Why Stock Control Is So Important in the Hospitality Industry

Running a successful restaurant, café, pub or other hospitality business isn’t easy.

Before you’ve served a single customer, you may already have committed significant amounts of money to premises, refurbishment, equipment, staff and your initial stock.

Then, once the doors open, you have another challenge: controlling your margins.

We work with a number of hospitality businesses, and one area I believe deserves particular attention is stock control.

Why?

Because if you don’t know accurately what stock you have, you may not know accurately how much profit you’re making.

Why does stock affect your profit?

The basic calculation behind your gross profit is straightforward:

Opening stock + Purchases – Closing stock = Cost of sales

Your cost of sales then directly affects your gross profit.

That means an inaccurate closing stock figure can produce an inaccurate gross profit figure.

Imagine your accounts show that you’ve made a healthy gross margin during the month.

That’s reassuring – but what if the stock figure used to calculate that margin is wrong?

Your apparent profit could be misleading.

For a hospitality business operating on relatively tight margins, even a few percentage points can make a substantial difference.

Stock needs to be measured regularly

I wouldn’t want a hospitality business to wait until the year end before properly looking at its stock.

If you’re producing monthly management accounts, you ideally need a reliable process for determining your stock position at the end of each reporting period.

That allows you to calculate meaningful gross margins and compare performance from one month to another.

If your gross margin suddenly falls from its normal level, you can then investigate why.

Is food costing more?

Have selling prices failed to keep pace with increased costs?

Are portions too large?

Is there excessive wastage?

Could there be stock going missing?

Without accurate information, you’re largely guessing.

The danger of carrying too much stock

Good stock management isn’t simply about knowing the value of the stock at the month end.

It’s also about how much stock you’re holding.

Excessive stock ties up cash.

And in hospitality, a significant proportion of that stock may also be perishable.

If you’re regularly throwing away food because you’ve ordered too much, that wastage is coming directly out of your margin.

A few pounds here and there may not seem particularly important.

Multiply it across every product, every day and every location, however, and it can become a very significant number.

Gross margin should be a key KPI

For many hospitality businesses, gross margin is one of the most important Key Performance Indicators to monitor.

But I’d go further than simply looking at the overall gross margin.

Where possible, it can be useful to understand margins across different areas of the business.

For example:

• Food

• Wine

• Beer

• Spirits

• Soft drinks

• Other significant product categories

If one area starts underperforming, you want to know which one and why.

An overall percentage for the entire business can sometimes hide what’s really happening underneath.

A few percentage points matter

This is particularly important in hospitality because relatively small movements in gross margin can have a substantial effect on the bottom line.

Suppose a business generates £1 million of annual sales.

A 2% deterioration in margin potentially represents £20,000.

At £2 million of sales, the same 2% represents £40,000.

Suddenly, what appears to be a small percentage isn’t particularly small at all.

That’s why I believe owners should pay close attention to movements in their margins rather than simply concentrating on turnover.

Increasing sales is great.

But increasing sales while your margin is deteriorating may not produce the additional profit you’re expecting.

Stock control is really management control

Good stock control isn’t just an accounting exercise.

It’s part of running the business properly.

You need systems that allow you to understand:

• What you’ve bought

• What you’ve sold

• What you should have left

• What you actually have left

• How much is being wasted

• Whether your margins are moving in the right direction

The better the information, the faster management can identify problems and take action.

The bottom line

If you run a hospitality business, don’t treat the monthly stock count as an administrative nuisance.

It is one of the numbers that determines whether your management accounts are telling you the truth.

If your closing stock is wrong, your gross profit can be wrong.

If your gross profit is wrong, your margins can be wrong.

And if your margins are wrong, you may be making important business decisions based on inaccurate information.

In an industry where a few percentage points can make the difference between a healthy profit and a loss, accurate stock control and regular margin monitoring should be near the top of the management agenda.

Need better management information for your hospitality business?

At Paul Marks & Co Chartered Accountants, we work with hospitality businesses to help them understand their numbers, monitor performance and make better-informed financial decisions.