Comprehending your restaurant cash flow is essential to running your restaurant business. Cash flow refers to the amount of cash coming into your restaurant minus the amount of cash going out on a daily, weekly or monthly basis. Understanding this basic concept is key to ensuring your financial health during your restaurant recovery.
Managing your cash flow is something you must do on an ongoing basis, whether or not your restaurant is experiencing a cash flow problem. However, if your restaurant is currently struggling with cash flow, you’re not alone, as it’s an issue shared by many restaurant businesses. Solving this challenge requires taking steps that will either increase cash flow or decrease overhead costs, and ideally, both.
Common factors that cause cash flow issues
Some of the main causes of cash flow problems in restaurants are:
- Low profits (or losses)
- Too much inventory
- High labor to sales ratio
- Unexpected expenses
- Poor financial planning
Create a cash flow forecast for your recovery
The first step in managing your cash flow is having a plan. A cash flow forecast is a projection of your restaurant’s future financial position based on anticipated payments and receivables. Using a cash flow forecast, you will know when cash is coming in and going out. A cash flow forecast will give you warning before money goes out, so you can better manage your cash flow. The main goal of a cash flow forecast is to assist with managing liquidity within your restaurant business and ensuring that your business has the necessary cash to meet its obligations and avoid funding issues.
The unexpected impact of COVID-19 on the restaurant industry has had a huge effect on cash flow for most restaurant businesses. Consequently, you might need to make major adjustments. Now more than ever, your cash flow forecast is essential to helping you make critical business decisions.
For example, by analyzing your cash flow, you can determine how to manage, delay, or temporarily stop your required outflow cash payments. When looking at your cash outflow, start by breaking your expenses into your fixed and variable costs.
Your variable costs include expenses such as sales tax, payroll, and food costs. Your fixed costs are the base level of operating activity expenses, including your rent, outstanding debts, or existing liabilities in accounts payable (AP).
You may be trying to decide whether your sales from delivery/takeout and limited dine-in capacity can generate enough cash flow, given your fixed costs and outstanding AP (current liabilities, payroll, etc.). Any number of adjustments may change your calculations. However, one of the most helpful tools in deciding between any approach is your analysis of what variable cash outflows you can adjust, and what fixed cash outflows you cannot adjust, given your current inflows. With an understanding of your cash flow, you are better prepared to weigh your options.
Cash flow forecasts are especially helpful when deciding whether or not to cut an expense. You can also gain insight into your business by comparing actual figures to what you forecasted.
How to Categorize Restaurant Expenses
When creating your cash flow forecast, categorize your restaurant expenses by fixed and variable costs.
Your total fixed costs are your expenses that must be paid, despite the amount of your revenues. These costs do not fluctuate. You can count on paying them monthly. Common fixed costs include:
- Rent, insurance, and property tax
- Utility bills
- Phone and internet
- Licenses and permits
- Marketing and advertising costs
Variable costs are expenses that vary in proportion to the total menu items you sell. Your total variable costs change with changes to your sales volume. Variable costs include:
- Labor costs
- Food and beverage costs
- Takeout containers or disposables
- Credit card processing fees
Mixed costs are those that are both partially fixed and partially variable by your business demand. For example, your utility costs can vary slightly with the changing months, but typically utilities stay within a range. For your cash flow forecast, group mixed costs with fixed costs and use a monthly average for your calculation.
How to improve cash flow in your restaurant business
Having a positive cash flow can be the difference between staying above water or facing potential serious financial repercussions. The pandemic and its resulting downturned economy can have a devastating effect on your cash flow. Follow these cash flow management tips to successfully manage your cash flow to avoid a cash crunch now and in the future.
1. Stay on Top of Bookkeeping
When you have limited cash flow, it can be tempting to reduce accounting and financial resources. However, this is exactly when it is most essential to have someone on top of your expenses and billing.
Ensure that invoices are entered daily to help you better manage your cash flow. Running financial reports daily will also provide insights into your finances, allowing you to determine if you need additional financial guidance.
There may be mistakes in vendor invoices or added fees from vendors when you’re late on payments that end up costing your restaurant more. A common mistake during times of poor cash flow is using a credit card to pay invoices. However, the credit card doesn’t get reconciled by the accounting team and invoices are still being sent to the company, so bills can end up getting paid twice.
Understanding the relationship between the kitchen and your finances is always important, but it can be the critical difference for surviving tough times. It’s impossible to run effective cash flow if you’re behind on your data entry or missing information.
2. Keep Inventory Low
If your restaurant sales are not covering your expenses or if you have extra inventory in your walk-in or dry-storage that just isn’t moving, it may be time to update your restaurant menu. it’s a good time to start trimming fat from inventory. Analyze your menu to determine if there are items that aren’t selling. By minimizing your menu you can limit the amount of inventory you need to order each week. Also, cross utilizing menu items helps reduce waste and save money.
Additionally, keep an eye on your inventory to make sure you’re not consistently over-buying food and liquor each week. Careful forecasting can alleviate this problem.
3. Hold Vendors Accountable to Contract Pricing
As you receive vendor invoices, use a system that can track purchased item costs so that you can discover any contract violations. Reviewing these numbers frequently can help you hold vendors accountable to the prices they are quoting. Also view item price verification across all of your locations to determine if all stores are paying the same price. Tracking these prices on an ongoing basis can ensure that your restaurant business is paying only the contracted amount for an item.
4. Organize Changes in Payroll
Payroll fluctuations can be one of the biggest issues for restaurant operators. Turnover, new employees, furloughs and layoffs can combine to complicate payroll. Keeping a payroll budget and maintaining a payroll budgeting process can be an effective way to organize your payroll.
Normally, you’d budget six months out based on historical payroll data. But, Covid-19 has thrown a wrench in that timing as historical data from last year is not relevant for your recovery. Analyze how your payroll has changed over the past six months. See if you can notice any trends in this short time frame. Analyze your turnover in the six-month period. This will give you a better understanding of wage changes in your budget period.
Looking forward will help you prepare for how payroll will change and will help you manage your cash flow.
5. Restructure Your Seasonal Forecasts for 2020
Forecasting your cash flow will also allow you to create seasonal budgets. Using your cash flow forecast as a guide, budget out several months in advance of seasonal upswings, or in the current climate, downturns in sales. You’ll have a much closer understanding of your needs and can allocate costs of seasonal staff, stock and marketing in advance of busy times. It also gives you the flexibility to adapt during periods of slow business.
6. Increase Restaurant Cash Flow
While the best way to increase your restaurant’s cash flow is to increase sales, this may be a greater challenge than controlling costs, especially in light of closed indoor dining and other pandemic-related
restrictions on your ability to grow your revenue. Still, this doesn’t mean that increasing your restaurant’s cash flow is impossible. You can run promotions, such as early bird specials to attract budget-conscious diners and use your email database to get the word out. You can also encourage Yelp reviews and use your social media platforms to engage with your customers. Use your creativity to market your restaurant on a limited budget.
For more no-cost and low-cost marketing ideas, read the blog post, 13 Restaurant Marketing Ideas and Tips for Driving More Customers.
7. Make Frequent and Informed Labor Decisions
Labor has a major impact on your restaurant’s cash flow. Consequently, you’ll need to use forecasting to help predict the number of employees your restaurant will need each day based on your recent sales and labor data. This will enable you to create more purposeful schedules during these uncertain times. Throughout the week, reevaluate the schedule and readjust your forecasts based on actual sales coming in. If sales don’t meet your adjusted recovery forecast, you may have to reduce the number of staff working—both on the floor and in the kitchen. The current situation is ever-changing, requiring you to evaluate labor needs on a frequent basis and adjust accordingly.
8. Avoid Relying on Credit
Credit can be a useful tool for getting your restaurant business off the ground, but don’t let it become a crutch when you’re having cash flow issues.
Instead of accepting offers of credit from your vendors, negotiate a discount on your food and beverage purchases in exchange for making immediate payments. You may find that your vendors, are also concerned about their cash flow and may welcome upfront payments. While paying upfront may seem counterintuitive when cash is low, it’s preferable to adding debt to your financial situation.
9. Work with Your Creditors to Improve Cash Flow
Be proactive about asking for help. If you know it’s going to be difficult making the month’s mortgage or rent payment, call your bank or landlord and ask for an extension. Your bank may extend your deadline or even restructure your loan to help you make ends meet.
You should always know how much money you are bringing into your restaurant business and how much is going out. If your restaurant is experiencing a cash flow problem, it’s important to take steps that will either increase cash flow or decrease overhead costs – or ideally both.
Successfully managing your cash flow during challenging times requires cash flow forecasting. Restaurant reporting tools provide a wealth of detailed information about your inventory, sales and labor, to help you forecast your cash flow.
If you’re interested in improving your cash flow, consider using Restaurant365, an all-in-one, restaurant-specific accounting, inventory, scheduling , labor and HR platform that features advanced financial and operations reporting tools.