The FD perspective
– A general comment
– A general comment
By Tony Nares
Following several decades in this business, it’s an understatement to say the job of the FD in hospitality has seen an evolution. The erstwhile formality of working in a silo, on the edge of your seat in your suit and tie, staring at the monthly bank statement, with quivering anticipation of the bundle of management account papers, followed every year watching whilst your tidy notes are plastered with auditor’s pencil hieroglyphics as they justify their fees. The annual meeting with the bank, bad news softened with a game of golf or a long lunch.
Fast forward to a post COVID world, with the FD drawn into every aspect of the business, in hospitality an explosion of choice available to our customers, and an avalanche of information every way you turn – everybody knows more about you and the way you tick than you do yourself. The FD needs to be fleet footed, still focused on detail and rely on gut feel – if it looks wrong it is wrong – as well as listening to the voices whilst trying to sort the wood from the trees.
And the overriding principle remains – cash is king. What can we service? What are the risks here? Valuations and covenants – its all about looking ahead on the best information available. Not an easy task when the speed of macro influenced changes is getting quicker at every milestone – both the speed of decline and the pace of recovery.
What can we borrow and at what rate? What attitude does the debt funder have to risk in our sector? What is the security worth and how can I provide comparables and credibility to justify, alongside the lender’s own intel – COVID has shown we simply can’t legislate for every possible impact and there is no such thing as a totally reliable sector or business source. Wedding venues a dead cert – not anymore – hotels near a major conference centre – also no, but memories are also getting shorter each cycle.
A few specifics
The operating cost and resource related issues in our sector are doggedly linking themselves to every row in the P&L, resulting in liquidity pressures and the wider possibility of more risk as desperate measures sometimes are inevitably considered (impacting on D&O insurance premiums).
Revenue recognition and deposits – assessing the correct VAT treatment on booking deposits and cancellation fees, particularly if the circumstances vary in which the deposits taken are refundable – market pressures are dictating more flexibility.
Valuations - the uncertainty of Covid over the last few years has impacted on valuations, leading to volatility in the valuations obtained, particularly relevant for any businesses who have not yet returned to their normal trading pattern. Work will inevitably be needed to provide comfort from past trading patterns and peer reviews.
Revenue vs. capital - with the “super deduction” of 130% first year allowance now available on certain capital expenditure, the assessment of repair vs. capital is as relevant as ever.
Energy and utilities
Electricity and gas costs have reached unprecedented levels over the past months. Of course, there will be some businesses in contracts placed well before the most recent dramatic rises, and for the time being this will have shielded them from those movements, but there will be many others where contracts are due to end soon, and those will be confronted with very large increases indeed.
Commentators do not anticipate significant falls in rates over the coming months, particularly with the added pressure on prices as we move towards winter and very recently the uncertainty from the reopening timings of the Nord Stream 1 pipeline. The current commitment to a contract, and the length of its term, depends on your attitude to risk; sign up now to at least gain some visibility on future rates, at least the bad news will be locked in, or run with Out of Contract rates to see if macro support to cushion rises is implemented. Credit challenges from suppliers are more robust and a contract may not be available without support from a PCG – so filed information needs to be monitored.
Global energy pricing is a hugely complicated model, with factors far outside our control, including the linking of wholesale prices of gas and electric, however the UK imported less than 4% of its gas from Russia in 2021.
HF’s expertise gives it a unique position in the marketplace. i.e. we are not just finance specialists, we are also active hoteliers who understand the wider complexities of the industry – and therefore the potential ‘trip wires’ and how to mitigate and plan for them.