Cash flow is the lifeblood of every restaurant business. To keep your operations afloat, you need to manage your cash flow properly throughout the year.
Restaurants often have cash flow issues, which often stem from seasonal business fluctuations, problems with low profits (or losses), overstaffing, unexpected expenses, poor financial management, and keeping too much inventory in stock at any given time.
To solve these cash flow problems, a restaurant owner must consider two key components: they must look into increasing the amount of cash flowing into the business, and they must look at decreasing costs and the amount of money flowing out of the business. Ideally, you want to target both these issues at the same time.
While this may sound like a complicated endeavour, there are a few simple tips that you can follow to keep your cash flow out of the red and improve your business's overall financial health.
1. Create a cash flow forecast
A cash flow forecast considers all of a business's financial information to produce a detailed estimate of its financial situation in the future. It looks primarily at payments coming in and expenses going out of the business, in this instance a restaurant. Basically, you need to keep track of daily sales and expenses to understand your restaurant's cash flow patterns. It is a good idea to use restaurant management software or POS systems to track transactions accurately.
A cash flow forecast is an excellent planning tool for projecting future revenue and expenses. It helps you gain a deeper understanding of how much cash your business needs to meet its obligations and can help you anticipate future cash flow problems before they happen.
Included in your cash flow forecast will be all of your revenue and expenses. Expenses will be broken down into fixed costs, such as your rent, loan payments, and insurance, and variable costs, such as payroll and food expenses.
During the COVID-19 pandemic, several restriction changes directly impacted many restaurants' cash flow. Having a forecast in place is critical to adapting to unforeseen circumstances. Plus, it will enable you to see a detailed list of all your expenses to decide where you can cut down to cope with any changes in revenue.
Forecasting will give you the flexibility to adapt to changes and issues as they arise. It allows you to look at which variable costs you can adjust based on revenue changes and which fixed costs you cannot adjust regardless. Creating a cash flow forecast can also help you create a seasonal budget.
2. Create a seasonal budget
As a restaurant owner, it comes as no surprise that your business sales can fluctuate significantly depending on the season. Using your cash flow forecast as a guide, you can budget several months ahead of various seasonal upswings or downturns. It also allows you to compare your budget to your actual numbers to determine where any discrepancies are arising from.
This gives you the advantage of being able to increase or decrease your staffing and inventory levels accordingly. You can also negotiate favourable payment terms with suppliers to improve cash flow based on seasonal projections. You can request extended payment terms during the low season or discounts for early payments during the high season to manage cash flow effectively.
3. Stay current with your bookkeeping
A key to effective cash flow management is bookkeeping. Without keeping proper track of your business's financial information, you won't be able to accurately determine what expenses you are incurring and whether you have sufficient cash to pay them. Bookkeeping is a business function that you do not want to eliminate, even if you are experiencing cash flow problems.
It is crucial to have someone stay on top of your expenses and ensure that your bills are paid promptly so that you have real-time visibility on your revenue and expenses and can run reports to provide insight into your overall financial health.
You need to have a solid knowledge of when bills are due and pay them well ahead of any deadlines to avoid costly penalties. If you cannot pay the full amount on time, try negotiating with your vendors. To have full visibility, you need to stay on top of all incoming invoices and track upcoming deadlines.
If you need to reduce the amount that you spend on your accounting personnel, consider outsourcing!
4. Optimize your inventory levels
Having a significant amount of cash tied up in inventory can greatly affect your cash flow. An excellent way to improve the health of your cash flow is to optimize your inventory levels. You can do this by downsizing your menu and keeping fewer items in stock, cross-utilizing ingredients in other menu items to reduce waste and save money, or by removing menu items that aren't selling well.
Keep an eye on your inventory so that you don’t consistently over-purchase each week. Creating a detailed forecasting report will help with this.
5. Control operating expenses
It is definitely a good practice to regularly review operating expenses such as rent, utilities, and labour costs. Controlling these expenses, especially during slow periods, is vital for your restaurant's survival.
Look for opportunities to reduce overhead costs without compromising on quality or customer experience. This means finding the right balance in scheduling staff according to the flow of business while ensuring your staff can earn a consistent living. Basically, this means matching staffing levels with customer demand. Cross-training employees to perform additional roles can help reconcile the tension between reducing labour costs and maintaining staff earnings during slower periods. That way staff can have enough earning hours each week while the restaurant can reduce labour costs by hiring for fewer positions.
Controlling utilities may not result in massive savings, but finding ways to reduce electricity or gas consumption can lead to meaningful savings over the medium to long term. installing energy-efficient appliances, LED lighting, and programmable thermostats, to lower utility costs.
Another approach is to focus on menu design. This means having managers and senior staff in the kitchen analyze menu items to identify high-profit margin dishes and prioritize promoting these items. Reviewing ingredients in lower-margin dishes to minimize food costs would also be helpful, provided that quality does not suffer dramatically.
Final Thoughts
As a restaurant owner, improving your cash flow can mean the difference between success and failure. The healthier your cash flow, the better able you will be to deal with any fluctuations in sales that may come your way. One of the best methods you can employ to ensure that you always have visibility into your cash flow is to keep accurate and timely bookkeeping records.
If you want to manage your cash flow and your entire restaurant business confidently, contact the team at Enkel. Our experts can provide you with the bookkeeping assistance you require, assuring you that your business's finances are always well taken care of.
