increased wage costs and increases in direct food and drink costs, the cost-of-living crisis has led to a decline in bookings and consumer spend.”

While it may look like that the hospitality industry is bound to the risk of insolvencies, Page stated that accountants can suggest ways to eliminate this risk. He also stated that most of the time a lot of the commentary is focused on big multinational companies and big establishments, but “the true essence of hospitality lies in businesses that provide a local atmosphere, as a national restaurant chain would provide the same limited experience”.

He says: “I think that from a accountants point of view, what accountants can do for small businesses is to help them to look at things like cash flow forecasts, which might come as second nature to someone in an accountancy practice, but might not be top of anyone’s priority list when they’re trying to worry about bookings and getting staff in for a shift. It comes down to knowledge is power, and cash is king.

“If you know what you’re spending your money on, you can control what you’re spending your money on. If you know that you’ve got a large rent quarter coming up, you can start to accrue for that and if you know you’re going to miss that rent, you can start to have conversations with your landlord, and to demonstrate that you’re not trying to pull a fast one on them. But if they don’t want an empty property where they’re subject to paying the rates, then you can make some short term planning to survive one quarter, two quarters, three quarters in conjunction with the landlord. Similarly, there’s still a lot of COVID tax bit on businesses’ balance sheets, and having some cash flow forecasting and some knowledge of when that’s due how you’re going to pay it allows business owners to look at time to pay arrangements with HMRC and make proposals for the repayment of that debt. So cash flow forecasts are key.”

Page also highlighted the need for real time information and how installing cloud computing systems can help businesses upload invoices straightaway, knowing when they’re due for payments and being able to look at trends and map their spendings. He also stated that businesses can decide whether they need to stick with the same suppliers that you’ve used for 20 years? Are there alternatives? He says: “Being able to get that information quickly allows business owners to manage their cost base a bit more. Once they’ve got used to the system it should also allow them to look at scenario planning. So I think accountants can help with getting cloud based systems, running real time systems and looking at the cash flow forecasts. Once they’ve got the information, then they’re in a much better position to see what changes they can make themselves and see what changes or proposals they can make to any of those more fixed tourney type costs of the landlord.”Catto adds: “For those businesses that have navigated their way successfully through these past couple of years, they have done so by being on the front foot, by remaining agile enough to adapt their businesses to manage these turbulent conditions. Key to this is having access to current and regular financial information. Whether prepared internally by the business or outsourced to an accountant, this information will allow the business to monitor their profit and loss, cash flow and vitally track its key performance indicators (KPIs).

“KPIs for the hospitality industry will vary depending on the individual business but keeping track of KPI data e.g., revenue, occupancy or food and beverage sales will allow a business to make effective decisions based on previous performance and identify the various factors that affect the businesses performance. Having the knowledge to quickly adapt pricing for room rates, menus and products is key to remaining profitable in this ever-changing economy.

While the PwC report predicted there will be a significant rise in corporate insolvencies in 2024, on a brighter note it also revealed that the majority of people are expecting to feel better off in 12 months time than they do now, the economy is expected to grow albeit slightly and the employment market is slightly rebalancing. To which Page says: “So while wage price growth will make people feel better off in the first half of the year, I think the impact on businesses in the second half of the year will be slightly less and have less pressure on their margin. So it does feel to me that we’re talking about getting through to the next golden quarter, i.e. the end of 2024. Till then let’s hope the economists are right that that things are picking up and we’re all going in the right direction, we could get through to another prosperous period for hospitality sector where were individuals habits, flip more back towards what we were used to 2020s to 2019 kind of thing and getting into that, that habit of spending our money to enjoy ourselves.”