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Patisserie Valerie – A Warning Sign in Its Financial Statements

October 12, 2023

In September, the UK’s Serious Fraud Office charged four individuals connected to the financial collapse of Patisserie Valerie in October 2018. The charges include conspiring to inflate cash in the balance sheets of the financial statements from 2015 to 2018 and providing false documentation to the company’s auditors.

Could the alarm bells have been sounded prior to the 2018 collapse? Every case is different, but there are often indicators of potential trouble lurking in financial statements. Here we focus on one of several red flags in the Patisserie Valerie case – and in our view, one of the most glaring – trade receivables.  

Define expectations

When reviewing a set of financial statements, it is crucial to first step back and understand the business. Patisserie Valerie is primarily a retail business: a hybrid coffee shop and casual dining business selling premium cakes, pastries, and light meals to the public. It is reasonable to assume that most sales will be to customers who pay in cash or by credit card before leaving the shop. Relatively few sales to trade buyers are provided on credit with payment occurring at a later date (i.e. trade receivables).

Consequently, if Patisserie Valerie was indeed a healthy business, one might expect the financial statements to show a cash surplus and relatively low levels of trade receivables.

Benchmark in reality

For a meaningful analysis of a company’s performance, it typically needs to be compared against competitors. Looking at the five-year period prior to 2018, Patisserie Valerie’s trade receivables consistently represented a significantly higher proportion of revenue than its peers. On average, trade receivables represented 11% of Patisserie Valerie’s revenue, which was nearly double the level at Caffe Nero and Costa Coffee (6% for both) and nearly four times the level at Greggs (3%).

Our review of the financial statements provides no obvious reason for such difference. As such, this should have been a red flag worthy of further investigation.

A subsequent FRC investigation reported that, in 2015-17, approximately half of Patisserie Valerie’s total annual sales came from a single customer order immediately prior to the financial year end and the related invoices contained multiple inconsistencies and errors. These ‘sales’ increased the company’s reported revenue and assets, giving a better impression of the company’s financial health. These ‘sales’ would also explain why Patisserie Valerie reported relatively high receivables in the financial statements each year.

Source: Patisserie Valerie financial statements

Lessons to be learnt

When expectations and reality are significantly misaligned as in this case, this should be a red flag to finance and legal teams. Red flags alone are not necessarily conclusive proof of a problem, but investigating red flags can lead to important findings that may safeguard a business from even bigger problems in future.

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