The Importance of Managing Your Cash Flow

The Importance of Managing Your Cash Flow
Happiness is a positive cash flow.-Fred Adler
 

What is Cash Flow

Cash comes in from customers or clients that purchase your products or services. If customers do not pay at the time of purchase then some of your cash flow will then arrive in from the collections of accounts receivable.
Cash is going out from your business in the form of payments for expenses, like rent or mortgages, in monthly loan payments, and in payments for taxes and other accounts payable.
Think of 'cash flow' as your own personal graphical representation of your business trading account. If more money comes in than is going out, you are in a "positive cash flow" territory (in the Black) and you have sufficient cash in your account to pay your bills that are due. However if more cash is going out than coming in, you will more than likely find your business account overdrawn otherwise known as in the RED. You may then need to find money to cover this overdraft. This is often the reason why new businesses may occasionally require additional working capital, in the form of a loan or line of credit to cover the initial shortages in cash flow.

Managing Cash Flow

Managing cash flow, however, is primarily and simply often just a "timing" issue. It's style="text-align:center">about managing "when" the money comes in and when it is to be paid out.” Possibly the most fundamental aspects of owning and operating your restaurant or any small business for that matter is understandingcash flow. Simply put, cash flow is the amount of cash coming in versus the amount of cash going out of your business on a daily, weekly and monthly basis. If you don’t understand these simple and yet basic concepts of restaurant and business finances then potentially can find yourself at considerable financial risk.

Many entrepreneurs dream of owning their own restaurant. They imagine walking around a full dining room on a Friday or Saturday night, chatting with customers and providing complimentary drinks. They would also dream of having a full reservation book and cash registers overflowing with cash. All too often many of these dreamers start a restaurant and will often fail within their first year of operation. Why, simply because they are far better at dreaming the dream than working their business plan. Restaurants will often lead the list of small business to fail.

A Loan Can Smooth Out Cash Short Term Shortfalls

The most useful resource that a small business can have is a line of credit at their bank. Unfortunately, banks are nowadays rarely interested in loaning money to restaurants. Restaurants often have a high failure rate, so they are often considered very high-risk loans.

Cash Out Versus Cash In:

In order to best understand your cash flow, first take in account what your currently owe, say for the given week. Then figure in what accounts are coming up for payment, like rent or bank loans. Then compare that figure with our forecasted sales. To help you estimate upcoming sales, you should be disciplined and keep your accounts always up-to-date.

Break Even Sales:

Another good exercise is to understand at what point in your Business you begin to break even. Regrettably Many Restaurant owners are not even familiar with this term. A simple explanation is how much weekly, monthly or yearly turnover/sales you need simply just to pay all the bills. A good example is only partially described above; add up all the expenditure you would have even if you did not open the doors. Rent, business loan and your wage this will give you a clear picture of the sales you need simply just to open the doors. Then add to this you’re expected utility costs your labour costs for staff and you soon get a feel for goal posts continually moving on you.

Other costs will come into the equation that is simply referred to “variable” costs. Rent can be a fixed cost; usually it is the same every week. Then again your rent may well be a variable cost too. Many Franchise Owners can pay a percentage based rent figure and some business owners in Resorts or Shopping centres can also find themselves paying rent based on a percentage of turnover. Like Fixed and Variable Home loans each have their advantages and disadvantages.

Employee labour, food and beverage costs are variable as they are directly linked to the volume of sales you will expect to turnover. Now that you have a feel for these fixed and variable costs you can start to work on your “Break Even Analysis.” A spreadsheet is always a great tool to create this and allows you to modify or create copies of your work sheet for “what if situations.” With “what if’s” you see the immediate effect on modifying amounts on your bottom line. I recommend exploring different scenarios to see the effect on your bottom line.

B.E.A’s are simply a form of budgeting or forecasting. Many restaurants especially those in resort areas or close to the beach are continually at the fate of the weather. Many restaurants will thrive during the holidays and struggle afterwards. Many will dip below their breakeven point for possible weeks or even months on end. It is imperative you know where your breakeven point is. As you approach it or go beneath you will need to have a survival strategy.

Simple and common sense advice when you dip below the mark simply focus on the business. This is not necessarily a good time to spend money on any new equipment or décor upgrades unless of course you have provided or saved these funds during the busy months and decide the quiet times are the best time to close for a day or two to give the painters a free run.

So many business owners’ are unaware they have dipped below their breakeven point and are often careless with stock and personal purchases. Simply knowing where the line it and curtailing purchases wherever possible makes it easier to survive in these tougher times. No supplier “special price” is worth the purchase if in results in your inability to pay your bills on time.

Never rely on credit from your Suppliers to prop up your cash flow. Many large food distributors will offer established restaurants with an amount of credit, which can range from a dollar amount to a time duration amount. For example, you may get a delivery of food on Monday and not have to pay for it until the following week or possibly even the end of the month. This is very handy when you have a large catering function coming up and need to buy raw items before you get paid for it. However, try not to make a habit of not paying for deliveries as they arrive. And check with your suppliers for any type of discount they may offer for immediate payment. Some companies may offer a percentage discount for accounts paid on delivery or within a week of delivery.

Emergency Cash

Just like owning a house or a car, your restaurant comes with many unexpected expenses. Kitchen equipment, for example, can cost you hundreds or even thousands of dollars to maintain, replace or even upgrade. Always keep an emergency amount of cash aside for these unexpected problems. I would suggest keeping a separate bank account with a nominal amount of cleared funds available for any such business emergency. Your bank Manager and accountant will be very impressed that you have provisioned for just such an eventuality. This provisioning will give you “kudos” when dealing with your bank or lending institution. It is by definition a form of a sinking fund! Put simply you are providing during the good times the ability to attend to large unexpected expenditures during the much leaner times.

Keep Inventory Low to Keep Cash Flow High

The only good part about a quiet weekend is that you probably won’t need to spend a lot of money on inventory in the new week. If you are consistently over purchasing food and alcohol stock items each week reducing your orders in size can only help to keep your cash flow high and in theBLACK. If you’ve got a lot of extra inventory in your walk-in, freezer or dry-storage that just is not moving, it may be time to update your Inventory system.Abcom’s eProphet.NETinventory and ordering module could be exactly what you need to keep your inventory lean. Unless your creditors are prepared to accept payment in services or product you will need to keep your inventory lean.

Be Careful With Customer Deposits

If your restaurant provides any sort off site catering or functions, you should always take a deposit to hold the booking date. Depending on your individual restaurant and catering policy, you may require anywhere between a 10% to 50% deposit. If the function is a few months, or even a year away, keep in mind that you need to figure that money into buying food and alcohol for the event. And if the customer cancels well in advance of the function, you may have to return at least a portion if not all of the deposit.

Be careful if you take a significant deposit and the function does not proceed. Especially if you find yourself stepping back from a booking you will need to be able to refund a deposit. What happens if your cash flow is poor and the timing is not suitable? You could find yourself refunding a deposit from your credit card or even worse having to approach your Bank Manager for finance.

The restaurant business requires an exceptionally keen eye for detail, from the level of customer service right through to the quality and presentation of the food leaving your kitchen. It also requires an equally keen eye for your budget. While you should not trip over the coins to get to the dollars, you should always know how much income you are bringing in and how much is going out at all times.

1. Know your business’ balance sheet thoroughly.This may sound obvious, but, as your accountant will not doubt confirm, many business people don’t know how cash flow works and its significance in keeping their operation afloat. Many owners focus on their business’ profit and loss statement alone. It’s a potentially fatal error because healthy profits can sometimes mask an impending cash flow crisis. Profit and loss statements don’t usually contain the information required to make an adequate cash flow projections. For that, you’re going to need a structured balance sheet that includes all the influencing factors including debts, interest payments, inventory and so on. This should be the basis for your cash flow projection which represents an “educated guess” at the likely incomings and outgoings over the period of time you have selected to map out.

2. Set up a detailed cash flow budget/forecast. You will need to focus closely on forward planning to generate your “best guess” about planned future sales and expenses. There are some cash flow software tools available, but, you can also set up your own worksheet in Excel. If you’re not familiar and skilled with Excel software, ask your accountant for help to set it up properly. They can also help you select suitable cash flow software to assist in the preparation.

3. Review and update cash flow budgets frequently. It’s your best insurance against potential cash flow shortages. If your business has a predictable cash flow, then cash flow budgeting on a quarterly basis is often sufficient. If you’re already visiting your accountant for other tax related matters, then you can get a cash flow budget prepared at the same time. The rule of thumb is that the greater the cash flow uncertainty a business faces, the more often a new cash flow budget should be prepared. If cash is exceptionally tight, you might need to move to weekly projections, and decide which invoices you’ll pay and whom you need to get payment from as soon as possible. Always watch the bank balances and make ensure you don’t have cheques waiting to be deposited. Rapid growth sounds good but, ironically, too much of this good thing can bring on a potential “cash crunch” – which frequently takes many business owners by surprise. A sudden spurt in sales is often accompanied by a run down in stock in-hand and debtors not being tracked or followed up when they go overdue. Strong sales one month often means a cash shortage next month. By monitoring the business’ cash status you can arrange credit from suppliers and banks to cover the temporary shortfalls. However, these arrangements take time to set up so you need to be prepared in advance.

4. Always set your credit terms very carefully. If the very nature of your business requires providing credit, then it is important to set very crystal clear limits to your terms of credit. Always follow up on your debtors, the business that always follows and consistently up on overdue debt is always going to be paid first. Remember your manners at all time when chasing payment; rude callers will always get paid last (if at all.) If you fail to follow-up overdue debtors then you effectively set the ugly precedent of tolerance.

5. Always attempt to get payments in quickly. Learnthe delicate art of managing your debtors. Always let your debtors know how much time remains before due dates. Stay engaged and in close personal touch with major debtors as the payment deadline approaches. Consider offering small discounts for early payment as an incentive to your debtors to always pay early and to pay on time.

6. Always pay your creditors strategically.Always take full advantage of credit terms offered to their fullest and prioritise all payments according to the consequences involved should you go overdue. Your Payroll, taxes and direct debits are at the top of the list for on-time payment; consider that your major suppliers may just be prepared to wait just to retain your business. Never pay early just to get a discounted price unless getting the discount is better than being without the cash. There is no value in paying early is it leaves you overdrawn or cash strapped and then in fact costs you more. Even less value is bulk purchases and Supplier specials if they reduce your cash flow to a difficult point.

8. Consider drafting an Excel worksheet and plot all of your major monthly outgoings in one column. Then in the next column insert your expected income. Now the tricky bit, show income only on banking days for example Saturday and Sunday would show no income as it would be shown all added together in Monday (when it actually hits the bank.). Secondly show your expected income one day behind it actually occurring, this allows 24 hours to get the previous days takings into the banking system. If you are prepared to experiment with formulas can get a running total of your anticipated bank balance at any point in the month. With this projected or anticipated result you can move debtors a day or two here and there to see how it affects cash flow and if there is any need to provision in more detail for any spikes. This is a great tool to ensure you do not go overdrawn or above your overdraft limit.

7. Always plan your cash flow especially for the difficult times.Be aware of when lean cash flow times are coming up and then prepare plan accordingly. You should always avoid funding a major purchase from your business’ working capital unless you are sure you have the cash to cover it or even better you provisioned for it well in advance.

9. Continually seek out suitable finance products that work to benefit you?Overdrafts, premium funding, lease facilities and cash flow funding products can all be great tools to help match your business cash flow with planned outgoings. Perhaps consider using a business credit card as a way to deal with the difficult times. Always be aware of the interest free period and plan to clear the debt before the honey moon period runs out. This is not always a viable strategy long-term as the interest rates can be crippling.

10. Do not incur tax and other late penalties, beware very of your obligations and plan to always attend to them on time.If you need extensions then be proactive approach the authority and ask for an extension, be absolutely sure of the terms and ask if it will cost you.

11. Always pay yourself a wage, just about every worthwhile Business Management Publication will tell you this. And, always, always, always pay yourself first.

12. Last but not least and most important alwayskeep your hands out of the till.

This article is not intended to take the place of sound and informed advice provided by your Accountant or Financial Planner.Your Accountant should always be your first line of inquiry and assistance.The content of this article are designed to be informative and does not take into consideration your specific business and financial requirements.


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Articles by QSR Media News Abcom

Peter W

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