Back to the Black
Most catering businesses will have spikes in turnover and with any cyclical business the peaks need to generate sufficient profits to get through the troughs. Many food businesses will now be back into the black after prospering from a warm summer and the cricket world cup, but as the saying goes “the time to repair the roof is when the sun is shining.” So before the dreary days of autumn start to take hold, now is time to look at the finances and mend any leaking rooves before the downpour of winter, advises Tom Bourne, senior associate with Cripps Pemberton Greenish.
An accurate cash flow forecast is key to help ensuring there is enough in the bank to manage any downturn. This can be a difficult balancing act, but where the directors of the business feel there is a risk of insolvency, seeking professional advice early can help avoid the need for a formal insolvency process (e.g. administration / liquidation) and mitigate any potential personal liability of the directors.
Investment / Re-Finance
Some businesses fail because of a lack of working capital. In catering businesses this is typically because the business has grown quickly and left the business starved of cash, so re-financing or re-investment may be needed. There are specialist investors / lenders who will provide finance to at-risk businesses, but high risk almost certainly means high premiums, so if additional finance is needed then it is better to secure this early when the balance sheet is healthy.
One of the first things to consider when a food business is experiencing financial difficulties is whether there are any agreements that can be re-negotiated or payment terms extended to help manage cash flow. This is known as a voluntary arrangement because there is no obligation on a creditor to agree to any proposals, but this can be a flexible short term-solution. For example, if stock is needed for a busy December you may be able to negotiate extended payment terms.
Company Voluntary Arrangement (CVA)
A CVA is a formal offer made by the company to its creditors to avoid a formal insolvency process. The proposal is governed by statute and will typically be put together with the assistance of an insolvency practitioner who will act as a “nominee” to supervise the implementation of the proposals. The proposal is voluntary but will bind all creditors if enough vote in favour of the proposal (typically 75% of unsecured creditors by value).
This process has become increasingly popular, although sometimes controversial, in the retail and food and drink sectors, with CVA’s agreed for Jamie’s Italian (before it went into administration), Byron Burger and Prezzo. Proposals are typically successful where there are a small number of large creditors (e.g. owners / investors) and can be used as part of a larger restructuring deal and / or to re-negotiate rents.
Back to the Black
Managing the finances of any food business is a tricky exercise, but where there is not enough to keep the vultures at bay it is important to seek advice early. This can help avoid a formal insolvency process and potential personal liability for the directors.
This article first appeared in B&I magazine in October 2019.