Article
Creating a Cash Flow Projection
If we could have seen the future, we might have been more prepared for the coming pandemic crisis. A simple 12-week cash flow projection spreadsheet is not a crystal ball, but it can help you plan for rather than react going forward.
Editor's note: Throughout the COVID-19 pandemic, Restaurant Owner.com has produced almost daily webinars on how to manage your way through this crisis. Recently, our team produced a webinar Surviving COVID-19: Cost Cutting & Cash Flow which we encourage you to listen to.
Businesses most often fail due to operating cash flow shortages than for any other reason. It's a simple matter. If cash is leaving the business faster than it is coming in, you can't cover your costs and overhead. In terms of cash-flow management, restaurants have one big advantage over businesses that extend credit to customers.
The restaurant business is a cash business. And even though most of our customers pay us with credit cards, we do not have to wait long for sales to show up in our accounts. So, during periods of steady business, restaurant cash flow management is essentially profit-and-loss statement (P&L) management. We drive sales and keep a watchful eye on expenses.
That said, many restaurants have a disadvantage in cash-flow management compared to other businesses. That is, our sales are often seasonal, while certain expenses, particularly rent, are ongoing. This problem is amplified in the pandemic, with restaurant sales cut off abruptly, leaving nearly every restaurant business gasping for air.
Few restaurant businesses, other than quick-service concepts set up for drive through service, are spared from this crisis. The large national chains are doing everything to obtain and conserve cash. And you have to do the same. It is unlikely your independent restaurant business -- unlike the large national chains -- has a revolving credit line or ready investors.
For most independent operators, if they are fortunate, CARES Act funds are a source of emergency cash as they adjust their business models to the so-called "new normal", including heavier reliance on delivery and takeout sales, and occupancy limitations during reopening, if they're able to reopen at all.
Please review the model cash flow spreadsheet (above). We will refer to it throughout this article. As you can see, it is a 12-week projection, and should be viewed as a moving target, meaning each week you will extend the horizon out another week. Because it is a projection, the bases for your assumptions are likely to change. As we will discuss, you should not consider this a crystal ball, but a well-reasoned and conservative guess what to expect for the coming 12 weeks.
You might note the spreadsheet is formatted like a typical restaurant profit-and-loss statement (P&L) with four critical categories of information:
- Beginning cash of every week
- Cash inflows and their sources
- Cash outflows and their sources
- Ending cash balance
The value of creating this spreadsheet is to help you project your cash inflows and outflows for the coming 12 weeks. It will help you decide where to cut costs and expenses and when you might need an additional infusion of cash -- perhaps a short-term loan -- to supplement sales.
Cash Inflows
Let's look at our cash inflows. You need to assess your cash balance every single day to make this process work. This is challenging since you need to determine what checks have cleared in your accounts. If you use QuickBooks or other accounting software package, if might be possible to get it linked to your bank account so that every transaction hitting your bank account is immediately reflected in your books.
IT IS LIKELY YOUR CREDITORS, LANDLORD, AND SUPPLIERS ARE NOT INSENSITIVE TO YOUR PLIGHT. THEY ARE LIKELY EXPERIENCING THEIR OWN FINANCIAL CHALLENGES IN THIS CRISIS.
Like most restaurant businesses, your credit card receipts may be 80-90% of cash flow. As noted, this is not typically a timing issue; however, if you have bank loans or lines of credit with the bank where your credit card deposits go, they may be able to sweep or divert the credit card receipts to pay down the loan balance. You might want to talk to your attorney or CPA about transferring your credit card deposits to another bank to regain control over these receipts.
Your first order of business is to project your sales volume. Start by looking at your previous three or four weeks. If you're increasing delivery or you've never done delivery before, are these sales growing? What's the trend? From there, you will need to make assumptions regarding your sales week by week going forward. You won't be 100% accurate. Again, you don't have a crystal ball. But if assumptions are conservative and based on past performance, your cash flow worksheet should provide you with a very reasonable and valuable estimate of your future cash picture.
As you will see in the spreadsheet, we separated out sales tax as a line item. That's not your money. The spreadsheet has a formula to calculate this amount as sales come in. You will also note a line item for loan proceeds, such as CARES Act relief. Other sources of cash can include owner or investor contributions. As noted, these line items can rep- resent critical sources of cash flow.
Cash Outflows
The categories here should be similar to what you see on your P&L. We've highlighted in red items that are absolutely critical, including food, beverages, and paper -- the things you need to serve customers. If you are not selling many alcoholic beverages now, these are not critical When we use the term "critical" costs, we are referring to items with which you need to run your business and can't defer payment. There might be other areas of cash outflow you can reduce, but these must be maintained. As much as you want cash flowing in the door quickly, these are items for which cash flows out the door quickly. As you likely understand, timing is a key component of cash flow management. It is simple math. You can't drain your cash more quickly than you receive it to stay in business.
Questions to be considered include what are you going to be spending weekly to pay for your food and paper supplies? When projecting cash flow, you are concerned with both the amount and timing of spending. In this business environment, your suppliers have their own cash flow issues, and you might be required to settle payment for product at the time of delivery.
Obviously you must have sufficient cash for payroll. In this model, we've separated net payroll and payroll taxes. You may want to talk to your payroll service if you use an outside payroll processor like with ADP or Paychex and ask them if you can get some relief with respect to the timing of payroll taxes. If you pay medical or health premiums, you've got to pay these benefits. You can't leave people hanging without their medical coverage. As for sales and liquor taxes, certain states are granting extra time to make those payments. In general, however, tax authorities are first in line for payment and are critical by nature.
Marketing may or may not be critical. Some operators treat it as such as they do everything to remain top of mind to guests who are no longer dining in. It is tempting to cut back on marketing during slow periods. This can be tricky, because it can be difficult to determine how it could affect your sales.
Utilities are critical expenses, of course. You need to keep the "lights on" and equipment working. Obviously, you got to keep the lights on. You got to keep the equip- ment working, so that needs to be in your cash flow budget. Other operating expenses are the myriad of other types of things like pest control and cleaning supplies, which are always critical, but never more than they are today. You need to remain well-stocked.
Occupancy cost has become non-critical to many restaurants. Try to negotiate rent abatement or at minimum, deferral of some portion of rent, with your landlord. The chains are doing it, and it can be a huge source of relief on your cash flow if you can work out such an arrangement with your landlord. You might also be able to gain some relief on the payment of property taxes, insurance premiums, and equipment lease payments.
If you are using credit cards for short-term financing, you need to make sure you are making minimum payments to keep this source of credit active and avoid legal action. Payment plans might have to be negotiated with suppliers to whom you owe money but cannot satisfy debt due to dramatic decrease in sales.
As you would understand, when we refer to deferring obligations, we are not suggesting creditors do not get paid. The advantage of a 12-week cash flow projection is to help you know when you can satisfy your obligations and in what amount. Given the economic crisis, creditors under- stand the predicament of their customers, and are often simply looking for assurance of payment even if the terms need to be more lenient.
You should be thinking more carefully about what items are needed to serve customers and keep cash coming into the business, and what items you can cut back or defer not only immediately, but a month from today. And here is where the cash flow projection becomes really valuable.
As you review the model spreadsheet, you will note at Week Three, the business will be $6,000 short on cash. Again, this is not an unusual situation for seasonal concepts, such as those operating at resort destinations. And again, this is a projection, so that amount might be greater or lesser than $6,000.
That said, if you have given sufficient consideration to expected revenue, costs and expenses, you should have an idea what to expect. And the beauty of a cash flow projection spreadsheet is the cash crunch won't sneak up on you. In this case, you would have several weeks to prepare for it.
When you can project negative cash flow several weeks out, it gives you time to talk to your creditors, landlord, or suppliers to negotiate deferred rent or revised payment terms in advance. You might also begin the process of obtaining short-term financing to shore up cash flow when it is needed. (Be aware, you should only seek short-term financing when addressing cash-flow problems. You don't want to carry long-term debt to address a short-term cash shortage.)
In short, the value of a projection is you can have conversations with your landlord and suppliers before the cash shortage becomes an immediate crisis. You can explain what you are expecting, why you are expecting it, and the terms you might need to get through it. It spares you from running to creditors in a panic, which does not allow them time to consider what terms they can extend to you, and is likely to diminish their confidence in your ability to manage your business.
The Power of Break-Even
When forecasting your cash flow, conducting a break-even analysis can help you decide where and when to cut costs and expenses. If you're not familiar with break-even, it's simply calculating how much sales a restaurant must have to cover all of its costs for a certain period of time, say a week or month. Some of the advantages of knowing your break even include:
- It tells you the minimum sales volume your restaurant needs every week or month to have any real chance of making a profit. Knowing only your sales volume can't give you a good sense of whether you're making or losing money.
- Knowing your break-even enables you to respond promptly to sales declines that may put the restaurant in an unprofitable position. During a sales slump, break-even acts like an early warning system. It can tell you that once sales slide past a certain point, you're losing money and you have a real problem on your hands. It's much better knowing that sooner rather than later.
- Break-even also gives you a tool to quickly estimate your profit or loss for a period of time, with knowing just your sales.
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Article
Break-Even: It's Like Having Your Own Financial Crystal Ball
One of my sharpest restaurant clients, nearly aways knew what his monthly net income would be for each of his three restaurants before he saw the P&L. Using a simple break-even approach, he could accurately estimate his profit just by knowing each restaurant's sales volume. Here's how he did it.
Think Strategically, Act Deliberately
A cash-flow projection worksheet requires you to think about your business strategically and act deliberately. While your cash-flow projection will not be 100% accurate, it can still be realistic with an acceptable margin of error. And it can provide you with extremely valuable insights into what your future cash situation will likely look like.
It will also buy time to consider your options. The current business environment is stressful enough without the additional anxiety of reacting to crises.
It is likely your creditors, landlord, and suppliers are not insensitive to your plight. They are likely experiencing their own financial challenges in this crisis.
When you base your request for relief on a thoughtfully developed cash flow projection, it builds your credibility and their confidence in you and ability to weather this storm. It can only improve your working relationship and increase the odds you find out how to work through these problems together.
