In Retail, Restaurants and Risk we focus on the risks to retailers, drawing on our experience within the small chain retail sector and restaurants in particular.
A lot of my career in accounting has found me working in the retail sector, particularly restaurants, so I understand a lot about the risks of SME businesses in this sector.
In Q1 2015 household spending grew by 3.4% when compared to Q1 2014 and it has been increasing quarter by quarter since Q2 2014. That’s a big number and the figure for Q1 2015 is £266.6 billion, with the increase led by:
- Recreation & culture
- Household goods & services
- Restaurants and hotels.
(All Figures from the Office for National Statistics.)
Statistics aside it’s a lot of money, goods and services changing hands and good for retail business. The retail sector carries intrinsic risk in its business model, and this risk needs to be monitored and managed to protect the retail business and its finances. As we shall see those risks are sometimes shocking and surprising.
Case Study 1: A recently opened restaurant in an upmarket suburb had been trading for approximately 6 months with the previous Accountants providing a bookkeeping service and issuing monthly financial reports straight from the accounting software. Basically a very simple Profit & Loss with a Balance Sheet. This can be fine for some businesses but when you have invested more than £500,000 into a new business venture, I’d like to have a bit more detail than that.
I was asked to take over the task and provide the owners with weekly reports for their management meeting with senior staff and a full set of monthly management accounts. The owners were busy and successful entrepreneurs who spent little time on-site and the day to day management was trusted to senior employees.
What I found was quite shocking:
- The Accountants bookkeeping was not complete
- Stock never changed value on the balance sheet and was a nice round £14,000
- Petty cash was £12,000
- The monthly figures provided by the previous accountants showed a healthy profit that was wildly inaccurate given points 1 to 3 above
As I updated the records and dealt with the anomalies it got worse:
- The business was losing circa £10,000 per month
- It wasn’t meeting its VAT liability and falling behind with other creditor payments
- The stocktake was not being completed properly
- The business was overstaffed
- The staff were using the restaurant as their own private party venue (hence the picture above)
The restaurant was virtually empty in the day and quiet at night in midweek. I called the restaurant as a secret shopper to a book a table one evening and was told the restaurant was fully booked, only to find the following week when checking that this was not the case.
Unfortunately the damage was done and the business did not survive the poor management, and untrustworthy staff. A restaurant business has enough obstacles and risks to manage without poor accounting adding to this list.
Case Study 2: A Manchester city centre based retail business was very successful, well established, growing and struggling with its bookkeeping and accounting records to the point where suppliers were cutting off supplies. This was not because the business had cash flow problems, but due to professional incompetence on behalf of the resident accountant. Apparently the accountant said goodbye one Friday evening and never turned up again, leaving a mess of the accounting records in their wake.
Fortunately the business was very successful and cash rich. Once we had got the basic controls in place the problems were quickly eradicated and the business continued its fantastic sales performance and growth. It expanded operations into additional premises and started analysing its business performance as a whole and as four distinct departments.
The end result was the owner was happy, the suppliers were happy and the business went from strength to strength using sound, reliable and accurate accounting information to assist it achieve its objectives.
In both these case studies, the businesses had the normal and inherent risks associated with retail, such as stock, waste, cash and staff management, but these were not the only risks they faced. Both businesses were negatively impacted by their choice of accounting advisors, who did not have the sector experience to fulfil their roles and responsibilities.
Conclusion: All business activities carry risk so it is vital to build a reliable relationship with key people in key roles early on to identify and reduce risk to the business. Accounting information should be a key tool for any business and experience in retail business management is paramount to be effective in assisting business owners who operate in this sector.