Money management: avoiding insolvency

Worried that your pub is getting into financial difficulties? Business recovery expert Steven Williams points out the danger signs and suggests some solutions.

With uncertainty sweeping through the licensed trade, and even some big operators going to the wall, many licensees and small multiples are finding themselves in a situation where they are struggling to repay the debts they owe or are finding that their liabilities are greater than their assets.

When this is the case the business technically becomes insolvent - and that could have severe consequences. But by paying close attention to the way your business is run and taking the necessary action in time, insolvency can be avoided.

There are certain early warning signs that you can look out for so you can act to ensure that your pub will not become a victim of insolvency.

By staying aware of changes in the day-to-day running of the business, problems can be dealt with before they become too serious and the situation gets out of your control.

Got a problem?​

• Falling margins?​

If your gross margins are falling this is fine as long as you know why and have the necessary planning in place.

If you don't know why, beware. It's a safe bet that your fixed costs are not falling which means that your business may be making less profit than you thought or none at all, even if it is still growing in terms of turnover.

No money in the bank?​

Watch out if your business bank account is constantly at the overdraft limit or is threatening to go into the red when you have no agreed overdraft facility, especially if this not how the bank account has worked in the past. The bank manager calls this process "hardening" and it's a sure sign of one of two things, neither of which is good for your business. Either you are making losses or you are under-capitalised.

Renegotiating credit?​

If you have to renegotiate credit terms with the people you owe money to - for example, if you have to ask the landlord to accept rent payments on a monthly basis rather than the normal quarterly payment in advance - there's a problem with your business.

Falling behind with tax?​

Be very worried if you fall behind with your PAYE payments. The new Enterprise Act takes away the Inland Revenue's preferential status and is likely to make tax collectors even more vigilant and liable to crack down.

Trouble paying your staff?​

Get specialist advice at once if you are struggling to pay the wages or salaries of your people. As well as being a problem for staff motivation, it's another sign something is seriously wrong.

Don't know where the money's coming from?​

If you find it increasingly difficult to identify, from the reams of management and financial information your computer produces, which part of your business is making the profits or why, you've lost control and you need to get this sorted out as a matter of urgency.

Owed money?​

You need to tighten your grip on credit control.

Working all hours?​

If you find that you are working long hours for little or no reward it is time to take a look at how your business is performing.

The solutions​

• Take control​

The best way to stop yourself getting into financial difficulties is to pay close attention to the way the business is run.

One of the first areas to assess is the effectiveness of your existing management control systems.

A situation in which the survival of the business is threatened can often be avoided by implementing tighter controls within the pub.

Manage your staff​

From a human resources perspective, ensuring that a formal management system is in place, with someone in charge who is respected by other managers and staff, is crucial.

Keep stock​

Regular stocktakes are another basic requirement. Although a simple measure, they can highlight whether pilfering or theft are taking place, allowing immediate action to be taken.

Incentivise staff​

Creativity with staff incentives can provide a useful way to motivate staff and can also improve cash-flow.

Fix wage costs​

If you operate a small group of pubs, fixing managers' wage costs as a percentage of turnover encourages them to think carefully about how they manage staff - for example, the number of people they employ and the shifts they work - ensuring the pub is run more efficiently.

Get the price right​

Take a hard look at your pricing policy and make sure in particular that you are passing on any increased costs to your own customers.

Focus information​

A common error made by many business owners is the generation of excess management information, which then becomes unwieldy and difficult to analyse.

Management information should focus clearly on the facts and trends that really matter.

Producing too much information will just cause confusion.

Set budgets and monitor performance​

Paying close attention to the business's monthly accounts and making regular business forecasts are crucial measures for any business, but they even more so in the pub industry where the business can be of a seasonal nature.

A tough but achievable budget should be set, against which your performance is monitored. A good habit to develop is the production of a cash flow forecast for the coming six months which is updated each month on a rolling basis.

You have to accept that both the budget and the cash-flow will be wrong - the trick is to understand why it's wrong and to react quickly and sensibly to correct the variations.

Too late?​

If the situation does reach a point where there are problems that cannot be turned around, it is vitally important to tell the stakeholders in your business.

Talk to your creditors, the bank and the brewery to make sure they are aware that the business is experiencing difficulties.

Help should also be sought from a professional adviser from a reputable firm who will be able to establish what the next steps for the business should be.

Steven Williams heads the dedicated licensed trade team at Begbies Traynor, the UK's largest independent insolvency and corporate recovery firm.

He has worked as a licensed trade specialist at the company for 14 years, advising pubs and restaurants which are experiencing difficulties and working with them to find solutions and turn their businesses around.

He has been involved with several hundred cases in the past few years and recently he saved 100 jobs at the Third Room group. He is also on the advisory panels for major brewers and pub companies including Scottish and Newcastle, Coors and Carlsberg-Tetley.