Keep your
business on track

Many catering businesses rely on the festive season’s party bookings to boost their profits and meet annual targets. However, the downturn in the general economy has reduced leisure spending by businesses as well as individuals. Substantial numbers of Christmas parties were cancelled or held as cheaply as possible at the end of last year, causing many caterers to suffer losses for 2008. This may be the start of things to come. Top tips from Barry Knight, director, Smith & Williamson

There are a number of actions a business can take to ensure it stays afloat in difficult times. The economy has been relatively benign for years and this has masked inefficiencies. But now things are heating up, leaving some businesses exposed. While caterers are traditionally more resilient than other sectors to the vagaries of the economy, caterers have been affected by the credit crunch much more quickly than anticipated. Careful management is key and it is essential that any difficulties are addressed promptly (see Golden Rules, following page). But why are caterers getting into difficulties?

Let’s consider some of the challenges faced by caterers

Competition

First, barriers to entry into the UK’s catering industry are very low. With a minimal investment, most people can set up a catering business either from home or on the high street within a month. In addition, many restaurants also provide catering services – if you google caterers in your area you will find several businesses to choose from, if you check your local directory you will find even more.

Change

The second factor is the sheer rate of change. Caterers are subject to the whims and fancies of their clients as well as party numbers, which can change several times in the run-up to an event. It takes a savvy business person to deal with clients changing their mind from a three course sit down meal for 300 to a hot finger buffet for 1000 and back again, and have the right stock and staff in to make the event a success.

Cash

Third, and most importantly, businesses ultimately go bust for one reason: they run out of cash. Good cash forecasting and bank facility management are fundamental. Independent caterers have to embrace – usually single-handedly – all the jobs that, in larger businesses, are covered by teams of people. Once you have stripped out the more creative aspects of your professional role – such as cooking, menu planning and winning clients – the rest is largely administrative, but equally important. You need to ensure that you keep accurate records of the costs of food, supplies and staff as well as income. Not only will this help you to budget and plan year on year, but it will also be handy for when the tax man comes.

Any caterer must sell above cost and overheads to survive while maintaining sufficient liquidity. For sales, it comes down to making sure that you have the right quantities of stock at the right time and for the right price. For costs and liquidity, the management of cash collection and constant monitoring of cost of sales and overheads are vital. I consider these areas to be risk management and measurement. Get them right, and problems can be identified and rectified at an early stage. Get them wrong, and you suffer.

These aspects of management are applicable to most sectors of the economy, but they are especially crucial for caterers. Given the ease with which the client can cut budgets or cancel events and the current pressures on all businesses, caterers, particularly since their services can be seen as a luxury, are arguably more vulnerable than other businesses in the current economy. If any cracks appear, the pain will be felt remarkably quickly.

Golden rules to keep your business on track

1. Produce regular forecasts. These should be at least quarterly, and preferably monthly, with cash flow being the most important. Run sensitivity analyses to compare cash position and bank facilities. Make sure that items of capital expenditure are identified well in advance. If you have undrawn bank facilities consider drawing down and placing cash on deposit with an alternative bank. Remember, cash is king and you only go bust when you run out of money.
2. Move your cost base away from fixed to variable even if at the outset it appears to cost more. If the business is facing a downturn and a possible fall in demand, there is likely to be excess capacity and the costs that are variable will naturally fall.
3. Set realistic banking covenants. These should reflect the true risk of the business and should not simply be intended to achieve the cheapest cost of borrowing. Anyone who breaches banking covenants rapidly loses the confidence of their banker.
4. Manage stock. All caterers should be experts in keeping wastage down. Take a regular inventory of your stock and ensure that not only is all stock within its sell by date, but also that everything is being used in a timely manner. There is no point in buying supplies that you can’t sell.
5. Check out the competition. Keep a watchful eye on competitors and if you are doing something different, make sure that you are right and they are wrong. Adjust your business model when required. It may be unlikely that a small operator can compete on price, but it can differentiate itself on quality and service.
6. Be flexible and think ahead. Consider changing customer patterns and aim to adapt accordingly.
7. Ensure you are adopting best practice. How good is your website: ease of use, comprehensive information, sample menus, client testimonials?
8. Be realistic. If you realise there is a problem, act on it immediately and work out a solution that can be presented to creditors. Don’t just assume you can trade your way out of problems, more remedial action may be required. Recognise that banks, in particular, don’t like shocks. 

Smith & Williamson is an independent provider of investment management, accountancy, tax, corporate and financial advisory services to private clients, corporates, professional practices, and non-profit organisations.