Stocktakers in the Pub business

Stock audit specialists can be both helpful and dangerous.

While many publicans may baulk at the cost of a regular stocktaking exercise, it could
• 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,
• as a by product can 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 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 money.
When coming to a rent review or lease renewal it is certain that without supporting independent stocktaking records the landlord will accuse the tenant of overstating allowances, or under-declaring takings just to identify two elements. It is difficult, virtually impossible to prove otherwise without those stock records. It is so easy for a landlord to create a case for a higher rent of a several thousand pounds a year because there was no independent record. 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 but then again without stocktaking records it could be worse.
Let us get out of the way certain irresponsible claims than may have originated by training organisations as well as the stocking firms themselves relative to allowances.
1. 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 an 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 they may have received not more than 652 pints of beer extra over and above what they pay for. Now that is the absolute maximum possible extra it could be but it should never be relied upon because the supplier will not yield 1.36 pints in every container, sometimes none at all.
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 be served. Often however in achieving that pint there will be an overspill. What is unacceptable is for the stocktaker or the pub employer to assume that customers will be under-measured and that, on that basis, there should be no allowance in the stock computation for spillages and that includes breakages. That has overtones of fraud.
3. Keeping the dispense of beer in good order is not only essential for the customers but it is also a legal requirement. Pipe cleaning is thus essential and cleaning less than once a week is unacceptable and in some cases, particularly with real ales, there should be cleaning even more frequently. There are instances where pubs choose to close down certain lines for lunchtime use or specific days. Beer sitting in pipes for a quantity of time may need extra cleaning cycles. Any assumption that the beer loss arising from the cleaning process is a percentage of beer purchases would be deceitful. It is obvious to any sensible person that if it takes 18 days to sell a branded barrel of beer if there is one dispense point it will have been cleaned at least twice, hence probably 10 pints of beer plus spillage etc all of which add up to over the 8 pints casually used by valuers. Although he loss of beer applicable to each line and each clean should be recorded in the cellar book the absence of a cellar book cannot be the excuse for not making an appropriate allowance.
4. Another area of danger 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.
5. There are times when a pub may have promotions. 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 cost in retail terms cannot be sensibly measured.
6. Quite apart from promotions there will be times when the proprietor may supply gratuitous drinks to supplier’s reps or customers. A record of such unpaid for drinks as they occur is very desirable. It is definitely not sensible for a proprietor to try to remember what has been incurred at the end of a month or quarter, it is often difficult to remember just the following day.
7. Depending on the policy of the proprietor 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.

Where staff are employed there is always a question as to whether they are honest or not. Systems and controls are in place not only for the proprietors benefit but for the staff also. Where a manager is employed then the issues become even more important.

Stocktakers – incorrect instruction and staff dismissal.
So much for the benefits that can be derived from the stock reports obtained from reputable stocktaking companies. There is a downside. Either due to inexperience, or for reasons connected with the firm of Stocktakers it is possible that their reports could lead to a result that suggests there could be a stock/cash shortage but in reality there is not. The risks associated with this are not always apparent.
Staff may be dismissed on the basis of a stock result that has been incorrectly formulated, allowances missed, policies ignored, incorrect assumptions made. Who would carry the can? The employer, and in the case of managed houses, the manager and the company that owns and operates them.

Deception- stocktaker or publican.

What has become clear in recent months is that some stocktakers carry out their inspection and calculations without prior agreed terms of reference relating to the keeping of records of cash, stock and allowances. A stocktaker who prepares a full stock audit report without identifying the full allowances mentioned above, because of assumptions they make such as staff short-measuring customers, or the contents of supplies containing more than specified , covering allowances is effectively producing a falsified, if not fraudulent, report. And a proprietor or owner that instructs a stocktaker to ignore any of the types of allowances mentioned above would be guilty of complicity. It does happen and people could be losing their employment as a result. Lawyers acting for employees dismissed for so called “cash/stock shortages” will be well advised to seek independent checks by an accountant and stocktakers together with errant managers and/or proprietors should be proscecuted.

Rent review, lease renewal

The calculation of the rent for a pub is based upon a “shadow” profit and loss account for the premises based upon the beliefs of a Valuer or the freeholder, the result is then often compared with other pubs and if lower then the profit assessment is often amended upward. One of the common practices is for a Valuer to state that a barrel of beer consisting of 36 gallons or 288 pints will retail only 280 pints and that this represents an allowance of 2.8%, adequate to cover all the allowances as already mentioned above .
To extrapolate further an example of the probable impact of using an allowance of just 8 pints a barrel is the following. You can see the impact on rent can be dramatic.

An example of a pub
Pipe cleaning, 9 beer types used in this 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

Now a pubco or Valuer would take the view that the total allowances would be 160 barrels, 8 pints a barrel at £2.62 less vat = £2,854. Because of the difference of some £10,334 the tenant may be forced to pay a rent that is higher by 50% of that amount and still have the cost of those losses. The effect in this case would be 50% of £10,334, say £10,000 would be an extra £5,000 a year rent and would also have to suffer the extra cost that had been excluded bringing the total cost to the tenant of £15,000 a year. That cost would be borne by the tenant for the next five year to the next review. Sound stocktaker reports and the evidence of that stocktaker in court would secure the tenants position.

The double edge sword, friend or foe.

There are two issues here. The first is that it is clear that the annual cost of a stocktake pales into insignificance when the cost of the higher rent is considered; and the second is the failings of the pubco/valuer to understand the issues. It is invariably to the benefit of the valuer to achieve the higher rent since their fees are frequently based on the rent achieved.

Perhaps the bigger worry is when the Valuer and the stocktaker are owned by the same firm. The dangers are clear for a tenant, it is possible that there is subversion by the stocktaker and collusion by the Valuer, or is it the other way around?

The use of an independent stocktaker can save a tenant money and their livelihood provided that the issues are clearly discussed and proper instructions given; even then there is this double standard that exists and when a valuer has been appointed by a pubco to assess rent and act on behalf of the pubco it is always wise to check that their employer is not also the same as your stocktaker.

In a recent case Christies were acting for the pubco claiming that an allowance of 2.8% of beer was adequate as an allowance. Christies own the largest firm of stocktakers in the UK namely Venners, who undertake stock audits.

To illustrate the need for careful review of policies and standards are necessary examination of the detail as can be found on the Venners web site allows questions to be posed based on the illustration and limited information. Clearly this is only an illustration and every location may have varied issues to be considered.

• Ullage from cask beers has been cast at 1.25 pints per container of an average of 11 gallons which I would have thought is questionable considering the sediment that real ales may produce.
• For pipe cleaning works out at 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 claim by the manager that it was nearer 5 pints per clean per font per week; far more likely.
• Spillages, there was no allowance and yet it would seem that four thousand pints were poured without a single drop lost, remarkable. Even if the beer is metered that is still questionable
• Breakages, none not a bottle of wine or beer, they must be very careful.
• Hospitality, which would I presume include staff drinks, averaged £6 a day, or about two and a quarter pints a day, that could be reasonable.
• A stock loss for the 41 days is reported at £294 while for the the 203 days it amounted to 4 stock shortages totalling £4,163 an average of £20 a day.

So there are some very questionable issues arising from that web page illustration. Based on 4 stock shortages for the manager that could lead to an employment warning however the evidence available would suggest that the stocktakers have undercast the allowance for ullage, pipe cleaning and spillage which collectively could more than wipe out that shortage. Here is a classic example of where there is substantial scope to disbelieve the stock result. What could happen if that employee was subsequently proven to be wrongly sacked? A claim against the stocktaker?

Although I have sung the praises of stock audits regrettably the detail in their web page does not appear to be a very good advertisement for them. Ultimately the responsibility for agreeing the basis of stock allowances rest between owner/operator and stocktaker. Get it wrong and there could be consequences for staff or managers. But then with no independent stocktaker there could be even greater consequences.

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