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The first days stabilising a distressed hospitality business

My last two blog posts focussed on Lean in Hospitality. Lean is a fantastic framework for a business transformation focussing on radically improving a stable - if not stagnant - hotel or restaurant. In this blog post, I will suggest some practical steps I take in the first week when I am immersed in a distressed business. So as not to disclose confidential information I will use the hospitality business I took over several years ago as an example.



I bought a business which was in crisis. It hadn’t made a profit for several years. The revenues were rock bottom and every aspect of the product suffered from low quality.


Walking through the door of such a business on day one - after reassuring the staff - these are some of the key items on top of my agenda:

  1. Is the property/business safe?

  2. Does the business comply with relevant regulations?

  3. Are assets/cash secure?

  4. Are the staff able to help transform the business?

  5. Where is cash in the business that I find and use quickly?

Is the property/business safe?

When managers/owners are battling a financial crisis, it is easy to overlook vitally important safety issues. Assessment reports relating to fire risk, health & safety risk, electrical and food hygiene/allergen documentation must be found and scrutinised. It is reassuring if they exist, are up-to-date and complete, but often this is not the case. Any shortcomings need to be addressed urgently.


Having completed reports to hand doesn’t necessarily mean that staff are trained or understand the importance of safety. This is when experienced eyes must assess staff behaviour. Do they appear to understand and embrace safety? Is the kitchen clean? Are food storage areas labelled and organised? How do the staff react when a customer mentions allergens? Are chemicals stored and used correctly? Is there proper access control to hotel rooms?


In the business I took over, there were risk assessments. They were copied almost word-for-word from the internet. This is neither suitable nor sufficient. Creating proper risk assessments and addressing deficiencies were on top of the agenda. It helps generate buy-in if you involve the staff in completing the assessment and bringing the documentation up to date.


Does the business comply with regulations?

The premises license will set out permitted hours and any other restrictions regarding alcohol. In the case of my business, before it was acquired, it was traditional to “lock-in” staff after hours for drinking. Ensuring the “permitted hours” are adhered to and ending staff drinking after closing quickly reduced alcohol inventory losses.


In our industry, it seems to be conventional wisdom that working huge numbers of hours a week is acceptable. It is not. It is detrimental to quality and profitability. This “hours” culture often leads to a lack of compliance with the Working Time Directive and the Minimum Wage Laws. Both of these can lead to big expenses in the future.


In the first few days of acquiring my business, I installed a time and attendance system. All employees - including those on salary - were required to clock-in and out. This led to an almost immediate reduction in staffing costs just by paying accurately with no more rounding up of hours. Synterest has its own clocking system which is available to clients.


Other areas of compliance to check are employee contracts, food hygiene and food premises approval from the council, GDPR/data security, COSSH, pest control, First Aid, fire safety, etc.


Are the assets secure?

Securing assets goes further than changing the door locks and the codes on the alarm system. A dive into all aspects of the business to find the porous areas where goods leak out is critical. An immediate priority is to put in place best practice to ensure that all value remains within the business. In particular, two key areas are cash and inventory.


Cash

Securing cash on day one is critical. If a safe has a combination lock, the number must be changed. If locked with a key, the safe must be replaced. Immediate and strict controls over who has access are essential and cash needs to be counted and deposited daily.


The EPOS system is the next port of call. The ability to override controls in the system must be restricted to deter voids and ‘comps’. Cash must be reconciled to the till and hotel system reports daily and when there is a shortage/overage, requiring the staff involved to untangle the discrepancy sends the message that you are in control.


Finally, systems should be introduced to ensure that no product leaves the kitchen or bar unless it has been entered into the till.


Inventory

Locks keep honest people honest. Install locks on alcohol stores and cold rooms. Limiting access might seem like an inconvenience to the staff but it provides friction to losses.


Regular stocktakes serve several purposes and for us revealed one occasion that vodka had high losses compared to sales. Our CCTV system showed that the morning keyholder helped herself to a half-pint of vodka each morning when she opened up.


Paying particular attention to how rubbish and recycling is handled can prevent an easy method of smuggling goods outside the business. What looks like innocent emptying of bins can easily hide stock being removed from the premises.


Are the staff able to support the transformation of the business?

It is easy to place the blame on the current staff when a business is in crisis. They may not appear to be safe, compliant or interested in the success of the business. Yet, this is probably more a reflection on leadership than the inherent character of the staff.


In my business, it required observation and experience to see the hidden impact of drug and alcohol abuse and the danger this posed. We enacted compromise agreements with a couple of managers to ensure the integrity of the business going forward. Acting quickly on this threat enables you to work more effectively with the remaining staff.


However, when you terminate leaders, lock doors and bring in changes, the staff are naturally very concerned. Any change can convince people to leave if they have alternatives. Open, honest and regular communication with each employee is crucial and will eventually bring an understanding and motivation to the culture. An increase in professionalism will be welcomed by the valuable staff members.


Where is the cash in the business that I find and use quickly?

In my last blog post, I detailed the eight deadly wastes. One of the easiest to address is inventory. Inventory is cash which is tied up and you cannot immediately use. You can often generate quick cash by focussing on reducing inventory.


In my business, there were many freezers distributed around the back-of-house. After the stocktake on day one, I tasked the chefs with using up this inventory. As the frozen food was sold, we removed excess freezers so they could not be used again. I implemented tighter ordering procedures to further reduce waste. Also, the less inventory there is, the less opportunity there is for waste and theft.


Particularly in hotels, the debtors’ ledger is another place to find cash. Although my hotel was under trading before we acquired it, one company occupied many of the rooms each week. My predecessors were concerned that if they chased the debts too aggressively, they would lose the client. In my first conversation with the company's financial controller, they were relieved that they were dealing with a new professionalism and agreed to bring their payments up to date. There were other debtors on the books who responded well to polite but persistent chasing and they soon became accustomed to paying on time.


The flip side of this was to pay our invoices as late as terms would allow. Some hotel/restaurant suppliers are happy to accept cash on delivery. Although this can be difficult to change in a financial crisis, it is my opinion that this should stop as soon as possible. Cash should be in the bank. Constant and professional communication to reassure suppliers is critical to achieving extended terms as they understand that the business will trade more successfully in the future.


Finally, I looked for all opportunities to reduce costs. I ranked our expenses, starting with the highest which was unsurprisingly staff costs. There were simply too many employees. Addressing this issue is tough but essential. This is where experience really counts. Disciplined scheduling based upon the forecasted business and reconciled to the time and attendance system delivered significant cost reductions.


With the right mindset, you begin to see opportunities everywhere in the business to generate cash. The way you fill your bedrooms, how you clean, your training and what you outsource all have a major effect.


Conclusion

This is a high-level overview of some of many quick hits to stabilise a business in crisis. There are a lot of other key areas to focus on. We go into businesses in crisis with a detailed check-list of key items to accomplish right away to secure the business and maximise value for all stakeholders.


Once the business becomes more stable, the next step is to create the vision and a plan for the business transformation of the hotel or restaurant. Key questions to consider are “is the property being prepared for sale?” “do the owners/managers wish to restructure and turnaround?” “Is it a plain old cost reduction which is required?” “Is the product right for the market?” Asking these questions is where you begin the journey of transformation.


In my next blog post, I will discuss frameworks for business transformation in hospitality.


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