Back to basics: finance for first-timers

Why do publicans fail? Very often it's because they just don't have enough information about how their business is doing. They see the cash coming over the bar but ask them how much profit they've made in a particular week and they won't have a clue.

By the time they've seen the accountant's figures it could be too late to make the adjustments to the business that could have saved it.

Wharfedale Consulting is an accountancy service set up last year to address just that problem. Unusually, it has spun out of a top 100 pubco which sold most of its houses to Enterprise Inns at the end of 2005.

As pub tenants themselves, and as landlords in the past, the Wharfedale team feels well-equipped to understand the financial issues faced by independent licensees and give them some help.

"The years spent advising our own tenants led us to the idea that we could run a specialist accounting business for them," explains Tim Bennett, who heads the consultancy.

"Pubs are a unique trade from an accounts point of view. There are so many different aspects to consider - the complications of couples working together, living on site, being open every day, a landlord and tenant relationship unlike any other, the beer tie, the different income streams and so on.

"It's a lot more than VAT returns and income tax!"

Wharfedale will provide a personalised service for its licensee clients, mainly aiming to ensure they run their finances in a disciplined manner, something Tim believes tenants don't get enough training or support in. Newcomers to the trade are the most vulnerable.

"There are a lot of new tenants coming into the trade and in certain cases they can get into a mess very quickly. They ought to be running their pub like a managed house in terms of the books. It's crucial to account for every penny and know how much you need to take to break even," he says.

"There are some tenanted pubs taking £15,000 or £20,000 a week and when that kind of money is involved you've got to be certain you're dealing with your finances properly to make sure they don't go awry.

"Any new tenant needs to know every week - not at the end of the quarter - whether or not the sums are adding up. They must make an informed decision on what to do, whether they should cut their costs and increase their trade, and so forth," continues Tim.

"Every pub we've ever run has had the benefit of flash profit and loss accounts, giving the licensee figures for each week, enabling them to understand the business better.

"You've got to know where you stand - and some don't have that information after six months!"

The quality of the information is also important. Accounts which lump together items of expenditure under 'incidental outs' or some other catch-all aren't much help. To identify where the costs are in your business, and where you might make cuts, you need it broken down into entertainment, gas, lighting and so on.

"Accountancy is not all about dodging tax, it's about running a pub properly, and that's how we've always done it," says Tim. "The first consideration of any new licensee should be how they are going to run the business in a disciplined fashion, not to try to be clever.

"It's such a key part of their business, but a lot don't think about it. Too often, accounts are an afterthought."

Tim's top 10 tips for first-time tenants

Licensees need to be equipped to financially manage their business before they take it over. It's not an area tenants should think about only after they have moved in. Unfortunately, many very quickly find themselves in a financial muddle because they are not organised.

Some licensees enjoy and understand bookwork, others don't. Equally, you may be working so hard downstairs that you put the 'financials' to one side. So it's important to have an accountant who understands the licensed trade and can ensure you keep your financial affairs organised and up to date.

An accountant's initial priority should be to ensure his client is equipped with the correct financial disciplines to control their business efficiently, effectively and therefore profitably, hopefully from day one.

1. Gather as much accurate information as you can when first considering a pub​

Don't ignore figures you may not like to see!

• Obtain recent turnover figures and annual accounts. VAT returns are also a good tool to establish turnover
• Obtain price lists to work out possible gross profit margins
• Find out what costs are involved in running the pub. There are a number you may not be aware of at first!

2. Create a profit and loss forecast, including a realistic level of income for you​

This must cover your own financial commitments, for instance, the mortgage on your existing property or historical loan repayments.

3. Project three levels of turnover using your profit and loss model​

• What you would consider the poorest level of trade might be
• Level of takings you have been told the site is currently trading at
• What you think you may realistically achieve within the first six months.

These projections will help you make informed decisions and aid your negotiations with your landlord. They will listen to a sound and reasoned argument

4. Organise your book-keeping system before you move in​

• Have the correct paperwork or computer programme to record takings and costs from the first day
• Have at least one bank account already open so that you can make the correct levels of bankings during the week
• Ensure you have an effective filing system in place. A plastic carrier bag will not do!

5. Understand how you are going to pay your staff, whether new or existing​

6. Employ your own stock-taker for the day you take over​

They will ensure you are paying the correct amount of money for the stock and glassware and will immediately help you identify any problems with your profitability. Agree the next time you would like him to visit.

7. Get into good habits​

Make sure you fill in your paperwork at the end of every day. Record your till readings and your cash expenses together with receipts and ensure the cash in the till tallies with your readings.

8. At the end of the first week...​

Finalise your weekly takings sheet, keeping your withdrawals to the budgeted level. Make sure you bank the banking figure stated. This will pay your bigger bills.

9. Use this organised financial information and your projected figures to assess how profitable the pub is ​

You need to know this after the first week, not six or 12 months down the line.

10. Don't get over-excited when the cash starts building up in your account during the first three months​

Remember the VAT, the utility bills and so on that are lurking around the corner!