Realist, not conformist analysis of the latest financial, business and political news

Ooops! Patisserie Valerie Looks To Have Been A Scam All Along

As soon as Patisserie Valerie got into trouble we around here started to mutter that perhaps there was more to it than seemed. Or even, less to the previous business than we’d all been told. The point being that once the scam – and it was a scam – is known then it’s very difficult to work out how big it is. For, once this particular form of cashflow scam is started there’s no real and obvious point at which it should stop. Until and unless it simply stops working that is, which is what happened.

Further, we can’t start from the accounts we’ve been presented to see what the real underlying situation is. Because it’s the accounts themselves which are the lies. Thus, as we intimated might be the case, there’s a distinct possibility that Patisserie Valerie never did in fact make a profit at all. Something further evidence is also pointing toward. Not proving, not yet, but pointing toward:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] Patisserie Valerie black hole more than doubles to £94m KPMG, the administrators for scandal-hit cafe chain Patisserie Valerie, has revealed that its forensic accountants found a £94m black hole, more than double the previous £40m estimate. In its latest report the accountancy firm said Patisserie Valerie which collapsed into administration in January, falsely claimed to have £54m in cash and that its assets were valued £23m higher than they were. [/perfectpullquote]

Understand what the basic fraud here was. Profits are declared after we take all the costs off all the revenues. So, if we stick some of the costs – the invoices for them – down the back of the sofa and not pay them then we’ll overstate profits. This is what is alleged was being done. The problem with not paying the bills is that suppliers stop supplying you.

So, we can go to a milder form of this, which is to shove bills for this period off into being paid in the next period. That means we are declaring a profit now at the cost of having to meet those bills in the future. If we’re always making a loss then that total amount we’re carrying on the cashflow increases and increases. We can partially get around this by expanding the business. We’re making a loss on every transaction but making it up with volume. Or, to be less flippant, expansion, even at an ever greater loss, gives us a bigger cashflow to carry that loss.

This will eventually stop to work too. That ever greater accumulated loss we’re trying to carry cannot any longer be disguised by disgruntled creditors being paid 180 days late and so they start to foreclose. As indeed happened, some shops were being reclaimed by landlords over unpaid rents.

We can again delay this by lying to the banks. We have one set of bank accounts over here with lots of cash in them. This is that accumulated bit we’re pinching out of the cashflow and declaring as profits even while we’re losing money. Then we have the other set of bank accounts over here which show whacking great overdrafts and loans. We don’t tell anyone about those of course.

But again this eventually fails because we still end up, because we’re still making a loss, with creditors still insisting to be paid even though we’re making a loss and thus don’t have the cash to pay them. Even after shifting costs, ravaging the cashflow and raping the banks. And thus, eventually, we go bust.

Which is roughly what did happen. Who did it, well, there’s one being closely questioned by Plod. Others stuck cash in when the problem was first noted and we’d not expect anyone who did that to be aware of that underlying fraud going on.

However, what this does all mean is, well, when, if ever, was Patisserie Valerie making a profit? As we’ve said:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Luke Johnson’s Patisserie Valerie isn’t having an easy time of it. They thought they were sitting on a cash pile of near £30 million and they weren’t, they really weren’t. They weren’t paying their bills – landlords were trying to take back shops – and HMRC was trying to wind the company up. Not only that there were overdrafts management didn’t know about meaning that rather than £30 big up they were – before those various creditors – £10 million down.[/perfectpullquote]

We now seem to be rather more down.

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] Patisserie Valerie announced that there was an oopsie in its accounts back in the autumn, an oopsie which led to the shares being suspended, an emergency capital raising and a hope that all would be well once the matter was properly investigated. That turns out not to have been quite the operative situation. They’ve come back now and said that matters were worse than they thought. We are not privy to any special or new information here but we can indeed still form a view. It’s entirely possible that the chain just never was making a profit. Isn’t now either. And if that’s true then there’s no value to it either. Our suspicion is that this is the real situation too. [/perfectpullquote]

And the loss is much worse than we all thought those few weeks back.

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]Patisserie Valerie has just gone bust as it was long possible it would do. The particular reason is that the banks wouldn’t extend facilities, that is, they’d rather like their money back instead of waiting to see how things turned out. Standing behind that is that little problem with someone, somewhere, fiddling the books. For years. Instead of having cash in the bank it had secret overdrafts and mountains, veritable Himalayan ranges, of unpaid invoices.[/perfectpullquote]

All of which raised the interesting question we’ve mentioned before. Did Patisserie Valerie ever in fact make a profit?

We’re getting ever closer to the evidence that it didn’t. Not sure yet, certainly not, but it’s something to properly consider.

Effectively, Patisserie Valerie was kiting the accounts payable, those invoices from suppliers, and when that got too tough it was fiddling loans from the banks. It’s possible that the amount and extent of this was greater than all their reported profits over time, meaning that they never did make a profit at all.

Reported profits peaked at £11 million last year, it’s been running as a proper chain for about a decade, there’s a getting on for £100 million hole. Back of the envelope does indeed say that there’s a good possibility no profit ever was made.

Still, even with this uncertainty there is one thing we can predict. The end of Luke Johnson’s career as a newspaper pundit on how to run a business. Yes, we do indeed think he’s innocent of any fraud or dodginess and that it was another level of the company entirely doing this. But still. For him to carry on would be as ridiculous as, say, a tax campaigner and retired accountant recommending the use of a closed company, using one himself, yet being paid to denounce the use of close companies as tax abuse. And that would just never happen, would it?

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Matt Ryan
Matt Ryan
5 years ago

LOL – like the reference to the Professor of Practice.

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