How to Manage Restaurant Cash Flow During Restaurant Restrictions

Tracking and understanding your restaurant’s cash flow is essential, whether business is booming, or times are tough. A healthy, positive cash flow is necessary to pay your bills and grow sales. Understanding your cash flow not only keeps your operation afloat, but it also prepares you to handle unexpected changes in sales and expenses.

Monitoring your cash flow is more important than ever during the COVID-19 outbreak. Here, we first review restaurant cash flow fundamentals, and then explore how your restaurant can approach cash flow in these extraordinary times.

How to calculate restaurant cash flow

Your total cash flow is calculated by subtracting your cash outflows from your cash inflows for a specific period of time.

For most restaurants, cash inflows and outflows come principally from operating activities. Your restaurant may have outside financing or sales of assets, but the bulk of cash flow is calculated from your food and drink sales minus what was spent on your operating costs.

In addition to funding operations, your cash flow is especially important if you have debt or need to meet bank obligations. With a positive cash flow, you don’t need external funds to operate, and you can use the cash toward paying your debt, paying dividends to owners, or investing in improvements that grow your business.

Keeping track of cash inflow

Your total cash inflow includes sales from customers, as well as any money from your financing sources or cash made from selling assets. For most restaurants, inflow is principally the cash from your food and drink sales, or related catering or merchandise.

Keeping track of cash outflow

Your total cash outflow includes cash you spent on operating costs or any funds used to buy assets. For a restaurant, your operating cash flow expenses include everything you need to be in business, such as the cost of your food and drink inventory, payroll, utilities, insurance, and rent, as well as expenses like interest on a loan or payments on equipment.

Calculation example

To understand a cash flow calculation in action, say your restaurant is tracking cash flow during a certain time period.

Your cash inflow for the period:

$20,000 in food and drink sales + $2,000 from a bank loan + $500 selling old kitchen equipment = $32,500

Your cash outflow for the period:

$12,000 in food and drink inventory + $5,000 in wages + $3,000 in other operating expenses = $20,000

Your cash flow for the period:

$32,500 (inflow) – $20,000 (outflow) = $12,500

Have a cash flow forecast

Tracking your cash flow allows you to create cash flow forecasts. Forecasting enables you to better understand your future financial health, based on your sales and prime costs. With a forecast of your cash ins and outs, you are better informed when planning for your bank debt obligations..

If you are a franchise business, you will have required upgrades. If you are a unique concept, you will have costs like facility maintenance, advertising, or expenses associated with redefining and updating your concept. These are all discretionary expenses that are necessary in the long-term, but with data-driven forecasts, they can be strategically timed to match your cash flow.

Your forecast allows you to make decisions that match trends in your cash flow. When you understand your forecast, you can proactively adjust to seasonal drops in sales, plan for utilities during a given period, or understand the best time to spend cash on making upgrades.

Redo your seasonal forecasts with COVID-19 in mind

The sudden impact of COVID-19 on the restaurant industry has had an enormous effect on the cash flow forecasts for most restaurants, and owners and operators need to make major adjustments. Admittedly, one of the toughest aspects of the current COVID-19 situation is that no one knows how long this period is going to last, which makes forecasts difficult to solidify. However, in these times, your cash flow forecast is essential to helping you make critical business decisions.

For example, by analyzing your cash flow, you can understand 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, like your sales tax, payroll, or food costs, may have already declined or can be further reduced in your cash flow. (Note: in the COVID-19 crisis, the speed at which the economic environment changed meant that many restaurants were stuck with in-store product that quickly became a sizable loss. However, moving forward, your food costs will be more variable.)

Your fixed costs are the base level of operating activity expenses, like your rent, outstanding debts, or existing liabilities in Accounts Payable (AP). Your cash flow analysis will point to addressing these fixed costs right away, and this analysis will inform your critical business decisions.

Right now, you may be trying to decide whether your sales from delivery/takeout are able to generate an adequate cash flow, given your fixed costs and outstanding AP (current liabilities, payroll, etc.). You may be trying to decide whether to close temporarily, apply for an SBA loan through the new stimulus bill, or hold onto your cash for now and reopen again later.

With developments changing by the hour, your business may have more options than you think. Your vendors may allow you to start a deferred payment plan, your landlord may temporarily allow for nonpayments or deferral, or your franchise corporation may offer a period of no royalty fees or interest-only debt. (Note: some franchisors are offering their franchisees financial relief during the COVID-19 crisis. A number of brands are giving their franchisees temporary royalty and ad fund relief.)

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 for your business.

How Grubhub, Uber Eats, DoorDash and other delivery apps impact cash flow

Third-party delivery services bundle sales and deposit the money into your restaurant’s account on a specific time period. The deposit frequency is written into your contract, but it may range from every two to three days to every two weeks. Tracking details like payment timelines helps you adjust your cash flow forecasts when projecting whether delivery will pay off for your business operations model.

Similar to third-party delivery, the majority of cash flow coming in from operation is credit card deposits which also have a delayed time to hit the account.

Be hypervigilant with your bookkeeping

When you don’t have a lot of cash flow, it may be tempting to take away resources from your accounting or financial operations. Many restaurants are wondering if they really need accounting and bookkeeping services right now. However, if you’re falling behind on your AP and your cash flow is looking crunched, this is exactly when it is most essential to have someone on top of your expenses and billing.

In many situations, without oversight of your restaurant cash flow and accounting, missed opportunities and small mistakes can have very real effects. For instance, your vendors may be able to offer you credits in your food shipments or be willing to implement payment plans with deferred dates. In other cases, 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 crunched cash flow is that an owner trying to appease persistent vendors uses a credit card to pay invoices. However, this card isn’t getting reconciled by the accounting team, invoices are still being sent to the company, and bills 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.

If you are committed to staying in business in the long term, accounting for your cash flow and expenses enables insight and oversight that fuels informed decisions in these uncertain times.

Conclusion

While the COVID-19 outbreak is a challenging time for restaurant owners and operators, with an understanding of critical financial indicators like your restaurant cash flow, you are better equipped to make the decisions that are best for your business, staff, and customers.

If you’d like more information on strategies like moving your business to a delivery model, watch the roundtable discussion featuring  industry experts from Restaurant365, FTR Hospitality and All Systems Hospitality, Inc., or visit R365’s COVID-19 Resources Center to stay up to date on helpful resources for your restaurant.

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