Financial Considerations for Restaurants and Hospitality Sector

Financial Considerations

The restaurant and hospitality sector is a vast field and what makes it unique is the fact that there are a large number of components that make up the industry. This is the reason why before taking up financial considerations it will be relevant to go into details regarding its scope and scale.

There is a general notion that restaurants and hotels form the backbone of the hospitality industry. It is not fully correct. There are others that fall in this category like clubs, casinos, theme parks and resorts. Even a portion of the luxury transportation sector such as cruise ships and famous fancy trains are considered to be an integral part of the hospitality sector.

There is however a common thread running through each element – the industry thrives on providing luxury services that are based on tapping disposable income of people. For example, restaurants provide food but not that common to everyday life. This is why during times of recession the hospitality sector is always the hardest hit in terms of turnover.

While most industries today have a fixed accounting system, the same is not true for the hospitality sector. For example accounting for restaurants will be different from that of clubs or cruise ships. Hence it is necessary to see the financial aspects of this sector not in terms of the total structure but what is unique to each of them.

The comprehensive financial consideration of the restaurant and hospitality sector can be broadly classified under 5 heads. However it ought to be mentioned here that these cannot be placed in water tight compartments and any one of them can be good for a number of categories in this sector.

  • Financial Accounting – The hospitality industry like most service sectors consists of buying and selling goods and services. The main areas are hotel rooms and F&B. However other areas include gaming, forms of entertainment and club and cruise ship services. Business accountants analyse and summarize all financial transactions and draw up reports and balance sheets that accurately reflect the earnings over expenditure to arrive at profitability.

However, because of its complexities and the danger of being diverted away from the core task of selling leisure activities, this sector prefers to outsource financial accounting functions to well established agencies.

  • Cost Accounting – This is very important as it classifies and records hundreds of expenses made in different departments. The focus over here is classification of heads which has to be precise if the final balance sheet has to be accurate in all respects.

An example will illustrate this point. If you are a manager of a resort you cannot stop at restaurant accounting only. Your deputies in various departments such as the golf course, F&B and the spa will be spending money to keep the operations running. It will be impossible for you to track all expenses on a daily basis. Here, experienced cost accountants will analyse the total costs as per functional area of products and services sold. This will be presented in appropriate formats to make the whole matter easily comprehensible. Here again, outsourcing this function will take a load off your shoulders.

  • Managerial Accounting – This is basically forecasting of activities based on past experience and is a major financial consideration for the restaurant and hospitality sector. Based on previous expenses and utilization of goods and services it is to be decided what level of inventories should be stocked. Too much is blocking precious capital, too little might result in poor customer service. By keeping a strict vigil, holding of inventory can be optimised.
  • Tax Accounting – This is a very crucial task for the hospitality sector. The range of taxes payable includes amongst others, hotel room occupancy, F&B, entertainment and allied services, all with varying tax rates which might also differ between states.

These are some of the Financial Considerations for Restaurants and Hospitality Sector.