MUSIC RETAIL - 'S' LTD
An indpendent music retail shop whcih, together with sales from their wbesite, generated a turnover of about £1.7m last year on which it made a small £10k loss. Nothing to worry about here then, just a bit of tweaking..... but one of the joint owners was deeply concerned about ongoing viability and asked us to take a look
As you might appreciate, music retail has, for some time now, been an extremely tough market in which to operate. So against this background it seemed, on the face of it, good news (using our special cash flow template) to find that last year, despite the loss, the business actually generated (rather than absorbed) £80k of cash.
But that in itself, while interesting, is not enough. Where did this cash come from? How was it created?Well, it principally came from reducing stock levels to an absolute bare minimum. Such a change might have worked to create cash last year but this offers no further scope. it's not a change you can hope to make year on year.
Adding to the concern was the fact this cash had been utilised to pay the directors (through loan accounts) and pare down another loan - commitments which would be ongoing.
On top of this, the business had seen the drip, drip, drip effect of year-on-year falling sales volumes and erosion of margins. Nothing dramatic, indeed almost fractional. But these changes (together with onerous rent commitments) cumulatively take their toll, particularly when looking at the options to pull the business round.
The anxieties of the owner proved (in this case) to be well founded.
Even the website was now showing itself to be poorly designed, requiring disproportionate time to service orders and needing considerable investment; money they did not now have.
After reviewing in detail the revised targets needed to make the business work, the decision was taken to close. A sad outcome but in this case one the directors can feel confident was the right decision based on a full grasp of the facts.
What does this case demonstrate?
Some might say this is a case of investing good money after bad by even carrying out such a review. But unless you undertake a quick exercise like this - it need take no more than 2-3 days - key decisions about the future of a business are made on no more than a whim (i.e.pure guesswork). As often as the required targets are out of reach, so they prove to be entirely achievable.
That said, I found myself wondering about what might have been. Was there a point over the last couple of years when there was the cash available to remedy the issues with the website? And at the same time it's easy to ask these sorts of questions with the benefit of hindsight.
But there are, of course, countless examples of situations where money has been 'sat on' or spent needlessly while essential investments (that would in themselves generate cash) have been overlooked.
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