What Every Restaurant Operator Should Know About Managing Cash Flow
For many restaurant owners one of the most perplexing and frustrating aspects of running their business is getting a handle on the ebbs and flows of their cash flow. All too often cash balances can be more than sufficient one week only to turn into a shortfall and potential overdraft situation the next.
Cash shortages can be a real distraction from productive activities. A cash deficit can be disruptive to operations if lack of payment threatens key deliveries and services. And never underestimate the damage to your reputation and credibility when your lenders and suppliers don't get paid in a timely and consistent manner.
While managing cash flow can be a constant challenge in unprofitable restaurants, it can also become an issue in profitable restaurants as well.
How do you go about keeping up with what your cash situation so you can smooth out those cash flow peaks and valleys? First let's look at the dynamics of cash and how cash flow differs from income and expenses on your P&L.
Cash Flow is Different Than Net Income
Let's start with the P&L which is very easy to understand. The dynamic of income is one of "magnitude." You want more income and less expenses to maximize the amount of Net Income you earn.
For example, in the image below you can see that based on a simple projection of cash coming in and going out it this business is looking at a cash shortfall of around $10,000 at the end of Month 2.
The quickest and usually easiest way to fix the problem is to start exploring ways that cash could be received quicker, in Month 2 rather than Month 3 or delay some payments scheduled for Month 2 until Month 3.
If you approached a few of your vendors ahead of time (very important to give some advance notice) and explain you've got a short term cash crunch and need some more time to pay, many, if not most vendors are happy to cut you some slack with some extra time.
While working with many restaurants over the years, some with horrendous cash challenges, I've found the best thing any operator can do first is to set up a simple worksheet that estimates weekly cash receipts and cash payments.
Most restaurants' cash flow can fluctuate dramatically from week to week primarily because of the timing of payments like payroll, sales taxes, and rent.
The reason to take some time to set up a weekly cash projection is to see what's coming so you have some time to do something about anticipated shortages. The only thing worse than having a cash shortage is having a cash shortage that was a total surprise.
How to Prepare a Weekly Cash Projection
You start the process by estimating your cash receipts from all sources by week.
CASH INFLOWS (RECEIPTS)
Cash & Credit Card Receipts -
Plus: Sales Tax
Less: Paid Outs
House Account Collections
Then estimate your cash payments by week.
CASH OUTFLOWS (PAYMENTS)
Beer, Liquor & Wine
Other Supplies & Services
Occupancy Costs -
Note Payments (P&I)
Use your actual cash on hand or a good estimate as a starting point . . . The thing to remember starting out is that this is a PROJECTION. It's never going to be 100% accurate, but you'll quickly find that doing this a whole lot better than doing nothing and essentially being in the dark.
Do this for several weeks or months out into the future and I think you'll quickly see what a helpful tool it will be and how much you'll learn about the cash ebbs and flows of your business.
RestaurantOwner.com members can download the following Cash Flow Projection template set up as an Excel spreadsheet and begin the process immediately.