Beyond The Basics Of Restaurant Cash Management

Whether you’re seeking an investment to start a new restaurant or working capital for an existing one, it is absolutely essential that you know the impact that the payment of that debt will have on the business’s cash position. The best tool for recognizing the impact of an investment on the business is a break-even analysis.  A budget focuses on the operations’ comparison of current income and expenses against a target, whereas, a break-even looks into direct expenses that affect your balance sheet.  Items such as debt servicing, and capitalized expenses, like buying equipment and leasehold improvements. These are items that aren’t reflected on the Income and Expense Statement. However, they have a tremendous impact on the cash position of the business.

Effective Cash Management Rules to Follow

  • Do not forego your investment needs:
    • Consider how much money you need and what you’re willing to give up to get the money. Work out the financial details regarding the payback of the investment
      • This includes the interest rate and term of the investment
  • Do not chase deals:
    • Deal chasing is not a viable plan for you or your investors. It places your investors in a position where they are second-guessing your intentions and ultimately their own decisions
    • This is followed up with the investors creating personal agendas for getting their money back
      • It’s always based on their terms, not yours.
  • Do not create unrealistic trade programs for your investors:
    • We see this all the time. A person receives a $40,000 investment. Part of the payback includes a trade account –  This is only reasonable with very specific limits on alcohol and food
    • It is impossible to manage cash flow when the payback is a limitless trade account
      • There’s no control over when investors can take advantage of the trade
      • If the restaurant sales are slow investors can chew up cash that is critical for the ongoing operation
  • Do not overpromise the return on investment:
    • In an effort to obtain investment, the operator promises a wild return on said investment without acknowledging the impact that the promise will have on the business
      • This kills the ability to manage cash
      • It’s characterized by an operation that makes money operationally, and yet there’s no money to pay priority debt like taxes because the investors are being paid too much, too soon
  • Do not confuse marketing and deal of the day companies, as well as hard money lenders, as investors:
    • They are characterized by high interest, short-term loans with variable payback schedules
    • The payback schedule is typically tied to a guest metric or credit card deposits
      • This makes the payback on the loan almost impossible to manage

Restaurant Cash Management Strategies By Days of the Week

Days of the week: Facts about the days of the week as it relates to cash flow:

  • Monday
    • This is usually an Administrative Day because it’s typically a slower day
    • Perform all of your interviews, new hire paperwork, operational and financial forecasting when you’re not impacting the guest experience
    • This will free you up to manage the business and verify your forecasting accuracy during the remainder of the week
    • Cash is pretty much neutral from the weekend except for any cash deposits that you’ve made from Saturday and Sunday
  • Tuesday
    • This is typically the heaviest Cash flow day of the week
    • The weekend credit card sales are typically deposited Tuesday mornings
    • It’s always good to have major expenses like payroll checks dated for Mondays or Tuesdays so you don’t have to worry about transferring money to cover the expense
  • Wednesday
    • All weekly expenses from the prior week should have cleared the bank
    • This is a great day to perform a mini bank reconciliation and determine what cash remains
    • It’s also the best day to transfer extra cash into savings
  • Thursday
    • This is a good day for a Cash Flow Forecast review day
    • Thursday is the best day to review your accuracy from your Monday’s purchasing and labor forecasts and make adjustments based on the remainder of the weeks’ events
    • Identify any areas of overspending
  • Friday
    • This is the worst day for managing cash
    • It’s the lowest cash flow day of the week
    • All bills are paid, all orders are placed and paychecks are cashed
  • Saturday-Sunday
    • Use the time to make some money by focusing on operational costs. The weekend provides the greatest chance of increasing restaurant cash flow from the management of prime costs. (Food, Pour Cost and Labor).

Bonus Cash Management Strategies

Here’s a shortlist of best practices that assist your ability to effectively manage cash:

  • Vendor Terms
    • Vendor terms do not equal positive cash flow. Every Expense Paid Every Week. We see our best operators paying as many (if not all) of their expenses each week. It provides them with the truest sense of operating and enables them to really see their cash position every seven days.
  • Accruals and Prepaid expenses
    • Accruals and Prepaid’s are accounting terms for identifying expenses on your income statement each week even though they are paid monthly. Examples of these expenses are: Rent, Utilities, Rental Equipment, Credit Card fees and Insurance. Accruals are expenses that are paid at the end of the month, while Prepaid’s are expenses paid at the beginning of the month.   Using them makes you the last dinosaur at the Le Brea Tar Pit. They are functionally outdated and give someone a ton of non-revenue producing work to manage them. Pro Tip: Run your financial statements weekly detailing each paid expense. Use a budget for the management of large expenses its far more manageable and flexible.
  • Payroll
    • One of the largest expenses in the operation and folks still pay bi-weekly and semi-monthly. There is no better way to manage cash flow than to pay your folks weekly. For years we have reviewed our clients’ successes when they switch to weekly payroll. Weekly payroll eliminates spending money that isn’t yours.
  • Credit Card Fees
    • Also one of the largest reoccurring expenses in your business is the fee that a credit card company charges. Did you know that many credit card companies allow you to have your fee taken out daily vs. one time a month? The process is called daily discounting. American Express does this as a standard practice. It is a very effective way for you to manage your cash flow.
  • Impound your own Taxes
    • One of the best ways to grow your business empire is to never get behind on your taxes. Since most taxes are due monthly or even quarterly the best way to not get behind is to transfer your tax money into a savings account each week until it is due. You are essentially impounding the money in your own account. This is another very effective way for you to manage your cash flow.

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