Earlier this spring, the University of Windsor Students’ Alliance (www.uwsa.ca) announced that they were closing the student-owned-and-operated pub (The Thirsty Scholar) due to financial reasons. This announcement surprised me; why can’t a business successfully sell beer to an audience traditionally associated with beer and pubs? I suppose there are a myriad of potential reasons—students don’t like beer, the pub is paying outrageous rent to its landlord, or general mismanagement for starters. I decided to dig through the pub’s financial statements (they should be publicly available, as records for most student organizations are). You should check their financials web page… you may have better luck than I did (www.uwsa.ca/financials.php). I couldn’t find a working link to any financial statements for the pub that were more recent than April 30, 2009. Note to the UWSA executive: I suggest you hire a computer science student to fix up your website.
What’s the point of looking at these financials? What can they really tell us? Financial statements should be one source for examining an entity’s history. With a little interpretation, we can usually learn quite a lot. Financial statement sleuthing may not be as popular as CSI-style forensics, but really is not that much different. Let’s take a look at the statements that were available. Note to reader: you will want to open a set of the financial statements and follow along with me.
The second page of the 2009 financial statements is the “Review Engagement Report.” A review engagement is one type of assurance on the financial statements. It’s not nearly as good as an audit engagement, but provides some level of comfort that the financial statements are not grossly misstated. The third page is the index—not useful.
The fourth page is the “Statement of Income” for the year with comparatives for the prior year. We find out that the pub had just over $450,000 of revenue, compared to $511,000 the year before, with beer sales declining from $172,000 to $123,000 (a 28% decline!). Gross profit increased though, which is usually good news. Gross profit is the amount left over after paying for the direct costs of beer, food, and liquor. For 2009, gross profit was $201,702. In order for the pub to be profitable, all the rest of the expenses needed to be less than that. Unfortunately this wasn’t the case. Actual expenses were $261,854, resulting in an operating loss for 2009 of $60,152. That’s a slight improvement from the prior year when the pub had an operating loss of over $95,000. What was by far the biggest expense? Wages. In fact, the wage expense exceeded the gross profit in both 2009 and 2008. That means the pub had no chance of being profitable even before it paid for any advertising, insurance, policing and security, or repairs on the facility. I hunted around for some industry statistics on drinking establishments and food services and I found the following data (www.restaurantcentral.ca/ResearchTrends/IndustryStatistics.aspx): average cost of goods sold was 36% of revenue, and average labour cost was 33.9% of revenue. The Thirsty Scholar’s numbers for 2009 were: Cost of goods sold, 56% of revenue; and labour, 48% of revenue. That both of those figures were so grossly out-of-line with industry norms suggests management incompetence. I’ve seen similar issues with student-run businesses before. Don’t get me wrong, I love student-run and student-owned businesses, but they must be run by people with appropriate training and it is important that the student associations ensure the managers are properly trained. Ok, enough on the income statement, let’s move on.
The fifth page is the “Statement of Retained Earnings,” which accumulates all the profit or loss retained by the business. Again, it isn’t good news for the Thirsty Scholar. By April 2009, they had accumulated total losses of almost $1 million. The losses that we saw on the income statement for 2009 and 2008 were not a short-term issue—the pub must have been accumulating losses for quite a while.
The sixth page, the balance sheet, is the last that I will examine for this post. Remember the key accounting equation: Assets = Liabilities + Equity. The Thirsty Scholar had total assets of $29,764 (mostly cash and accounts receivable). Their liabilities? $885,359! That’s incredible! They owed almost 30 times what they had in assets. I’ve rarely seen such a poor Asset:Liability ratio, and without digging too much further it seems pretty obvious that this business is broke both financially and structurally. Shut it down, pull the pin.
I hope you’ve enjoyed this somewhat macabre walk through the financial statements of a student pub. Next time you’re sitting in your local school pub enjoying a beverage, don’t forget the lessons we can learn from examining the financial statements of a business.