Thirty days have passed from the closing of the previous month. You have just hired your next, new accountant who promises they know restaurant accounting. You look forward to your first profit and loss statement hoping you will then have something to show to your spouse or possibly investor how well you are doing.

Finally, in the mail the package comes from your accountant and you immediately turn to the Income Statement since you have no idea how to read the first statement which is the Balance Sheet and usually the third statement “Statement of Changes in Cash Flow” looks Greek to you.

You turn right to the bottom line or Net Income and you see a month end profit of $10,000 and you instantly think you are in the big time. You make that next call to your spouse or partner and tell them the good news and they instantly start spending their share of the profit. Your spouse asks for a distribution and your partner wants his allocated percentage for the month to use in his other businesses.

So you take out your checkbook and realize you’re overdrawn and start getting upset with your accountant and wonder, “Where’s my cash?” So you pick up the phone and ask the accountant what happened to my cash balance? If I show so much income why am I overdrawn?

A business may be profitable, but without cash flow, it won't survive. Sales and profits don't necessarily coincide with their associated cash inflows and outflows. You may experience all the sales in the world, but if you do not time your cash disbursements, the business might experience a short-term cash shortfall. This is why it is essential to forecast cash flows as well as project likely profits on a weekly and month to month basis.

Cash flow! Cash flow! Cash flow!

Cash flow is the lifeblood of any restaurant. For new restaurants, immediate cash is needed to create future cash flow. The first time the payroll is missed, you will know exactly how bad it is to be short of cash. How do you know how much cash to have in the business? Keep a check register. Call the bank! They can tell you very quickly.

Your accounting system should be able to match what the bank says. This needs to be the first place for improvement. Sit with your accountant and create a system that from start to finish will help you monitor cash flow. Hire a friendly associate that has a successful restaurant and pays attention to cash flow to teach you how they monitor and handle cash flow. Throw the ego out the door and ask for help. Use the system that works for you after asking others for advice.

Having cash is not the only answer. It needs to be the right amount of cash. Enron had millions of dollars in the bank, but they still were still forced to shut down. Having enough cash to meet this months financial obligations isn't enough. Cash analysis is more than a current, monthly calculation.

How do I calculate cash flow?

Although most cash inflows to restaurants come from sales, loans and interest earned, the biggest cash inflow is coming from sales income. Create a system that documents week to week, month to month, and year to year sales history. If you can not afford a POS system to achieve this create an excel program that will accomplish the same results or possibly just use a running total on a sheet of paper. But do it.

Cash outflows include payments to suppliers, payroll, utilities, rent, and interest payments on loans or in other words, paying the bills. Create a list of monthly bills per week, month, and year. In a restaurant these amounts are fairly consistent and can be used effectively to calculate expected cash flow needs. Have the list with you so you can reference it. Know your daily target sales to cover your expected weekly cash needs. This will take some practice and time to get your magic number but work towards a daily sales target.

Net cash flow is the difference between the inflows and the outflows. A positive cash flow would indicate that the business was healthy enough to have more than enough cash to pay the bills. Just as a negative cash flow would indicate the need of additional cash to pay the bills and keep the business healthy.

Cash flow planning is crucial to the health of your Restaurant

Forecasting and totaling all significant, regular cash inflows relating to sales, bank loans, interest income and other income and then analyzing in detail the projected needs and timing of cost of goods, payroll and other payments is what cash flow planning entails. The more detailed the analysis, the better the information is for you. When this net cash flow is added to or subtracted from the opening bank balances, any likely short-term shortfalls can be projected and planned for.

How do I control cash flow?

Here are five suggestions to help you manage cash flow.

1. Especially in the independent restaurant establish separate accounts for business and home. "It's too easy to commingle funds, and spend the cash for personal reasons, when it is needed to pay business debts. Profitability does not reflect cash-this could be called the 'High Profit-No Cash' syndrome."
2. Manage your cash appropriately. "You can have too much cash in your business. Cash is an asset that should be working at all times, gaining interest." Create a forced savings account for estimated tax payments, savings for the owner, and a three month emergency fund. Become accountable to making routine deposits to the bank. Have a friend or spouse drive you to the bank each week and make your deposits just as you pay your vendors each week. Get in the habit of paying yourself.
3. Restaurants should work from actual prior period results, month to month, and year to year--leaving some cash in the bank at all times. Work with your vendors so that your cash account does not fluctuate with highs and lows but is somewhat consistent through the year. Put your vendors on ACH and set terms so that your cash requirements are consistent. You drive payment terms not your vendors. Create a system on how your Restaurant pays their bills. Create a system that your entire team is aware of and is not allowed to deviate from without your permission. You need to field all possible curve balls when it comes to managing cash flow. For example, it is inevitable your water heater will need replacing or your roof will leak or your oven breaks. These known capital expenditures need to be projected for as part of doing business.
4. Flowchart your cash through your Restaurant. Take the time to document your cash receipt and disbursement process. Have your accountant help you follow the money from the time a customer presents to you a dollar bill or swipes their credit card to the time you take the deposit to the bank. How do your POS record the transaction? Who takes the deposits to the bank? Do the bank statements come to your house? Find out everywhere the money travels and identify ways to follow the money. For example, always open your own bank statement. Always reconcile your POS or Daily sales to the bank deposit and credit card transactions on a daily basis.
5. Leverage money effectively. When you start a new business, you will usually receive unfavorable terms from vendors... After establishing a good relationship with your vendors, ask them to extend your credit and payment terms. Constantly find ways to purchase in volume and receive discounts. Consider refinancing your equipment and personal loans you incurred to open your restaurant. Now that your restaurant is showing cash flow take your financial statements and find a new lender to decrease your monthly outlay for debt service through a reduced interest rate being charged.

In short, take the time to monitor how cash including credit card transactions flow through your system and how you can check this flow on a daily basis. Whether you download your transactions from your bank nightly or use the Internet to receive your daily POS sales start a system of monitoring. Don’t delegate cash flow to anyone but yourself until you have a proven cash flow system is in place that works for you. Ask your peers and other successful restaurant owners for guidance.

The next time you receive your monthly statement from your accountant instead of asking “Where is my cash” you can start the conversation off with, “my cash ended up exactly where I projected it to be based on my own cash flow system we created and your statements prove that.”


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