Based on a recommendation from his banker, Wade Smith asked you to come in and do a preliminary assessment of some of his business processes at his restaurant, Counter Culture Café. Wade is asking for a loan from the bank in order to upgrade and remodel his downtown location and possibly open a second café across town.
Counter Culture is a bit off the beaten path but has a steady and dedicated clientele attracted to the healthy food selection, house-roasted coffees, and eclectic atmosphere. Even though the prices can be a bit steep, like $16 for an omelet, a lot of the clients are freelance writers and other artists, outdoor enthusiasts, students from the local private college, and a wide variety of offbeat characters. What you don’t see at Wade’s place on a normal afternoon are young families with kids and business people. What you do see are groups of two and sometimes three people conversing quietly, individuals working on laptops or reading a book, and people sitting at the counter enjoying a meal in the company of others. Wades serves breakfast all day, adding in a lunch/dinner menu at noon. Counter Culture is open from 7 a.m. to 11 p.m. every day. It’s fairly busy from about 10 a.m. to 1 p.m., and then there is a steady stream of customers for most of the day in the summer. In the winter, business slows down significantly.
Wade only accepts cash. No checks, no debit or credit cards. He does not keep a cash register. His staff makes change from their pockets and deposits their daily total in a lockbox at the end of the day. The shift manager then deposits that money in the bank.
“I know if the receipts are right because I’ve been doing this for 20 years,” Wade says. “I can tell how much we are making by counting the customers during the day. I know the average sale, and it’s simple math from there. Also, I trust my employees. Like my daddy told me, ‘Hire hard, manage easy.’” Even so, Wade rarely takes a full day off. When he’s not there, he puts one of the long-term employees in charge of counting customers.
The bank wants a set of financial statements before they make the loan. Wade has drafted a set of cash-basis financials and wants you to write a cover letter to the bank attesting to their veracity so that he can proceed with his loan application. On the side, Wade’s personal banker, Alan Funk, has asked you to make some recommendations to Wade about implementing better accounting practices and internal controls.
Questions for discussion:
- What recommendations would you make to Wade and how would you justify your ideas?
- What objections might you get from the owner, and how would you counter them?
- What would you need from Wade in order to attest to his financial statements, and what qualifications, if any, would you need in order to do that?
- What ethical issues can you identify, if any?