A while back Graham (as I’ll call him) approached me for some help. Graham was the lead investor for a group of business angels. 6 months before, £350k had been put into a restaurant business for refurbishment.

Keith, who ran the business had approached Graham for a further £200k, he was under pressure from suppliers, but couldn’t explain why he needed the extra money.

Graham was extremely concerned and asked me to investigate. The monthly accounts were showing a small profit and he was gobsmacked that he was being asked for more money.

What the investigation revealed

The main reasons for the cash shortfall were:

  • inaccurate accounting and forecasting
    • the business was very slow in recording supplier invoices. At the time of the cash injection it actually owed more money than the accounts showed. (While the monthly accounts were prepared by a firm of accountants, they relied on Keith to provide all the invoices). As a result the original cash flow forecasts had been incorrect.
    • The business operated through several companies; one company didn’t trade and had no monthly accounts. However some of the refurbishment costs were paid by the non-trading company and hadn’t been reflected in the accounts.
  • the accounting problems had muddied the waters and when they were unravelled it was apparent that the amount spent on the refurbishment was well over budget – Keith may not have been a perfectionist as regards accounts, but it seems he was when it came to the refurbishment!

Moving forward

Finding out what had gone wrong was all well and good, but it was apparent changes were needed to help the business move forward.

Keith was the sole signatory to the bank accounts and had project managed the refurbishment. While no evidence of fraud had come to light, a lack of checks and balances was noted. Graham asked for advice in improving control; he is now scrutinising payments and also processes were put in place to improve the accuracy of the monthly accounts, such as checking supplier statements and sense checking to daily information. The profit and loss account only tells part of the story and there is now more focus on the balance sheet.

It is an old adage that sales are vanity, profit is sanity but cash is king… but it is oh so true!