Understanding restaurant CVAs and closures

As recently reported by Catering Today, the number of restaurant insolvencies has risen by 25% in the past 12 months. This news came within weeks of 23-site restaurant chain Abokado announcing it was entering into a Company Voluntary Arrangement (CVA) and follows a general trend of high-profile closures throughout the world of catering and hospitality. Sadly, it’s all too easy to recall what happened to Jamie Oliver’s restaurants as well as Strada and Prezzo closures.

Such news is often met with doom and gloom and a general sense of dread for the sector. Although this is not surprising, it’s time for restauranteurs and catering companies to look beyond the headlines. With the right analytics, businesses can use CVAs to help protect their companies and grow them by optimising sales and marketing.

To achieve this, the analytics must scratch well below the surface. Much will be made of the reasons for closures and CVAs. Poor management, irrelevant menus, slowing sales and escalating operating costs are often reoccurring themes of insolvencies and struggling restaurants. However, a CVA can reveal much more insight than what many experienced catering professionals will already immediately suspect when considering closures.

Analytics should start by focusing on creditors affected by the CVA and where they rank in terms of having their debts paid. All too often, trade creditors like ingredients, food and drinks suppliers will fall to the end of the queue when administrators start considering repaying money owed by the insolvent business. If they do receive money, the trade creditors are likely to recover less than 10% of what they’re owed. It’s because of this that unsecured trade creditors to a company which has gone out of business can be up to three times more likely to face closure themselves.

It is also worth considering that HMRC has gained what’s known as preferential status. This means they jump to the front of the repayment queue, with unpaid taxes and duties given top priority. Taking this into account, we believe around 80% of insolvencies will see no money paid to anyone beyond the Government. Being aware of which trade creditors are impacted by a CVA can help protect restaurants and other catering companies.

Decisions can be made about broadening supplier agreements to reduce potential supply chain disruption down-the-line and safeguard the availability of key menu items. It can also help protect a restaurant against inflated supply chain costs as struggling businesses attempt different quick-fixes to making money.

Further data analytics will also reveal the wider financial obligations of trade creditors, identifying other businesses at risk from credit lines going unpaid as the CVA has a domino effect. Using this knowledge, restaurants can pinpoint any risks to the businesses they deal with to minimise the threats to their own entities.

Restaurants and catering companies should also take a close look at debtors when analysing a CVA. Corporate bookings and events can prove key credit lines for many restaurants and caterers, with payment terms of between 30 to 90 days commonplace.

Understanding who the debtors are and their own financial position can help to inform sales and marketing efforts and the setting of credit terms. For example, it’s possible to run a financial health rating for a business, which essentially validates whether or not a restaurant would want to pitch their premises and services for a corporate contract. If the financial health rating is low, the restaurant can choose to either avoid targeting the company or tailor its price and promotion accordingly. This helps maximise the potential returns and conversions from sales and marketing.

Similarly, the financial health check can help restaurants to avoid bad debt. They can use the information to set credit terms that suitably manage risk. This could involve requesting part-payment up-front or staging payments throughout the provision of services, rather than waiting 30 or even 90 days for a debt to be settled.

While reporting of CVAs should act as a trigger for data analysis and business intelligence, restauranteurs and caterers would be better placed to take an ongoing view of the financial stability of the businesses they deal with. Whether it’s their suppliers or corporate trade, it’s possible to build financial avatars for the companies they rely on. These avatars can update in real-time and constantly pinpoint how secure their lines of supply and credit really are. This can prove pivotal to cashflow and survival in an increasingly competitive market.

By Mark Halstead, partner at business and risk intelligence specialists, Red Flag Alert

Back to top button