The Importance of Developing a Solid Cash Flow Strategy for Your Restaurant or Bar

One of the most critical areas that we recommend small businesses monitor on a continuous basis is cash flow. No matter if you are just starting your business or if you have been operating for several years, cash flow is the lifeblood of just about any entity, and in many cases, cash flow will dictate the success of an organization.

Cash flow is the movement of money in and out of your business—essentially, the total of how much money is going in and coming out on a monthly or weekly basis. Cash flow does not refer to your overall revenue or profitability, but how much cash you have available at a particular period in time.

Cash flow planning involves forecasting months ahead to make sure you have enough cash on hand to fund expenses, acquire inventory, or pay employees, for example. A cash flow plan is a tool that every business owner should utilize to better prepare for the future. While cash flow planning cannot provide you with a foolproof long-term plan, it can help you stay on track financially for the short term.

There are numerous benefits of cash flow planning and include the following:

• Having a reliable estimate of how much money will go in and out of your business each month.
• Allowing you to make informed decisions related to current and future spending, repayment of debt, and gauge timing on potential investments or expansion plans.
• Solidifying the financial stability of your business.
• Assisting with pricing decisions to ensure costs are covered and margins are protected.
• Identifying weeks where cash balances may be low and if expenses need to be adjusted and/or if outside financing may be needed.
• Assisting with managing inventory levels to ensure you are not investing too much at one time and potentially creating a liquidity issue.

To develop a cash flow plan, start by making a list of all monthly expenses that make up your outgoing cash flow, such as rent or mortgage payments, payroll, loan payments, insurance, marketing, tax payments, and materials and supplies. Many of these costs will be static from month to month, but if your business is seasonal or if these expenses tend to significantly increase or decrease throughout the year, you will need to adjust accordingly for these fluctuations.

Much like expenditures, you will next want to create a list of all the incoming cash you expect each month which can include cash sales, collections from accounts receivable, tax refunds, and any financing from bank loans or lines of credit. If you are a new business owner, sales may be a bit tricky to predict. However, if you have been in business for a while, using prior records in conjunction with current market conditions should provide a reasonable estimate. It's also critical that you effectively manage your outstanding accounts receivable balances to ensure your customers are paying you in a timely manner and the cash is being collected.

Once you have a good grasp on your incoming and outgoing cash, you can then figure out your monthly cash flow and understand what your overall estimated cash position will be at any given time. Simply subtract outgoing money from incoming money and the sum of these will provide either a positive or negative cash flow for the month.

Cash flow planning continues to be a common pain point for many small businesses however, by taking the time to understand the sources and timing of incoming and outgoing cash along with consistently monitoring and managing your cash position, you can improve the financial health of your business and proactively identify issues before they lead to serious trouble.

Here are some additional tips on how to create and develop a solid cash flow strategy and plan:

• Identify your goals, including how far you want to forecast into the future. We generally recommend a good starting point is to create a cash flow plan for at least 90 days.
• Use the cash flow projection as a tool to analyze how any large purchase or investment will impact your overall future cash position prior to making a final decision.
• Understand the impact of any seasonal variations or sales cycles in your incoming cash flow, and any corresponding outgoing cash flow requirements that may be needed to purchase inventory or raw materials in advance.
• Plan for the possibility of slow-paying customers and the impact this will have on collecting accounts receivable on a timely basis.
• Have a "Plan B" in case unexpected events drain cash. Business owners who plan to cover a cash shortfall should have the loan or a line of credit in place well before the cash is needed.
• Bill quickly to help ensure a steady and timely stream of incoming cash. Delays in billing could contribute to cash shortfalls.

The overall lesson that small business owners must master immediately, is that a business cannot operate very long when cash outflow exceeds cash inflow. However, with a reliable planning strategy, accurate cash flow forecasting can be attained and ensure peace of mind when it comes to your business's finances.

Tim Reynolds is a Tax Principal at DHW with over 25 years of experience in the accounting industry. His areas of expertise include various federal and state income, transactional, and excise taxes, as well as general accounting and financial statement preparation. Additionally, Tim serves as an operational consultant for the retail, restaurant, grocery and manufacturing industries. Tim can be reached via LinkedIn or email at tim@dhw.cpa.