For the unwary publican there is a wide range of drains on the purse that have a habit of turning into a nasty surprise. By Andrew Turzynski
There are few things that make you feel more like celebrating than success in business. And if it happens to be the pub business, it's nice to know that the champagne toast to your triumph will not only taste sweet, but will probably be "on the house" too.
Don't get too carried away with the free drinks, however, because the first thing any pub manager needs to control, in order to keep bar life profitable, is the "hidden costs" that go with the pub trade territory - costs, for instance, like a regular round of drinks on the house.
As a pub manager - whether tenant or owner - beers, wines, minerals and spirits aren't the only form of liquidity you need to keep tabs on. For the unwary there's a wide range of drains on the purse that have a habit of turning into a nasty surprise.
Perhaps the single most important thing when it comes to money managing any business is to get the underlying financial package right in the first place, and this is an area where anyone who runs, or who is planning to run, a pub should seek specialist help.
No amount of cash management will overcome a fatally-flawed finance package. It's also worth remembering that some funding arrangements - such as a brewery loan - carry obligations that may restrict your flexibility to develop your business as you wish.
Furthermore, not only are there up-front costs such as those involved in buying out a previous tenant or owner, but with a tied tenancy any bond paid to the brewer to protect against arrears on beer and spirit orders - perhaps £5,000 or more - will be tied up until your tenancy ends.
You should eventually get it back with interest, but until that time the money is effectively lost to your business. Cashflow management will always be critical - not least in a cash business such as the pub trade, where that very cash flowing out of the business is an all too common reason for failure. Assuming you've got your basic financing package right, however, you'll have cash available when you need it to run the pub effectively. And with a good understanding of the costs you are likely to incur, you'll avoid the flow turning into an unwelcome leak.
For planning purposes the "hidden costs" may be put into two categories - the day-to-day running costs on the one hand, and the cost of developing the business in a certain direction on the other hand. In practice, however, the categories often merge.
Take staff costs as an example. A licensee may wish to expand or enhance their business, perhaps improving service at the bar, developing food as an income stream, or freeing up some time to get to grips with the management of the pub.
Maybe he or she just wants to replace an outgoing member of staff in a competitive market. Advertising for staff in local newspapers or trade magazines, training - particularly for a position of responsibility - and even uniforms, all represent a cost, albeit an investment in a better business. Whatever the motivation one inevitable consequence will be a significant ongoing cost in the form of wages - at least at the level of the national minimum wage - National Insurance, if applicable, and other commitments involved in employing people, such as providing meals or setting up a stakeholder pension scheme.
Wages paid for barstaff are likely to be for a minimum four-hour shift, and the longer you plan to be open the higher your wage bill (and, for that matter, every other bill) will be.
The wage bill can escalate dramatically if the publican opts to take on a manager to run the pub. One way around this, practised by many city pubs, is to reduce wage bills by accommodating staff on a live-in basis. It's an attractive perk for the employee, and one that will reduce the wage bill to some extent, but it does bring with it the new responsibility of residential "tenants" and, inevitably, the costs associated with that status.
Holidays also take on a new dimension for the pub manager-turned-employer. If you have employed staff, the chances are that you will have to pay for them to take time off, and also employ someone to cover for them in their absence.
If you wish to take a holiday yourself you are faced with closing - involving a loss of takings, and possibly of customers - or employing a locum manager to take care of business while you are away, an outlay of perhaps £400 to £600 per week.
Food is potentially a highly profitable line of business for a modern pub, but any specialist staff that you employ to enable you to provide a food service will make or break your plans, and no-one more so than the chef. True, you'll need space for suitable tables and chairs (maybe 50 per cent of the square footage) and you'll also probably want to be able to cater for children. You'll need a good, spacious kitchen - possibly involving a major refurbishment. You'll need to meet all health and hygiene regulations too - not just when you set up, but on an ongoing basis. But above all - unless you are going to do it yourself - you'll need to cost for a chef who is capable of providing the food to match the atmosphere that you are trying to create, and at a volume that is capable of paying for all of the relevant overheads - staff, kitchen, crockery and cutlery, kitchen utensils, tables and chairs (and not forgetting food) - and still be economically viable.
Being a pub, whether they are eating or not, most of your customers will probably want to drink something. If you've got a tenancy agreement you will have to buy your beer from the brewer at a high margin, if not you will be able to shop around and get it cheaper (though most owner managers do, unlike tenants, have the upkeep of their building to pay for to balance things out). Either way, stock will be a major overhead. To stock a cellar for even a modest pub from scratch may well cost £5,000, and to keep even a small freehold pub in beers, wines, spirits and minerals can easily cost £10,000 per month. Mark-up on each unit sold retail should be around 50 per cent, but anything you buy that you can't sell is money down the drain.
While some designer lagers are served in the bottle most customers still prefer their drinks in a glass (and sitting down on a chair at a table too!), and you'll need hundreds, of all shapes of sizes. It's one of the essentials of a successful pub for which many publicans rely on a local cash and carry. The goods come cheaper and you can buy what you want when you need it, but remember the only way you can work like that is if you have the cash in the first place. It's a classic example of the very practical approach to cash flow that pub life demands.
As pubs have become more family and entertainment oriented, the expectation of the levels of comfort and amenity have risen too, not to mention the demands of regulation and the statutory authorities.
A surprise visit from the health and safety authorities can find you rapidly and unexpectedly out of pocket as you will be required to rectify any fault that they find within a strict time period. The modern licensee has to find money for amenities too, often to be paid a month in advance. These include the obvious things such as water, gas, electricity and the telephone. The precise costs will depend on factors such as how big the pub is and where it is, but according to one licensee "think of your household bills and then at least treble or quadruple them".
Non-domestic rates or business rates demands from the council (maybe £400 per month, possibly much more), public liability insurance (variable depending on things like size of stock and furniture), rent (probably no less than £1,000 per month and possibly much more), cleaners and window cleaners, fire