The guys at MNE Accounting told us that being in the red can actually be a good thing. But how can this possibly be!/
Natasha Harris, Operations Director at MNE said: “We often come across businesses who are so afraid of borrowing as it stunts their business’ growth. A bar owner client of ours was running a generally profitable group of four bars. We’d wrestled their accounts into shape and were reporting figures to the boss each month. And every month, Tim our MD, talked the client through his figures and considered expansion options, of which there were few great ones. Seasonal changes affected profitability at times, as to be expected, but generally, the four bars were profitable in more months than they were loss making – and the profits comfortably outweighed the losses.”
One month, MNE caught up with the client to discuss results and they’d told Tim about a popular bar they’d seen that was on the market but had to shut down because of the previous landlord’s financial troubles. As the bar had a loyal following, the now empty space was a brilliant opportunity for MNE’s client to snap up.
However, the client was coming out of a low season. “A quiet February and March had taken its toll on cash flow, so he had decided that this bar was one that got away. He’d worked out that he was £20k short on the deposit, stock and improvements to the bar – but he was a man of traditional beliefs – that borrowing is trading out of one’s depth,” Natasha explained.
After looking at the figures, Tim had pointed out that profitability on this bar would likely be complementary to his other four bars, given that it appealed to a very different clientele – meaning that seasonal fluctuations would be ironed out a little. Also, the bar’s financials seemed a no-brainer, given the high visitor numbers. A little work with a brilliant broker (and some long discussions with our client), the bar was financed by a £15k loan and the rest covered by a £10k overdraft. The bar, unsurprisingly to all involved, delivered just over a year of great results. Tim added: “Not only this, but the client’s bankers were happier. Managing an extended overdraft perfectly, alongside a more controllable cash flow, kept the bank manager from getting concerned during the spring – and in the bank manager’s words, has opened doors for future borrowing!”
This is why from the management accountants point of view, being in the red is sometimes an excellent position to be in! Yes, being overdrawn is a little unnerving for a first time borrower, but when the forecasting is done properly, MNE feel that leverage is a brilliant tool to be used by business owners at the helm of a business which has untapped opportunities.
“Many accountants would shudder at the thought of spending money before it’s been earned. In our view, business has to take opportunities sometimes – and with some careful planning, can very easily be done,” Tim commented.
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