Stocktakers are they an Asset or Liability? Barrel-Dregs (347)

STOCKTAKERS-  When they can be an Asset or sometimes, through their errors, a Liability?

Stocktakers are they of  value?

I have detected a serious issue relating to the use of professional stocktakers that needs to be aired.

While many publicans may baulk at the cost of a regular stocktaking exercise, its value could be to:

• serve to protect their income,
• offer support for the examination of their takings by either Inland Revenue and Customs & Excise,
• show that they have the desire to display competence in the running of the business,
• be used to support the assessment of volumes and profit for rent reviews.

There is no reason at all why a competent independent stocktaker should not be engaged to produce monthly, or at least a quarterly, reports on consumption and cash movement. The content of the report is important. The  stock report should provide an overall statement of the stocks, including age and condition together with  purchases, consumption followed by identifying gross profit margins by item, evaluation of allowances and promotions as well as comparing anticipated income with actual to reveal cash variations. Shortened versions of detailed stock reports are generally a waste of time and money.

When coming to a rent review or lease renewal it is certain that without the support of independent stocktaking records the landlord will accuse the tenant of overstating allowances, or  under-declaring takings, and these are just two elements. It is difficult, virtually impossible to prove the existence and accuracy without those stock records. In my experience I have found that by ignoring allowances and overstating volumes a landlord will create a case for a higher rent of a several thousand pounds a year which can be  difficult if not impossible to challenge without the aid of independent professional record that can be submitted as a rebuttal.

 The cost of the stocktaker would be easily balanced against such excesses in the rent, quite apart from the peace of mind relative to the other issues. 

Minimum necessities for stock and cash control.

The essential ingredients for good stock control is a proper record of purchases, wastage and ullage, gratuitous drinks, staff drinks, promotions, breakages, pipe cleaning and where there are multiple bars a cellar book is essential. Both the bar and cellar should keep a record book to note down those allowances and events.  Essential are till rolls, till readings with till cards all to aid cash control. Records should be kept up to date, never less than once a week, preferably daily.

 

Stock and cash Allowances

Incorrect examination and application of allowances can also give HMRC cause to believe that the proprietor, owner or manager is pocketing takings. Very dangerous and costly to defend but then again without those professional stocktaking records it could be worse. 

There are problems relating to allowances. Both firms that are involved in training publicans, as well as some stocktakers  fail to explain the importance of calculating allowances. The following are just a few of the more important issues that need to be considered.

1. 1.       It has been said that barrels, and kegs of any size, 9;18;22;36 gallon or 50 litre etc, can have a surplus of beer built into them. That is a gross exaggeration of the truth. A brewer can include up to 2.12 litres [ 2.49 pints] in a 36 gallon barrel, or 1.36pints in any other size under Excise rules. That means that for a pub purchasing 160 barrels a year and assuming that they have mixed keg sizes then  if every container included a surplus then they may have received not more than 652 pints of beer extra over and above what they pay for. That is very unlikely because average must apply; not every container would have a surplus and as a consequence that absolute maximum possible should never be relied upon.

 

1. 2.       A pint of beer with a head ensures that the customer gets less than a pint. Not so! Even when beer, and that includes lager, is metered for delivery if fobbing occurs then the glass of beer needs a top up, and there will be spillages. There is no such thing as “no spillages”. The law regarding the “head” on a glass of beer is always under attack but the reality is that technically a pint should always be served. Often in achieving that pint there will be an overspill.  What is totally unacceptable is for the stocktaker or the pub employer to assume that the publican will ensure that all customers will be under-measured to compensate for any spillages and breakages  thus resulting in there being no allowance in the stock computation. . Regrettably I am aware of at least one of the biggest firms of stocktakers and a large managed house pub company taking this line. That attitude if applied has distinct overtones of fraud and if a publican or manager becomes aware of such devious practices then they should report them to the Police. Perpetration of Fraud is still an offence that can result in a prison sentence.

 

1. 3.       Keeping the dispense of beer in good order is not only essential for the customers but it is also a legal requirement. Beer sitting in pipes for a quantity of time may need extra cleaning cycles. There are instances where pubs choose to close down certain lines for lunchtime use or specific days. Pipe cleaning is thus essential and cleaning less than once a week is unacceptable, particularly with real ales, and so therefore cleaning should be applied even more frequently.  Any assumption that the beer loss arising from the cleaning process is a percentage of beer purchases would be totally fraudulent.    It is obvious to any sensible person that if it takes 18 days to sell a branded 18 gallon container  of beer with just one dispense point it will have been cleaned at least twice, hence probably 10 pints of beer plus spillage etc; it has been known for a stocktaker, quite wrongly, to   assess on a percentage basis just 2 pints as an allowance creating an under-allowance  difference of at least  the 8 pints. That cannot be acceptable!  Although he loss of beer applicable to each line and each clean should be recorded in a bar/cellar book  the absence of a such a record must never be the excuse for not making an appropriate allowance.

 

1. 4.       Another questionable area of allowances arises from post mix systems for soft drinks. The valves can become blocked if not cleaned, and the water mix distorted. Regular checking is essential since a change in the ratio may cause excessive shortages or a highly watered drink a huge surplus.  This is very much a management issue which needs attention since it can have an enormous impact on the stock result.

 

1. 5.       Pubs do have promotions in spite of the desire of the government to remove them. The day, length of time the promotion exists and the retail value of such promotions should be recorded in a bar book. It is never advisable to engage in any form of promotion where the cash effect in retail terms cannot be sensibly measured.

 

1. 6.       Apart from promotions there will always be times when the proprietor may supply gratuitous drinks to supplier’s reps, advisers or customers.  A record of the product and cash value of such unpaid drinks is very desirable. It is definitely not sensible for a proprietor to try to remember what  gratuitous drinks have been incurred at the end of a month or quarter; it is often difficult to remember just the following day.

 

1. 7.       Depending on the policy of the proprietor/manager staff drinks, even soft drinks, may be supplied without cost. The occasion and retail value of such should be recorded. Again it is dangerous to assume that at the end of a month or quarter a quantity can be remembered. Such allowances should be pre authorised by the proprietor/manager.

 

The employment of staff is always comes with a question as to whether they are honest or not. It has to be remembered that systems and controls are in place not only for the proprietors benefit but for the staff also, and this becomes even more important when a manager is employed.

 

Stocktakers – incorrect instruction  that can result in unfair staff dismissal.

Although there are substantial benefits that can be derived from stock reports prepared by independent and reputable stocktaking companies there is a downside.  Either specifically the training procedures of the Stocktaker firm, or the inexperience of their Stocktakers coupled with inadequate systems and controls in place, can lead to the Stocktaker reporting a stock/cash shortage when in reality there is not. That is why clear systems and controls coupled with explicit instructions to and from the Stocktaker, specifying the terms of reference, is essential.  The instructions regarding the issues above are central to the validity of stock reports.

Should staff may be dismissed on the basis of a stock result that has been incorrectly formulated, allowances missed, policies ignored, incorrect assumptions made it is the employer that can become responsible  for unfair dismissal and the costs associated with such a claim. And in the case of in the case of managed houses, both the manager and the company that owns and operates may become financially responsible.

How stock results can lead to deception.

Recent experience has shown that some stocktakers carry out their inspection and calculations without prior agreed terms of reference relating to the keeping of  records of cash, stock or any allowances.

 

 I have found specific evidence where a firm of stocktakers produce results for managed house company under direction that their reports should assume  that all substantial genuine allowances should be ignored on the basis that managers and staff should short measure customers by up to 5% to compensate. The problem that emanates from that managed house decision to the stocktakers is that the Valuers when considering rent reviews for tenants adopt the same practice as if it such were acceptable.   Valuers and stocktakers adopting such policies when preparing stock reports or rent reviews can only be defined as both unprofessional, and effectively fraudulent.

 

It is worth reflecting on a statement made by Christies some time ago relative to their subsidiary Venners  in which the letter stated that “managed house chains will not permit their managers any wastage allowance except where electric pumps and oversized glasses are in existence. The manager and their staff are expected manage wastage out of the typical 95% pint, which is sold in rim measure glasses. There is, however, an acceptance of a small pipe cleaning allowance but this relates to the number of dispense points and pipe runs and tends to be a fixed cost rather than an allowance against turnover”. It is interesting to note that the 5% wastage was the view from a Director of Christies, my experience has been that Christies when handling a rent review only allow 8 pints per 288 pints, which is 2.8%,and totally inadequate. It was interesting that there is a pub managed house division that that is supporting the rather unethical, and totally illegal, practice of expecting their staff to give their customers a five percent short measure.

 

Lawyers acting for employees or managers  dismissed for so called “cash/stock shortages” resulting from such flawed stock results would be well advised to seek independent examination  by either an experienced trade accountant or independent qualified stocktakers.

 

Rent review or lease renewal

 

The calculation of a proposed rent for a pub is based upon a “shadow” profit and loss account for the premises reflecting the trading beliefs of a Valuer or the freeholder, which may subsequently be amended by subsequent negotiation with the prospective tenant.  The calculation should be presented in whole detail to allow the prospective tenant to understand and discuss.

 

Often the Valuer/landlord will attempt to use in their arguments a comparative of the performance of other pubs, including managed houses. The danger of those comparatives may be that they are nothing more than a statement of performances expected from other tenants; they are not factual performances and the claim that such projections have been agreed with tenants is deceitful because they may have been procured  without advice or with duress, a highly questionable practice.  Only factual performance should ever be considered asa comparative.

 

One of the main arguments at a rent review will always centre on the liquor gross profit margin and again comparatives which are not factual performance are irrelevant, disingenuous and deceptive because it is known that stocktakers and Valuers do have the habit of ignoring the impact of legitimate allowances when constructing profit assessments.

 

 One of the more common practices experienced is for a Valuer/negotiator to state that a barrel of beer consisting of 36 gallons or 288 pints will generate 280 pints for resale, representing  an allowance of 2.8%, arguing that this is accepted by Stocktakers as being adequate to cover all the allowances as already mentioned above. This has been proven to be totally false however to reinforce that point consider the following and then consider the deceptive impact of using an allowance of just  8 pints a barrel on rent calculation.  

 

 The example below is for a pub that has proven to lose 4.5 pints of beer each time it cleans just one font. This example has nine beer types and a total of 14 fonts generating 160 barrels per annum. Of course in real life there should be documented paperwork  for the following but for the purpose of this illustration

• ·         the operating policy for the pub is that staff would have one free drink at the end of each session fore which an allowance of 1% has been adopted.
• ·         spillages will occur and that they are also estimated at a mere 1% of throughput,
• ·         similarly promotions, including gratuitous drinks, have been evaluated as 2% of volume.
• ·         And there may be a proven cash loss, derived from stock reports, that should also be included since they are a legitimate business cost.

 To put all these into perspective Promotion and gratuitous drinks may equate on average to £47 a week, while spillages and staff £23 a week each which considering the volumes may be considered reasonable. These are summarised thus:

Pipe cleaning, 9 beer types used in a pub with 160 barrels throughput
Fonts		14
Weeks		52
Pints		4.5
Retail Pt		£    2.62
Gross value		£  8,583
ALLOWANCES
Base promotion, spillage				% of
and staff on % of turnover				Turnover
Adjust net of vat for
	Pipes		7,304	as above
	promotion		2,442	2%
	Spillages		1,221	1%
	Staff		1,221	1%
	Stock Loss		1,000
allowances in total net			13,188

 

 

This review helps to identify the real impact of ignoring allowances in the calculation of rent. A rent Valuer/negotiator for a pubco taking the view that the total allowances on those 160 barrels would be only  8 pints a barrel  [that is 8 out of 288 pints] at £2.62 less vat  their assessment of the allowances would  equate to just £2,854.  Comparing their figure with the table above reveals a difference of some £10,334. The omission of those allowances would have the impact of increasing the annual rent by as much as an extra £5,000 a year.

 

That extra financial burden constructed by the Valuer would be the result of applying flawed evaluation principles derived from Stocktakers. What is worse is the fact that the tenant would not only be forced to pay a rent that is excessive but still have the cost of those allowances which the tenant would have to bear. The £5,000 rent plus the £10,344 allowances, total £15,344 per annum. And they would have to bear that annual cost till the next review, possibly five years hence  so the cost to the tenant would be £76,720. The major problem is proving the allowances and this would be greatly facilitated by having used a professional stocktaker preciously since only that independent professional evidence could secure the tenants position.

 

 

The double edge sword, friend or foe.

 

While it is clear that the annual cost of using a professional competent stocktaker pales into insignificance when compared with the cost of the higher rent without that evidence. It all depends upon the stocktaker applying a professional and ethical standard coupled with written terms of reference which should include how allowances are recorded and included ensuring that the stock results become an asset to the business.

 

Without the results of a stocktaker acting for a tenant they become at the mercy of the rent Valuer/negotiator of the landlord. As already shown above the Valuer may rely on a firm of stocktakers that have a habit of reflecting values implanted by managed houses, which may neither be in the interests of tenant or consumer.

 

 Examining an illustration of a detailed stock result reveals both essential and worrying issues. For example

 

• ·         Ullage from cask beers was cast at 1.25 pints per container of an average of 11 gallons, the equivalent of 4 pints per 36 gallon barrel. I would have thought is highly questionable considering the sediment that real ales are known to produce.
• ·         Pipe cleaning is shown as an average of 1.8 pints per font per clean per week. Without knowing the length of the run that would appear to be very light compared with the more common claim, particularly from experienced managers, it was nearer 5 pints per clean per font per week, a far more likely truth.
• ·         Spillages, there does not appear to be any allowance. This is even more questionable considering the thousands of pints being poured without a single drop lost, remarkable. Even if the beer is metered that is still questionable. And what about topping up?
• ·         Breakages, none not a bottle of wine or beer, which is very unlikely  for any pub.
• ·         Hospitality, has been shown . This I would presume includes staff drinks. This is shown as an average of £6 a day, or about a couple of pints a day, which could be reasonable.
• ·         A stock loss for the 41 days was reported at £294 while for the 203 days it amounted to 4 stock shortages totalling £4,163 an average of £20 a day.

 

It is interesting to compare that stock result on the web page with Christies view that 5% of volume should be adequate for al of the above, and even more interesting is a more recent case review, also from Christies that an allowance of 2.8% of beer was adequate to cover all allowances. That 2.8% represents  8 pints per barrel of 288 pints; clearly that is totally inadequate.

 

Given that the illustration revealed   4 stock shortages in a row it could mean that there would have been an employment warning or termination for the manager.  Given that the illustration appears to have under-cast the allowances for ullage, pipe cleaning and spillage and correction could collectively  more than wipe out that shortage there would have been a very definite possibility that staff or a manger could have been wrongly sacked.  What would have been interesting, after the error was identified and wrongful dismissal confirmed, is if any claim of damages against the firm could have been extended to include the stocktaker.

 

In Conclusion.

 

The example above shows how easily an extra £5,000 a year rent can be erroneously claimed at a cost of over £75,000 to a tenant over a five year period. Hence the words of caution! Stocktakers can be an asset working for the publican  but when valuers adopt  practices applied by their stocktaking arm in their valuations that are neither ethical or professional then the odds are stacked against the  publican. It can never be right that rents should be cast on the basis that the tenant must carry out fraudulent practices in order to meet the projections upon which rent has been based.

 

Although I have sung the praises of stock audits some of the practices adopted by them and the Valuers must be questionable.  To ensure fair and proper stock results for the publican, and the protection of the integrity and professionalism of the stocktaker,  it is essential that terms of engagement for the stocktaker identifying clearly the basis of stock allowances is procured.  Subsequently the stock results can be used as evidence for any purposes for the benefit of the publican.

 

Without the support of a stocktaker or a proper an agreement as to their terms of engagement a publican may well be at the mercy of landlord, rent negotiator, HMRC or any other body.

NOTE ABOUT FRAUD: The following extract should be considered when reflecting on rent reviews and assessments by valuers on behalf of the freeholder when it can be shown that they include calculations that assume that the tenant should procure from the consumer a 5% reduction when delivering a glass of beer,  in order to satisfy the financial requirements of the freeholder.

            In criminal law, a fraud is an intentionaldeception made for personal gain or to     damage another individual. Fraud is a crime, and also a civil law violation.   Defrauding people of money or valuables is a common purpose of fraud.

Brian Jacobs 2012

 

The views expressed are not necessarily the editors and www.buyingapub.com accepts no responsibility for them, we do try to avoid offensive or litigious statements being made. They are written by concerned professionals in the industry who feel that these issues should be raised to ensure that all licensees are made fully aware of many hidden pitfalls.

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