Kerching! Why Retail Tenants Should Follow the Money - and the Ghost Transactions...

Kerching! Follow the Money: Unveiling Hidden Retail Profits

Join Gary Marshall, the host of That Retail Property Guy, as he explores the critical overlap between estate management and accounts payable from a retailer tenant’s perspective. 
In this episode, Gary highlights the often-overlooked opportunities to recover lost profits through diligent financial oversight. By sharing personal anecdotes and pearls of wisdom, Gary underscores the importance of 'following the money' and the remarkable insights and rewards this practice can yield.From discovering errors in business rates allocations to unearthing missed capital contributions, Gary demonstrates the substantial financial benefits of meticulous financial reconciliation and cross-departmental collaboration. Through this episode, he aims to inspire retailers into re-evaluating their property cost management routines to ensure hidden funds contribute to the bottom line.

00:00 Introduction to That Retail Property Guy

00:35 Understanding Retail Property Costs

01:39 The Overlap Between Property Management and Accounts Payable

02:08 Case Study: Following the Money

08:18 The Ghost Transaction

15:30 Lessons Learned and Final Thoughts

17:01 Closing Remarks and Call to Action

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Transcript

0:00

Welcome to That Retail Property Guy with your host Gary Marshall. In each podcast episode, we delve into topics relating to the particular overlap between estate management and accounts payable from the perspective of a retailer as tenant. Sharing stories and insights through Gary's unique lens, we hope you'll be entertained, enlightened, and maybe a little inspired. Welcome to That Retail Property Guy. I'm your host Gary Marshall. I'm here to share information and insight on behalf of the retail tenant. Let's start with this key point. Property is often the second largest budget in a retailer's outgoings after its people costs. Retailers who have a bricks and mortar presence or a clicks and mortar presence generally have a property portfolio with leases and occupational contracts obliging regular payments for rent service charge you Insurance and so on. Managing those lease based obligations is a complex task involving skill sets in landlord and tenant legislation, valuation, negotiation, but also detailed verification of invoices, organization of payments, tracking of liabilities and assets. I've supported retailers teams in all these areas, offering guidance and experience. Anecdotes, pearls of wisdom, and sometimes blunt Northern criticism and even exasperated use of multiple exclamation marks in PowerPoint slides. Most of the time, proper prior planning prevents poor property portfolio performance. Sometimes, however, a bit of glue is required, an extra layer of attention, another coat of investigation. And where is that glue? It's in the overlap between property management and property accounts payable. It's the supposed sweet spot where the skill sets combine into a whole which is greater than the sum of its parts. This hand holding, mutual support, combined effort should ensure that property costs are minimised, or at least optimised, and that wastage or loss is reduced, so every widget that the retailer sells, is minimised. Contributes profit to the bottom line, not operating cost per property. So let me explain. It's fair to say that a retailer in ascendance, riding that profit parabola upwards, enjoying year on year growth and new acquisitions and unimaginable demands on property expertise, might just miss a few details here and there, but at some point, as that rollercoaster slows, finds its balance and allows pause for reflection, There will come a moment to check down the back of the sofa for those overlooked pennies and pounds, sometimes lots of pounds. Even a seasoned retailer, well established with practiced property administration, might also check down the back of the sofa just in case they've overlooked anything. I've posed this question to numerous retailers over the years, either to the estates team or to the accounts team, and usually I've been met with a reassuring nod. Although sometimes a protective shields up that everything is humming nicely. There's nothing to see. There are no weaknesses. It's an obvious human nature response. I suppose, especially when those managers are embedded in the end to end process, but I've scratched beneath the surface. And even the best run well oiled functions can reveal hidden rewards. In truth, I've helped retailers recoup millions. Yes, Millions of pounds that should be profit in their pocket, but sadly was hidden in the landlord's or agent's coffers or ring fenced in long forgotten provisions. And don't forget, that's millions that go on the bottom line, all by using the common mantra of follow the money. It's often surprising where this trail of following the money takes us. It's also surprising what obstacles and disconnections it reveals, sometimes leading to a change in working practice. I once supported a finance controller who had a quite surprising outlook on life. They told me they wouldn't get out of bed for less than five grand. Well, I suppose in context, it makes some sense. They were controlling a property portfolio budget measured in millions where the pivot tables and Excel calculations were measured to one or two decimal places. So five grand. Wouldn't even register on a total. However, it would register on a single line, which could be the cost or profit center of a single store, and it could impact strategic decisions for the future of that store. So my mantra following the money led me to question every stores, every cost line, each least based charge. Each process that contributes or should contribute to the viability of a branch as a proportion of the overall retail business. Not all results come quickly, some take a degree of digging and I suppose that's where the finance controller drew their line of what was worth chasing or what wasn't. But I delved deeper than the five grand plimsoll line. I explored numerous discrepancies and unexplained variances that were each individually below the radar for the finance controller's attention, but pretty quickly added up to 180 odd grand. And maybe you think that even that isn't enough to warrant getting out of bed for, but the impact was far deeper reaching. In simple analytical terms, at face value, a single branch was presenting as unprofitable, owing to a massive variance between expected business rates and actual business rates, or at least actual business rates according to the finance accounting system. This red flag was impacting on many decisions. It was critical to understand what was really going on. So by pouring over a few Excel sheets of unexpected variances and unresolved open items, all of which is data easily extracted from the finance records, I noticed a common theme. Not exactly a pattern, but something common enough and simple enough to be worth pursuing. Basically, I noticed that a lot of entries at less than five grand spread across the business rates lines for multiple stores. Suggested that many stores had already underpaid their expected business rates for the year. The finance controller was focusing on a big overpayment for one store and was overlooking these smaller items and especially these underpayments when in fact they were two sides of the same coin. I noticed that the total of all the underpaid amounts was kind of similar to the single overpaid amount. And I noticed that the overpaid store had the lowest branch number in the series in the list. So in any Excel list sorted by branch order. That overpaid store was always the first line. And by delving a little deeper into the process for inputting these raise payments, the root cause became clear. A few months earlier, a table of many modest business rates items, one item per store had been posted incorrectly into the accounts. Now these weren't actual payments. These were the internal journals allocating a single large payment, which had gone to a supplier. The total of the table had been posted incorrectly. Entirely against the first store on the list. So in the business accounts used by the analysts to check profitability and to inform many of the decisions, a previously profitable store suddenly went dark. I pointed this out and the finance controller was able to make a very quick and very simple correction to properly redistribute that table of charges to the right locations. The challenge was averted. The non profitable store was suddenly profitable again. Of course, it had always been profitable. It was just the internal numbers that were obscuring a truth. And many of those numbers were less than five grand. So this endorses my mantra, follow the money. But to be honest, follow the money isn't an original idea. Auditors often follow a similar trail. Commonly starting with the bigger numbers and the frequent occurrences, And then maybe picking an outlier that stands out from a recognisable pattern. But, with no disrespect intended to auditors, they are often not subject matter experts in the landlord and tenant lease contract rent invoices world. So a bit of extra glue, an extra layer of attention, another coat of investigation, can offer some remarkable insight and chance of rewards. My eyes were truly open to this many, many years ago in what I'm referring to as the ghost transaction. I was supporting a client on a task relating to estate management databases, which required me to cast my eye over numerous records of leases, rents, landlords, not all the most glamorous stuff, but worthy of attention. Databases should be right. Now I'm curious by nature and a tad sceptical one particular lease summary. Now this wasn't the actual legal lease document, but a summary report provided by the lawyers when that lease was acquired a few years earlier, gave me details of the main terms. This included the start date, the expiry date, the annual rent and, remember I told you this was a long time ago, detailed a capital contribution from the landlord. It wasn't a huge amount, it was a gesture of sorts, somewhere between an enticement to take the lease and a recognition of the costs involved in setting up shop. It was an interesting six figure sum, definitely more than five grand. And remember I'm curious, so I followed the money. I looked for evidence of how that contribution had been allocated. Was it amortized as a rent equivalent or offset against the capex for the shopfit? This could make a difference in the database record. So just across the landing from the estates team was the accounts team who processed this stuff. I toddled over to ask a question. Can you show me how this was coded? Interestingly, they gave me a different answer based on a different sum. I could see they'd allocated that sum as rent equivalent, so, so far so good. But it wasn't the sum referred to in the lawyer's lease summary. So where did their number come from? The accounts guy was a squirrel who saved a copy of everything. It took him a few moments, but he was able to tie that number to a board minute from years earlier when the acquisition had been approved in principle. I say in principle because it isn't unusual for deals to evolve or morph as they approach completion. But if the board approved number was different from the number in the lawyer's report, why hadn't the actual allocation of the receipted funds? Picked up that difference, straightened it out, set up the correct amortization. I thanked the accounts guy and headed back to the estates records. And I hope you're on the edge of your seat right now, as the plot twist is revealed. I couldn't find any paperwork explaining why or when the board approved contribution had evolved into what the lawyers had summarized. Or any reason why the accounts guys hadn't corrected the amortization when the actual sum came in. There had to be a reason that nobody had picked up on this. The lawyer who had done that deal had moved on. The acquisition surveyor who had done the deal had moved on. So who could I ask? It would have been so easy just to let it go. But I decided to make one more call. I reached out to the landlord's lawyer. Could they kindly provide the missing correspondence, something evidential, just so I could be sure that the estate's database reflected the true position? The landlord's legal representative was extremely helpful. They told me they'd be delighted to assist, but they couldn't see anything in their file about the payment. Perhaps their client had paid it directly? So one more call. I reached out to the landlords themselves. Could they confirm when they paid it? And how much, and why not the board approved sum? So here we are. You're ahead of me. Here comes the punchline. They replied that they were still waiting on the invoice from the tenant. Four years had passed and they hadn't raised a flag about it. But why would they? Right? The money was still sitting in their account. Ka ching! And boom! At the same time. I couldn't understand why my client's accounts guy had apparently booked a receipt that had never come in. It was showing in the accounts like it had come in. Nobody was missing it, let alone chasing it. This ghost transaction was masking a truth. I took the obvious steps. I liaised with the client's estates and accounts teams. We organised a long outstanding invoice. I chased the funds till they arrived. We liaised again to ensure that they were booked correctly. This required a financial adjustment. And a fair amount of egg on face for the accounts individual concerned. But, all in all, it was a successful outcome. A hundred grand up. All more or less by chance. The turn of events had revealed something, a disconnection of thought and responsibility. The accounts guy had placed a degree of reliance on a board minute. Without questioning the actuality. The acquisition surveyor had negotiated a great deal, but hadn't thought to close the circle by instructing the finance team to raise the invoice. The lawyers had summarized what they believed to be true, but hadn't connected the dots. The absence of connected thought had left the business exposed to flawed accounts and missing funds. So maybe everyone involved, including the lawyer, thought the other guy had taken care of it, but nobody had actually checked. Nobody added that bit of glue. And wait, did I mention that I'm curious and a tad sceptical? I considered that maybe this wasn't an isolated incident. If it could happen once, it Could it happen twice? It was relatively easy to pick out another acquisition from that same time period. It bore the same hallmarks, the same acquisition sphere, the same board approval process, the same lawyers, the same expectation of a capital contribution, and sure enough, the same disconnection of thought and responsibility, leading to no invoice and no actual funds coming in. So again, I took the obvious steps, and again I quickly established that the landlord was waiting for an invoice that had never arrived, was still sitting on the funds. But they willingly paid up as soon as I sent the invoice. Another six figure sum, thanks very much, ka ching! So I thought, if one overlooked contribution is careless, and two are reprehensible, Were the hallmarks of the first two somehow indicative of a pattern? In next to no time, I was able to identify over a dozen of these. The absence of glue between the estates and accounts team had led to confusion and lost funds. It was a failing of connective management, where separate teams do what they do very well, but they don't see the baton coming. pass on to the next team. They don't manage the overlap. They don't envisage the consequences. They either don't know what happens next or simply assume that someone else is taking care of it. That initial one off six figure sum became a series of amounts totalling a seven figure sum. It was a tidy reward for adding some glue, don't you think? I was able to recoup all but one contribution from those prior acquisition years. The one that got away was a small independent landlord who had waited a few years, but seeing that nobody had invoiced, figured that maybe nobody ever would. So took a strategic decision to spend the money and finally declare bankruptcy. To be fair, it was the smallest amount in the list. It wasn't a game changer, but it was still frustrating And it fixed in my mind an absolute rule. that time is of the essence. The more time passes, the greater the risk that a balanced you might never be recovered. So in this example, we achieved an overall satisfactory outcome. These overlooked funds were retrieved and were pure lost profits going straight to the bottom line. Naturally, the client put in place a process that was more robust, so the same thing couldn't happen again, could it? But that's not the end of the follow the money story. There are so many anecdotes and examples of misplaced, lost, and overlooked funds, all waiting to be picked up if someone would just follow the money. In other episodes, we discuss the necessity and the benefit of carrying out regular reconciliations on landlords or their managing agents ledgers. Create that then overlap between the two teams of estates and accounts payable, which makes the whole greater than the sum of its parts. My personal experience shows me that it's a false economy to reduce the expertise. Even based on cost for that resource, that there's a true measurable benefit in building a rapport, a relationship between the two teams in managing the Venn overlap that can yield immediate rewards and long term savings. So I hope these anecdotes might have inspired you rather than an alarmed you to scratch the surface, to look at the overlap area, to sense check what might be improved. In other episodes, we discussed this in more detail. Look out for those episodes, But meanwhile, I hope you found this interesting and entertaining. Join me again soon. Thank you for listening to That Retail Property Guy. Don't forget to explore more episodes and if you have ideas for future topics, feel free to share them below. If you enjoyed the show, please consider leaving a review. Your feedback is greatly appreciated. Be sure to like, share, and subscribe so you can never miss an episode. For more information, visit ThatRetailPropertyGuy. com. Thanks again for tuning in!