According to a study, 82 percent of small businesses fail due to cash flow problems. A cash flow shortage occurs when more money is flowing out of the business than is flowing into it. During a cash flow shortage, you might not have enough capital to cover your payroll or other operating expenses. When there is no proper plan or strategy in place for handling cash flow shortage, a cash flow crisis occurs.
To overcome your restaurant's cash flow crisis, you need to be ready to take action to save your business from an ultimate demise. You can also refer to this guide to learn more about managing cash flow.
Major Cash Flow Crisis Faced by Restaurant Business Owners
A Lack of Time to Plan/Forecast: Knowing the numbers is paramount for every business owner, but financial planning often slides down the priority list and becomes an afterthought. The advantages of forecasting and planning are enormous—you can avoid unexpected bills by planning ahead. You can also minimize the heightened cash flow pressures of the peak season.
Payroll Fluctuation: In comparison to other businesses, A restaurant’s payroll tends to change constantly, cause nightmares for the owners. There are various reasons for fluctuating payroll: Seasonality, high staff turnover, and varying hourly rates (depending on experience). Careful scrutiny and management are required to ensure that costs are affordable, and that there is a positive return on investment. Usually, restaurant staff expect to be paid weekly, so paying them on time means a constant pressure on cash flow. Without a solid team, running a restaurant is impossible. Set a monthly or quarterly budget and stick to it. Forecasting can help you set the appropriate budget, taking seasonality into account.
Demand during Peak Season: It is important to understand the flow of money throughout the year so that you can plan ways to manage it in advance, rather than panicking when it is too late. Certain times of the year are going to be much slower than others; in those times, you need to make sure that you can keep your restaurant's doors open. Fixed costs like rent, that remain the same all around the year, require you to reduce flexible overheads like staff costs and manage orders according to customer demand. Seasonal costs aren’t fixed—peak seasons demand that you accommodate paying temporary staff and other seasonal expenses.
Emergency Cash: Similar to owning a house or a car, owning a restaurant comes with the risk of unexpected expenses. Whether it is a bill, repairing a faulty appliance, maintenance or another cost, it can have a big impact on your cash flow. Having no cash reserve for emergencies means you run the risk of any such unexpected costs that could derail your business's daily operations. You can safeguard your business by maintaining a contingency fund and by paying for insurance.
Relying on Credit: To stay on top of numbers and avoid getting bogged down with credit payments, make sure you have an efficient way to manage your invoices. You can use cloud accounting software as it provides an up-to-date, comprehensive picture of cash flow. Pay for deliveries on arrival—you might get discounts for paying at the earliest. By avoiding a credit situation, you stand to gain multiple cash flow benefits.
Strategies to Overcome Your Restaurant's Cash Flow Crisis
Cash Flow Forecast: A cash flow forecast gives a clear picture before money goes out, so you can manage your cash flow better. It will let you know the inflow and outflow of your money, so you know when it's time to be frugal and when you can let expenses stretch. Forecasts are especially important when it comes to making capital expenditure decisions, or deciding whether to cut an expense. Also, you can gain insights into your business by comparing actual figures to forecasted numbers. If there is any variation between these, you can dig deeper to see what is going wrong. At the least, you can use the current year's forecast to plan for next year's budget plan. Forecasting your cash flow will also help you create seasonal budgets, which are crucial in the restaurant business.
Business Cash Advance: Even with all the right planning and management, cash flow is still a major challenge to get right. If you want to reinvest for renovation or expansion, for example, you will need working capital in advance. Maybe seasonality puts on too much pressure. In both cases, you could consider an alternative financing solution. If you accept card payments and happen to be in need of a cash flow boost, a Business Cash Advance (BCA) is a good solution.
Create Seasonal Budgets: Annual budgeting does not always work with a restaurant, due to the seasonal nature of sales. Monthly or quarterly plans might suit this better. If you aren’t confident about planning and forecasting, ask an expert. You can either your accountant or consult one of many companies that offer part-time Financial Directors for this purpose. They will advise you on all the financial matters concerning your business including budget forecasting, payroll planning, and even draw attention to important functions like marketing as well. Online advertisements, social media, and promotions in local media will help you to fill tables during quieter months.
Examine Your Menu: Your menu can have a huge impact on your cash flow. Make sure you do not stock a lot of high-priced and low-margin items. Make sure you keep your menu concise; customers are usually overwhelmed by too many choices, and you can concentrate on delivering fewer dishes of great quality. Keep an optimal level of inventory to minimize waste. Make sure you monitor stock on a regular basis. Also, make sure that your menu looks great, and is easy to understand. Avoid jargon, and put high-margin dishes on a ‘specials' area, or in plain sight within the menu.
Your cash flow numbers reflect the position of your restaurant business and its potential growth. As your business changes, you may figure out more ways to increase your cash flow.