Cash flow is the bloodline of every restaurant business. To keep your operations afloat, you need to ensure that you manage your cash flow properly throughout the entire year.
It is prevalent for restaurant businesses to have cash flow issues which often stem from 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 of these issues at the same time.
While this may sound like a complicated endeavor, there are a few simple tips that you can follow that will keep your cash flow out of the red and improve the overall financial health of your business.
1. Create a cash flow forecast
A cash flow forecast considers all of a business's financial information to produce a detailed estimate of what the company's financial situation will be in the future. It looks primarily at payments coming in and expenses going out.
A cash flow forecast is an excellent planning tool to help you project future anticipated revenue and expenses. It helps to give you 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, there have been numerous restriction changes that directly impacted many restaurants' cash flow. Having a forecast in place is critical to allow you to adapt to these changes. 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. This gives you the advantage of being able to increase or decrease your staffing and inventory levels accordingly. It also allows you to compare your budget to your actual numbers to determine where any discrepancies are arising from.
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 as to when bills are due and pay them well ahead of any deadlines to avoid costly penalties. If a situation arises where 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.
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 aren’t consistently over-purchasing inventory each week. Creating a detailed forecasting report will help with this.
5. Lease your equipment instead of buying
Does your restaurant need a new oven? A large asset purchase such as this can cause a significant dip in your cash flow. Instead of purchasing, consider leasing this equipment instead. Alternatively, you could choose to finance them, allowing you to pay off smaller portions over a longer period of time.
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 of your cash flow is to keep accurate and timely bookkeeping records at all times.
If you want to be able to manage your cash flow and your entire restaurant business with confidence, the team at Enkel can help. Our experts can provide you with the bookkeeping assistance that you require, assuring you that your business's finances are always well taken care of.