A cashless position

by Andrew Morgan - QTHB 4th of July, 2022

A cashless position
Photo by CardMapr.nl on Unsplash

Cash is something that most businesses receive at some point in time. Certain businesses such as cafes and takeaway food outlets are known to take more cash than other types of businesses.

Many years ago, motels would take higher levels of cash than today due to lower room rates, more customers carrying cash, less options with no or minimal electronic payment options. Today less cash is taken over the counter particularly for the payment of the account. More often, cash may be taken for small convenience items over the counter for drinks, chocolates, and so on...

The guest laundry is one area where cash will be taken via the coin operated machines or again over the counter for the purchase of small laundry detergents. This is not to say that all motels are this way. There are still many motels that accept high levels of cash for a variety of different reasons. Corporate customers will predominantly pay on card or account. Other clienteles however are potentially more likely to pay by cash.

A couple of issues with cash is that it is prone to theft or errors and from a taxation point of view can be an opportunity to avoid taxation. It is common knowledge that the ATO believes that businesses handling larger amounts of cash are more prone to poor record keeping which leads to mistakes being made. The avoidance of paying tax and employment obligations are commonly related to the receiving of larger amounts of cash.

Looking back to pre-2020, cash was increasingly giving way to other more convenient payment methods such as digital. Those businesses not using electronic payment methods were considered prone to losing business because people who had stopped using cash were unable to buy. With the increased use of mobile phone payment apps many people do not carry cash or even a wallet, and younger customers are particularly accustomed to using their phone to pay. Where it was once previously strange to think of paying for a coffee by card, now whipping out a card to pay for even the smallest amount is not even a consideration.

Nowadays, for many of us cash (particularly coin) is just too cumbersome.

During the period where COVID-19 became an issue around March 2020, many businesses were not taking cash at all, and most people were not eager to use cash for fear of becoming ill. Not using cash was either a human self-preservation effort or was forced on them by businesses that would only accept electronic payment. This largely forced a cashless society for a lengthy period of time until it was realised it was time to move on. At this point most people who still used cash became more comfortable using digital payment methods.

Anyway, how does this all relate to motel businesses and the accommodation industry? Well, aside from the potential problems of using cash that I’ve mentioned above, which relates to motels as a business, the bigger issue for me is the income not being banked. If it is not banked it’s not recorded in the financial statements and therefore it’s not able to be considered when determining the value of the business and property. Being asked to assess a motel business’ value means any cash component not being correctly recorded cannot be considered in the assessment.

As an example, using nice round numbers, a motel achieves revenue/sales of $25,000 cash from accommodation payments, $10,000 cash from laundry and $5,000 cash for over-the-counter items totalling an income of $40,000. If this is not showing up in the financial statements, then that is $40,000 less income and $40,000 less profit, as the expenses required to earn that income/cash have already been expensed and hopefully recorded. $40,000 profit to a motel business only, equates to a loss in value to that business of approximately $121,000 at a 33 percent ROI (return on investment). The loss in value to a freehold based motel business is approximately $285,000 at a 14 percent ROI.

There are a number of other items that could be considered in such a discussion on cash, however the moral of this story is to maximise the income and profit from the business to maximise the value or sale price achievable for the business. If the income is not in the financial statements, telling a potential buyer “The profits would be higher” due to a cash component not being included, is just hot air. No buyer can rely on this and will assess the business value based on what is in black and white.

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