Smoothing Out Restaurant Cash Flow In Six Easy Steps

am a restaurant guy. I have owned and operated quite a few in my time and I always valued what my accountants told me on my P&L and Balance Sheet, but the real measure of a smooth operation was how I managed my cash flow.

Cash flow is everything. Real restaurateurs win many small battles every day before they ever look to see if they won or lost the war. Everything relies on how we manage hourly employees, portion costs, energy efficiency. All those little pieces add up. Yet very often they will waste tons of money by not managing their cash flow.

Ask most owners how much revenue their restaurant does and they will often say, “I do $25,000 a week”, not – “yea, we do $1.3 Million a year and drive 17% net profit after taxes.” Which tells me everything.  The financial universe of most restaurant people has short windows with a fast turn over of money in vs. money out. Everyday counts and what goes out cannot exceed what comes in.

Without cash on hand to pay their vendors, meet payroll, cover the rent and utility bills -they don’t open the next day, forget about profitability at the end of the year. Unfortunately many of the cash flow pains suffered by these operators is the result of poor planning or rigid cash management habits followed by outright bad practices. Most notable, is extending terms with their suppliers and landlord to see how far they can push the envelope. Vendors are not banks, but many restaurants treat them like one.

The worst practice of all is not putting aside sales tax or payroll taxes. This is the most expensive money you will ever “borrow” and collections will not be pretty -the government does not lose!  Penalties and compounding interest could crush you and ultimately if you go too far, you could go to jail!

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Here are some practical things to do to manage your cash flow:

1. Do some cash flow planning and don’t pay everything at once. We regularly see clients line up their monthly bills, sit down and write all the checks at once. BAM! They hope that they put aside enough cash or that they will come up with it when the checks hit the banks.  We have seen restaurants pay thousands of dollars in NSF fees, yet this is the same guy who fights for $1.00 a pound on prime aged steaks! This is so bizarre as all your savings are burned up in bounced check fees.

While it is okay to write out the checks all at one time, you need to put the checks into a “holding pattern.” Mark each envelope with the date you should mail it in order for it to land on time and without crashing into another check. Stagger the payment dates by the importance and disburse checks accordingly.

Prioritize. For instance, the highest priority checks are the ones where a missed payment can hurt you either in cost or ability to operate your business. This includes rent, taxes or late utility bills. Other bills, such as utilities and insurance payments, will often have a reasonable grace period or a financial penalty modest enough to take advantage of having this cash on hand when needed. But these are still important bills to pay because you don’t want to get cut off. There‘s nothing more destabilizing than having your electric shut off in the middle of your Saturday dinner rush! Finally, be sure to look out for flexibility in payment options. Vendors and wholesalers who supply most restaurants are the best sources of flexible financing. Many are happy to work with you as long as there are regular payments scheduled, even if they are small.

2. Make it real! Pay out on revenue you have, not on the sales you are hoping to make. Would you land a plane hoping that the runway is beneath you in that fog bank? No, you want to know it is there, so only make payments knowing your sales are in the bank. If you know what you have, you will know what you can pay.

3. Invest in a payroll service. The two biggest cash flow crunchers are payroll and sales taxes. It may seem like an unnecessary cost for very small businesses, but a good payroll service can be invaluable, particularly in the collection and payment of payroll taxes. Rather than worry about saving the money and making progress payments to federal and state agencies, let the pros do it.

4. Get creative with your payroll schedule. I had a pub style casual restaurant client who used to give out her paychecks to her staff on a Friday afternoon.  Every week was the same story. His staff would run to the bank to cash their checks and two or three employees into it, her bank account would go negative but the branch manager, knowing the owner for years, covered all the NSFs but charged an “Uncollected Funds” fee for each passed paycheck.  Hundreds of dollars were burned up every week!  I immediately suggested that she switch paydays to Tuesdays. Why? Because that’s when all the weekend receipts cleared the banks and all the credit card deposits hit from the processor. She saved thousands of dollars and didn’t burn her banking relationship. Some states permit bi-weekly or bi-monthly payroll, which can be helpful to those businesses, especially when paid on the week before or after rent or other obligations are due. This also cuts down on the frequency of payroll tax deposits, as the payroll periods are spread out.

5. Establish relationships with a reputable credit provider. Planning for a rainy day is a noble cause but unrealistic for many restaurant owners. One thing I have learned as a restaurant owner is that even through positive cash flow periods, most financial short falls or storms come on suddenly and bring a sense of desperation or lack of control. It happens to most businesses at one time or another. Build a relationship with a reputable lender who can respond quickly to your needs. If they know you, they will be there to help quickly when you call. Our company has restaurant clients that call and we fund the same day.  That’s worth a lot in keeping your business on an even keel.

6. Segregate / Impound your taxes immediately. No matter how you justify it – sales tax is NOT YOUR MONEY!  You need to open a separate “Tax Account” where you deposit all of the sales tax collected each day. Don’t use this money to float your operating account, despite what you tell yourself that money rarely finds its way back in time to cover your scheduled tax payment.  When you are short, you will pay the hefty penalties and interest, that make borrowing at almost any cost, relatively cheap.

Managing cash flow has long been, and will long be, a major pain point for many restaurant owners, but it’s possible to bring relief through smart planning and open lines of communication with vendors and financial partners.

David Sederholt
David Sederholt is a multi-discipline entrepreneur who has launched and built numerous companies in specialty finance, foodservice and commercial real estate over 40 years. After owning, financing and operating over a dozen restaurants in his career he found a niche in serving small businesses seeking financing and strategic advice. For 10 years he served as Chief Operating Office of Strategic Funding Source, Inc., (now called Kapitus). David has also been a Managing Partner at a boutique investment bank and a specialty commercial real estate firm. He is a regular guest lecturer and contributor to business and industry publications as well as serving as a Board member and advisor to numerous companies and non-profit organizations. He is currently owner of Ragnar Partners, LLC, a private investment and advisory firm.