December 2019
Unless you have been living in a cave without any form of communication, you will be aware of the media frenzy surrounding Black Friday and Cyber Monday. On the face of it, companies appear to be offering tremendous bargains across a wide spectrum, whilst also gearing up for the Christmas rush. Unlike years gone by, the whole of December appears to feature a variety of sales and special promotions which was not normally be seen until Boxing Day at the earliest.
Typically, the current selling frenzy is in the retail industry but at what cost to the retailer ? Indeed, stepping aside from the issue of whether or not this approach generates a much higher volume of online sales at the expense of high street sales because consumers act on the basis that a low price is more important than, say, personal service, the insolvency practitioner starts to look around for candidates for retail administration/liquidation appointments in January/February. Why?
Experience suggests that, in general terms, buying turnover buys trouble on the basis that chasing sales on a reduced margin might make the business look good from a sales viewpoint, but all of the normal costs still require to be paid such as premises, utilities and staff : none of which offer a price reduction for goods and services whilst the business is selling as much as it can. As a result, cash flow might be positive in late November and December, but when the suppliers’ bills arrive in January/February, the wage bill is higher as a result of all that overtime, and the PAYE/NIC and VAT requires to be settled, the business can find that it has insufficient cash to deal with these obligations.
In contrast, restaurants, bars, hotels and similar establishments enjoy a significant increase in turnover at this time of year without having to sacrifice margin. Understandably, such businesses look forward to this opportunity to make money, as do those who eschew an online presence because they provide a slightly different offering that entices customers into their shop.
A key purpose in running a commercial business is to make money such that one can invest in the future but clearly, if reserves are already quite low and creditors press for payment, a short term cash injection from a seasonal increase in sales is unlikely to create the basis of a sustainable activity. It is not uncommon for a retailer to receive a knock on the door from a licensed insolvency practitioner in eth first month or so of a new calendar year because a bank or other large creditor has become concerned about trading viability and hence debt repayment, or for the business owner to seek advice from a licensed insolvency practitioner about the options available for dealing with the cash flow difficulties that have been created by the rush to increase turnover at the expense of a realistic margin.
In summary, don’t be busy losing money. Turnover is a standard measure of business performance, but a healthy gross margin coupled with robust cash flow are much better in the long run. Not necessarily a happy thought for readers in the weeks before Christmas but a practical one which simply seeks to advise the exercise of appropriate business sense and caution when looking at how turnover is being achieved.
The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen. They do not purport to represent those of the firm in general.