Don't ignore the signs of a business in trouble

Everyone knows that in the current environment many licensees are facing problems they've not encountered before.

Nationally there has been a drop in turnover, due in part to the smoking ban, the demands of health and safety, tighter fire regulations, a rise in the minimum wage, a lack of experienced staff, rises in utility costs and an increase in the tax burden.

This has created a situation where inexperienced (and even sometimes experienced) proprietors have found it difficult to bridge the gap and to make any kind of profit on their business.

Some operators borrowed funds three or four years ago to improve or expand their business, having forecast growth, year-on-year, of at least 10 per cent. Then they found turnover fell by at least that, while costs rose by as much, if not more.

In many cases lenders and pub companies have not helped; there was little initial compensation for these decreases, with rents not reducing in line with the drop in turnover.

It must be said there are exceptions to the rule too. Some pubs are bucking the trend, particularly where they are providing good value food and service by re-investment in their product, driving their business forward through inspired marketing and developing profitability via the imposition of strict financial controls.

Doctors, not undertakers…

Our company has been trying to help by addressing the problems faced by proprietors and lenders, attempting wherever possible to be doctors rather than undertakers. It has recently been too easy to find reasons for the failure of businesses; in many cases though it is simply down to bad management, poor marketing, lack of controls and failure to assess the market accurately.

Some licensees, encouraged perhaps by their own initial success or by their pub companies, take on extra businesses and over-extend themselves, often draining the original, successful entity.

Others are prone to burying their heads in the sand by ignoring the warning signs of declining turnover and profitability, disregarding mounting creditors and not keeping lenders informed of potential problems.

Forced to pay in cash

A common example is where a licensed trade business is unable to meet its loan repayments or rent, owes money to the Crown for VAT and PAYE, and is reduced to paying its suppliers in cash to continue trading.

Many proprietors do not produce regular accounts, apart from statutory ones. Starved of management information and, consequently, with no way of obtaining and reacting to key performance indicators, businesses predictably start to slide.

We are regularly called in by lenders or private clients to review businesses that have problems and to provide recommendations as to the best way forward.

Where major lenders are involved, assistance is generally provided when a client defaults on a loan or the financial institution has problems obtaining the information it needs to help it assess the extent of the client's problems.

From an operational point of view, we generally assess businesses thus:

• Analysis of turnover including the split of the business income by channel (wet/dry, etc).

• Identification of the current profitable and loss-making parts of the business by calculating gross profit margins and relating them to industry norms. A study of the business's supplier network to ensure that best prices are being obtained.

• Measurement of wages/staffing again against industry norms. If the cost is too high, we develop plans to reduce such costs without affecting the level of service.

• Analysis of the food offering to see if it fits the market and is producing enough turnover to be viable. Food often does not contribute to the profitability of the business.

• Is a pub targeting the right market? How much money is being invested? Is there an integrated marketing plan?

As well as these areas we look at costs, including utilities, and creditor balances, including suppliers, to see if these can be re-negotiated or re-structured. If rent is involved, we will contact the landlord to see if an alternative arrangement can be put in place.

We also produce meaningful monthly profit & loss accounts which can provide clear management information to the proprietors and budgets/forecasts for the following 12 months - anything beyond that is speculation.

The above can only be carried out with the co-operation of the proprietors and measured once they accept continued monitoring of the business. Without further reviews it is obviously impossible to check that the recommendations are adhered to and to ascertain whether the business is responding.

There is no magic wand for any situation where businesses hit trouble.

However, by looking at the basics of the business, producing meaningful accounts that can be used to monitor key performance indicators, implementing financial controls, focussing marketing and not turning a blind eye to potential problems, it is often possible to provide a solution to the problems besetting many in the licensed trade.

Paul Whitford is commercial director of business recovery specialist Licensed Solutions​