The importance of a good cash flow chart!

The importance of a good cash flow chart!

This is worrying story, but unfortunately a true one, that explains why a good cash flowchart is so important.

It is about the downfall of a public company, Conviviality PLC., and how that company valued at £500M in January, went bust in March!

All because they didn’t keep proper cash flow records.

This company had grown from a single store, Bargain Booze, in 1981, into a chain of stores that went public in 2013. Once public they went on a buying spree, buying several small off-license chains and then in 2015 and 2016 they bought two drinks wholesalers!  Over this period their sales grew from £372M to £ 1.5B.

However, their move into wholesaling led to a cash flow problem.  To explain, when they were an off license they got their money over the counter, but as a wholesaler they had to give credit, which needs either a pot of cash or invoice discounting to cover this gap. As they didn’t have the cash they chose invoice discounting, which meant they sold their invoices to a finance company who paid them most of the money immediately and then collected the money when their customer paid.

This would have been fine if their records had been correct, however, it appears that even though they were a large public company, they were still using a manual spread sheet!

As inevitably happens with manual systems, someone forgot to enter £30M of alcohol duty and VAT!

This had an inevitable and catastrophic result, leading to the recalculation of the profit forecast, which in turn panicked their suppliers, leading to their funders losing confidence in them and they stopped discounting their invoices. They couldn’t buy any stock! Conviviality PLC simply did not have the money to cover this, and, as nobody would lend it to them, there was only one solution, to call in the administrator.

Most of the jobs have been saved, as the administrator was able to sell the constituent parts to companies that have good cash management systems in place, at a fraction of their worth.

This is an example of how without good management accounts and proper cash flow management, things can go wrong, very quickly.

It doesn’t only happen to large companies, which leads me to ask, how good are you cash management records?

That's Think Cash!