The restaurant industry is notoriously competitive and has significant operational demands when it comes to optimizing inventory and predicting demand. To add to the challenge, a restaurant’s cash flow tends to ebb and flow, due to unpredictable factors that can be dictated by uncontrollable events such as weather and traffic. Despite those risks, the restaurant industry can also offer great rewards: Nearly 40 percent of restaurant operators surveyed in early 2017 expect their sales to increase in the next six months.
Here are some strategies you can implement into your operations to better control your restaurant’s cash flow and prepare for potential cash shortages, based on best practices in the industry.
Develop conservative projections
You cannot control every financial event that will impact your restaurant, but you can proactively plan for challenging business cycles. Establish a working budget that includes your cash on hand (in the bank, and actual cash), money you expect to receive from customer payments, special events and other income streams, upcoming expenses for fixed costs (such as electric bills, rent and taxes), and variable costs (such as payroll, supplies and marketing).Monitor your cash on hand on at least a weekly basis. Measure it relative to the expenses you know are coming. If you face cash flow shortages, you can proactively plan to decrease expenses or lean on financial tools that support cash flow, such as a merchant cash advance or low interest line of credit.
Leverage the cash you have on hand
If your suppliers don’t require that you pay in cash, offer terms such as net 10 or net 30, or don’t offer a discount for early payment, hold onto your cash for a few more days or weeks. Pay suppliers on the day they require, or ask if they’ll offer a discount for early payment.Invest any cash reserves into a risk-free, interest-bearing account that allows you to keep cash liquid and accessible. You likely won’t earn a significant amount of interest with such a conservative strategy, but you will earn a little extra cash on your cash, and have a safety net in a worst-case cash shortage scenario.
Optimize your inventory
Your suppliers may offer volume pricing for some items, but if they’ll sit in your kitchen or spoil before your restaurant is able to use them, you’re sacrificing cash flow. Try these strategies to optimize inventory:
Take stock of your inventory daily so you aren’t forced to make “emergency” purchases that cost more than you planned when key ingredients are out of stock.
Implement processes to ensure kitchen staff follow standards for the amount of ingredients that are used to create dishes.
Get creative with happy hour promotions, prix fixe menus, specialty dishes and craft cocktails that use ingredients in danger of going to waste, or feature ingredients you have in excess. Social media and text messages have made it possible to design “flash sales” that reach customers immediately, and empower restaurants to promote the products they’ll most benefit from selling.
Design deposit policies strategically
If you offer catering services for special events, design your deposits strategically (which may include a non-refundable deposit policy for cancellations). If you have spare dining rooms, a basement or outdoor space that goes unused most of the time, expand your business model to host special events such as cocktail hours, networking events or fundraisers. They may require minimal effort on your part, but can generate a steady stream of cash flow you can rely on in times of reduced demand for your core restaurant business.Cash flow management can be one of the biggest challenges restaurant owners face, but you can be less subject to cash flow shortages with proactive planning and a little creative strategy. Try these best practices to gain more control of your restaurant business’s financial ebbs and flows, and build a more stable business model.
Author bio: Tim Roach is a co-founder of Lendr, a provider of merchant cash advances for small to midsize businesses. Roach holds a B.S. in Finance from Linfield College, and served in the United States Navy at Seal Team One. Before joining Lendr, Roach founded Oak Street Trading, a proprietary trading firm, in 2002.