Managing your cash flow can be one of the hardest parts of running a small business, and restaurants are no different. It’s been claimed that as many as 90% of new restaurants don’t even survive their first year! It’s probably not actually as high as that, but the hospitality industry is still a tough one to be in.
Most hospitality businesses have a great deal of exposure to seasonal fluctuations, meaning sales (and therefore cash flow) can slump dramatically. So how do you manage your cash flow in this kind of climate?
To help out, we’ve put together a short guide which should give you some pointers.
What is cash flow?
To start off with, it’s important to understand exactly what it is we mean when we talk about cash flow. Your business’s cash flow is basically the balance between the money coming in and the money going out over a certain period.
For example, let’s say you take £14,000 in sales in November but you also spend £12,000 on overheads and expenses. Your cash flow for November would be £2,000.
But what if you need to spend £4,000 in that same month to replace or upgrade your kitchen equipment? You wouldn’t have the available cash flow to do so.
We’ve written about what cash flow is and how it’s calculated in our knowledge centre.
1) Keep track of your bills and expenses
If you don’t understand what’s coming out as well as what’s coming in, you won’t have a hope of getting on top of your cash flow situation. Don’t just pay attention to what’s already gone out – make sure you know what’s going to come out in the future.
For example, plan ahead so you can accommodate for upcoming rent or tax payments, as well as inventory or staffing costs. The better you understand your restaurant’s financial situation, the stronger position you’ll be in to improve it.
2) Review your prices regularly
This is something a lot of restaurateurs overlook. Keeping your menu options fresh is vital if you want your restaurant to stay ahead of the curve, but you have to make sure you regularly review your prices as well. If your costs have gradually gone up over time, you probably should think about charging a little more.
Increasing prices is a delicate job, however. You have to balance profitability with your restaurant’s popularity. Go overboard and charge too much and you could end up turning away loyal customers and putting off new ones.
3) Don’t depend on credit too much
Some food suppliers can offer you credit, meaning you can take delivery of ingredients on the Monday and not have to pay until the next week. This may seem like a great idea, but it can make it harder to keep on top of your cash flow. Especially if a large portion of your takings for the week get swallowed up in one chunk.
Some suppliers will even give discounts for immediate payment as they have their own cash flow to worry about too!
4) Put some cash aside for emergencies
Every business needs to plan for emergencies. If something goes horribly wrong and a vital piece of kitchen equipment packs in, do you have enough cash available to replace it quickly? What if a refrigerator stops working and you need to replace your ingredients for an especially busy evening?
Try to fence off a chunk of cash that you can keep aside for emergencies like these. Don’t be tempted to spend it unless you absolutely have to, as you never know what you might really need it.
5) Don’t order too much food
You know more about running a restaurant than us. And you probably already do this, but it’s an easy thing to forget. Make sure you don’t order too much food and tie up too much cash in stock that’s just going to sit in a fridge or cupboard for ages.
Again, this is a delicate one because you need to balance supply and demand. Order too much, and you’re hurting your cash flow and risk having spoiled food on your hands. But order too little, and you might sell out of that really popular dish.
6) Look for funding
If you’ve followed all the tips above but you’re still struggling to maintain a healthy cash flow, you shouldn’t be afraid to look for funding. Restaurants generally don’t have a lot of assets, so a secured loan from the bank is usually out of reach. But the alternative lending market is booming, and there are a number of fast, flexible solutions available.
At Boost Capital, we offer unsecured business loans and merchant cash advances. Which one is best for you depends on the nature of your business. If you’ve been trading for more than two years and your annual turnover is greater than £70,000, you might be eligible for a short-term business loan, which can be ideal for a quick injection of capital.
Our merchant cash advances are available for restaurants who take card payments, have been trading for nine months or more and take at least £3,000 in card payments a month. And because the payments are taken as a percentage of your card sales, the payments go down when your sales go down.
Got some tips of your own?
We don’t know it all. So if we’ve missed something that you think is really helpful for managing your restaurant’s cash flow, please let us know! You can find us on Twitter, Facebook and LinkedIn. If your advice is really good, we might add it to our guide so it can help other restaurateurs.