“Afternoon Tea and Two Free Gateau Slices?
Due to unforeseen circumstances this offer has been suspended as of 10/09/2018.
All vouchers already purchased will still be honored as per the original terms of the offer.
Apologies for any inconvenience caused.”
The above is from Patisserie Valerie’s website, posted one month before the discovery of “accounting irregularities”. Did HMRC quietly access the website, as they are owed £1.14 mill, and file a winding-up petition on 14 September?
We thought we would have a look at the financials of the company and found the following issues:
An analysis of the balance sheet suggests there was a significant investment in working capital during the year of over £2m. Most of the move was from a substantial increase in trade and other receivables, the biggest component of which was prepayments on leases:
|Trade and other receivables||11,004.0||12,327.0|
|Total operational assets||17,762.0||19,975.0|
|Trade and other payables||5,081.0||5,167.0|
|Operating working capital||12,681.0||14,808.0|
|Implied cash flow||(2,127.0)|
However, when we compare this to the cash flow statement it is evident that while the inventory and trade and other payable numbers tie exactly, there is a significant difference from the implied cash flow movement in the balance sheet to the actual cash flow movement on the cash flow statement:
|Cash flow statement||Implied by balance sheet|
|Trade and other receivables||(559.0)||(1,323.0)|
|Trade and other payables||86.0||86.0|
Linked to the issue above are these prepayments which primarily relate to leases. In 2016, the operating lease rental expense was £12.9m which grew to £14.2m in 2017, an increase of £1.3m or 10%, not too far from the 8% growth in new stores from 184 to 199.
However, it’s odd to see a ‘prepayment’ on operating leases. Typically, landlords will grant rent-free periods rather than a discounted rent (as the property is valued on the headline rent after the rent-free period). From an accounting point of view, these rent-free periods should be amortized over the life of the lease for example:
|No present values for simplicity|
|Five year lease||Year 1||Year 2||Year 3||Year 4||Year 5|
|Balance sheet impact|
So, we should expect a liability rather than an asset.
Property, Plant & Equipment
The business has approximately £200k of equipment (note, not fixtures and fittings) per store. This seems high for what is a glorified coffee shop. Also, capex is approximately £436k for each new store – much higher than I would expect as this is mostly equipment (fixtures and fittings are very low).
Three areas of financials which do not make sense to us – cake anyone?