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December 05, 2023

Top Tips for Restaurant Cash Flow Management

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Cash is king when it comes to the health and longevity of your restaurant business. Every year, the lack of a stable restaurant cash flow leads to the closure of many businesses. Research from US Bank reports that 82% of business failures are due to poor handling of capital movement. Even a short-term restriction on capital movement can make it problematic to pay wages or rent. Various conditions, including unexpected costs or customer late payments, may lead to this complexity.

In this blog, we’ll explain why perpetual capital flow is vital for your restaurant, inform you of the obstacles you may encounter, and give you some recommendations to assist you in managing your savings effectively.

The Definition of Cash Flow

Cash flow is the sum of funds that flow into and out of a business in a given period.

Cash constantly moves in and out of a restaurant. When you purchase food for your bar, the money is paid to suppliers. When customers buy your dishes, cash flows into the business.

With proper handling, your capital inflow surpasses your outflow, forming positive capital movement. At the same time, negative cash flow indicates financial trouble because it demonstrates more capital is leaving your restaurant than coming in, which can lead to loss of liquidity or even insolvency if measures are not taken on time.

Why Is Cash Flow Management Vital?

Any cook knows that the quality of ingredients may improve or break the taste of the dish. Likewise, restaurant cash flow management can seriously affect the functioning of a business:

  • Profitability: successful financial management increases your chances of profitability, e.g., implementing measures to decrease costs or raise income.
  • Possibility to survive challenging times: the culinary business is characterized by uncertainty. Proper cash flow management creates a buffer during difficult periods so your restaurant can withstand slow periods or unplanned events.

Many restaurant owners focus more on culinary activities, forgetting the need to work with finances. Don’t forget your restaurant is not just a unique menu but also an ongoing business venture. And like any professional cook, an excellent restaurant owner understands the significance of balancing food preparation and monitoring economic performance.

Cash Flow Management Tips for Restaurant

There are paths in which you may sustain a balance between capital inflows and outflows, which will assist you in establishing a reserve fund that you may utilize in crisis periods. Let’s analyze several intelligent ways to maintain money movement.

Monitor your spending

Cost of goods sold (COGS), labor, and overhead expenditures are the primary sources of capital outflow. You must decrease your spending as much as possible without compromising the quality and functioning of the restaurant. There are several options on how to achieve this:

  • Reduce food costs: analyze interactions with existing suppliers; if you notice problems with price or quality, try to find an alternative.
  • Examine menu items: eliminate items with minimal sales and generate insufficient profit.
  • Reduce utility bills.

It’s vital to regularly compare your current expenses to your budgeted values to guarantee you’re staying within your budget.

Make a capital flow forecast

With accurate information from restaurant bookkeeping, you may be able to prepare cash flow forecasts that will assist you in managing your funds successfully. This forecasting lets you understand when you will run out of funds and enables you to plan accordingly. Moreover, it lets you know whether making significant investment spending during a particular interval is possible.

Utilize projections to estimate periodical budgets

Annual economic plans are often not practical for restaurants. The cyclical character of their activities requires more dynamic budgeting.

Creating a cash flow projection as a guidance makes it simpler to plan your budget a few months before seasonal changes. You better understand your needs, calculate the required number of employees, and determine warehouse stocks and advertising campaign features. It lets you better acclimate during intervals of culinary business slowdown.

Optimize inventory levels

A large sum of money held in inventory may significantly impact capital flows. Optimizing your level of inventory is an excellent option for improving cash flow. You can do this by trimming your menu, decreasing the number of items in stock, cross-using ingredients in other dishes to cut down on waste and save money, or removing menu items that aren’t selling well.

Be careful with loans

Establish systems that track all outstanding loans and their due amounts before payment is due. Your bookkeeping structure should continually monitor current loans. Make sure you track your credit cards and debts owed to suppliers.

Open a reliable line of credit

Since restaurant operations can be seasonal or cyclical, it is helpful to have a choice of what to do during quiet times. Establish a strong line of credit with reliable economic institutions to ensure a low equity balance doesn’t keep you from paying your invoices. Access to capital anytime will assist you in maintaining your business in moments of crisis.

Work with different partners

If you are an entrepreneur, one of your pillars to success will be finding reliable suppliers who always bring products on schedule. Belated delivery costs money and reputation. An extensive checklist of sellers means you diversify risks and you won’t have to stop your business if one seller has troubles.

Top Tips for Restaurant Cash Flow Management

Achieve balance with your payroll

What’s worse, understaffing or overstaffing? In any case, lack of balance is a significant factor in poor cash flow. Consider working with temporary staff during busy periods and hiring a few professional employees year-round.

Create emergency funds

Similar to how personal finance works, restaurants also need to build emergency funds that can be used for urgent situations. Whenever you have extra capital, putting it into an emergency fund may protect your activity in the future.

How to Compute Cash Flow?

Computing your restaurant’s cash flow is easy. As a rule, your entire restaurant cash flow for a specific interval equals your gains minus your spending. Let’s look at how this happens in real life:

Cash inflow refers to the money received from operational revenues and other financing sources, including asset sales. We mean the revenue from selling food, drinks, and merchandise, organizing parties, equipment sales, and business loans. You can quickly compute your entire capital inflow by adding these components. Revenue tracking helps handle the restaurant capital movement effectively.

Outflow funds are the cash spent on operating the restaurant. It includes capital spent on purchasing assets and payments made for financing, e.g., dividends distributed to investors. Therefore, restaurant spending includes ingredients, wages, loan interest, and operating expenses, such as rent, utilities, etc. Add these sums to determine the total capital outflow.

Let’s assume that during the quarter you obtained:

  • Income from food and beverage sales: $450,000,
  • Profit from the sale of the stove: $6000,
  • Bank loan: $55,000.

The entire cash inflow is: $450,000+$6,000+$55,000 = $511,000.

At the same time, the restaurant faced some expenditures:

  • Purchase of ingredients: $280,000,
  • Payment of wages to employees: $50,000,
  • Other operating spending: $23,000,
  • Loan interest: $3000.

Total capital outflow: $280,000 + $50,000 + $23,000 + $3,000 = $356,000.

Your cash quarter for three months is: $511,000 – $356,000 = $155,000.

Comprehending the Cash Flow Documents

A cash flow statement, like a recipe, contains all the elements that make up your restaurant’s capital movement. Such a document divides all outflows and inflows of funds into three large groups:

  • Operating activities: these include resources received from your daily activities, e.g., selling food and beverages to customers, settlements with suppliers, and payment of employee wages. In simple terms, these are the finances that come and go when preparing and serving food.
  • Investment activity: it shows the change in capital associated with the purchase or sale of assets, e.g., you buy a modern refrigerator or sell a worn-out car. These operations don’t happen often, but they may make a big difference to your restaurant cash flow.
  • Financial activities: the category includes capital movement connected with obligations or equity financing. Have you taken out a bank credit to open another restaurant? Do you plan to pay dividends to partners? Be sure to record such transactions in such a section.

A thorough learning of such a document enables you to define profit margins and sectors that negatively affect the movement of capital to take corrective measures. Are your operating expenditures too large? Are your assets not generating as much income as you would like? The answers to these questions are contained in the capital flow report.

The Primary Troubles with Capital Movement

The culinary field is one of the most competitive fields in any country. Thus, the US National Restaurant Association predicts restaurant sales in 2023 will reach $997 billion, 11% more than in 2022. To achieve success, restaurateurs must be efficient and effective in all aspects of the business. It’s important to remember some of the troubles entrepreneurs face:

  • Unstable wages: restaurant wages can change up and down more than other businesses, which may be a nightmare for an entrepreneur. There can be many reasons, including seasonality, staff turnover, and hourly rates. This requires careful management to keep the business profitable.
  • Seasonality: comprehending the capital movement throughout the year means you can plan management techniques rather than getting stressed when it’s too late. There are periods when cash flow may be slower than usual, and you must guarantee you stay afloat during these times.

It is vital to remember late remittances from clients can also negatively affect capital movement. If a business does not receive capital on time, it may face trouble paying invoices, staff, and partners.

Final Words

For restaurant owners, improving capital flow often means the difference between prosperity and bankruptcy. One of the optimal methods to guarantee monitoring the capital movement is to entrust the execution of economic work to professionals.

If you plan to confidently manage your restaurant’s income and expenditure, the BooksTime team is ready to consult you. Our experts will provide the accounting assistance you need, guaranteeing your resources are always handled.

This article is not intended to provide tax, legal, or investment advice, and BooksTime does not provide any services in these areas. This material has been prepared for informational purposes only, and should not be relied upon for tax, legal, or investment purposes. These topics are complex and constantly changing. The information presented here may be incomplete or out of date. Be sure to consult a relevant professional. BooksTime is not responsible for your compliance or noncompliance with any laws or regulations.

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Author: Charles Lutwidge

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