In the hospitality industry, there’s often a debate about what matters most: profitability or cash flow. While both are essential for financial health, profitability is the ultimate goal. Cashflow, especially in hospitality, is a trailing indicator that reflects the results of profitability rather than driving it. Understanding this distinction is key to building a thriving venue that stands the test of time.
Why Profitability is the Priority
Profitability measures whether your venue is making money after covering all expenses. It’s the foundation of a sustainable business, ensuring that you’re not just operating but growing. In hospitality, where upfront customer payments (e.g., at the bar or for a meal) are common, cash flow tends to follow naturally if your venue is profitable. Key reasons profitability matters most:
- Profit Drives Growth: Without profitability, there’s no surplus to reinvest in the business for expansion, upgrades, or marketing.
- Profit Reflects Long-Term Success: While cash flow shows short-term liquidity, profitability demonstrates the financial health of your business over time.
- Cash Flow is a Byproduct: In hospitality, cash flow issues often stem from underlying profitability problems. If your pricing, cost management, or sales strategy isn’t solid, cash flow will eventually reflect those weaknesses.
Cash Flow: A Trailing Indicator in Hospitality
Unlike industries where payments are delayed, hospitality venues often collect revenue upfront. This makes cash flow a trailing indicator—a reflection of your profitability rather than a driver. For example:
- A profitable bar or restaurant naturally generates positive cash flow as sales exceed costs.
- However, a venue with poor profitability (e.g., high costs, low margins) will eventually experience cash flow issues, regardless of revenue volume.
This means that focusing on profitability is the best way to ensure consistent cash flowin hospitality.
Case Study: Why Cash Flow Can Be Misleading
A client once approached me after seeing a large balance in their business bank account. They asked if they could withdraw funds to cover private expenses. However, the client’s profitability reports indicated there were no significant profits, and I advised them to leave the money in the business. Upcoming obligations, like BAS and superannuation, required those funds. The client decided to withdraw the money anyway, which left insufficient funds to meet their BAS payments. This created unnecessary financial stress and a cash flowproblem that could have been avoided. This situation highlights a key point: cash in the bank does not equate to financial health. Without profitability to support it, cash flow can quickly disappear, leaving the business vulnerable.
Why Focusing on Cash Flow Alone Can Be Misleading
In hospitality, focusing solely on cash flow can lead to short-term decisions that harm long-term success:
- Underpricing for Immediate Sales: Lowering prices to boost revenue can hurt profitability, leaving less room to cover fixed costs.
- Neglecting High-Margin Items: Focusing on volume over margins may create cashflow but won’t build sustainable profit.
- Over-Ordering Inventory: Excessive stock may temporarily improve service consistency but ties up cash without contributing to profitability.
By contrast, focusing on profitability ensures that cash flow remains strong without compromising the long-term viability of the business.
Profitability First, Cash Flow Follows
In the hospitality industry, profitability is king. While cash flow is essential for daily operations, it’s a trailing indicator—a reflection of how well your venue is managing profitability. By prioritizing strategies that drive profit, such as controlling costs, optimizing pricing, and monitoring KPIs, you create the foundation for steady cash flow. That said, cashflow still matters. It ensures you can meet your short-term obligations like wages, supplier payments, and taxes. However, even the best cash flow strategy will eventually fail if there is a lack of profitability. In hospitality, profitability must always take precedence, as it drives both growth and long-term success. The key to success is simple: Plan to make a profitinstead of hoping to make a profit. Focus on profitability, and cash flow will improve as a natural result.
