Keeping track of your cash flow can be daunting, but it is extremely important. From a high level, you can estimate your cash flow with the following calculation:
Net Income from your Income Statement + Depreciation – Principal Payments – Fixed Asset purchases = estimate of cash flow.
This is NOT perfect… But it is a quick way to get a feel for how you are doing.
Once you get a general feel of your cash flow, be sure to stay on top of it. A bounced check costs you in fees, as well as in reputation, vendor’s favor, temporary outages, and just sheer stress. A few best practices for handling your cash flow include:
Setting up your accounting calendar correctly. A lot of people will just assume that you go by a regular calendar year when setting up your accounting structure. However, restaurants function on a week to week basis. You should therefore opt for a fiscal calendar where your periods consist of complete fiscal weeks. Using a 4-4-5 or 13×4 fiscal calendar will allow your fiscal weeks to fall in line with your periods. This makes it easier to determine trends in week-by-week and period-by-period comparisons, as well as reducing the need for journal entries to allocate labor to the correct periods
Entering Accounts Payable (AP) weekly. Entering your purchases in a timely manner will help you know exactly where you stand each week, allowing you to tweak your spending accordingly. This is vital in maintaining a healthy cash flow in such a low-margin industry, where one week you may turn a profit only to have an overdraft the next.
Pay according to the invoice terms. If it is not due for 30 days, then pay it in 30 days. You don’t pay your home mortgage a month early, so why would you do that in business?
Managing cash from your books, not your bank account. Reconcile your cash balance against your bank account, but don’t manage your money from the bank account itself. It’s not uncommon for a business to provide goods or services to you one month and not collect the money for 30, 60 or even 90 days, so it’s important not to mistake cash in the account as available funds.
Keeping a cash reserve. It is a good idea to have at least a 4-week operating reserve in your bank account at all times. This ensures that if there are any ‘hiccups’, you have the ability to keep paying bills for a month while things get worked out, without getting crossways with your vendors.
Planning ahead for large expenses. Always be aware of large expenditures and their timing so that you can plan for them. For example, taxes, large fixed assets purchases, yearly maintenance contracts, etc., are all due at certain times; don’t be caught off guard.
Re-evaluate your budgets as necessary. As your sales fluctuate, make sure your spending does too. Knowing where you stand financially on a real-time basis will help you to not overspend when sales are lower, and/or allow you to purchase more when the sales warrant it.
Opening your own restaurant is a lot of hard work. There are so many factors that can make or break your business, and poor accounting should not be one of them. While accounting may not be your passion, be careful not to overlook the role it plays in your future success. Setting up your accounting processes properly and then carefully managing them can help you realize your restaurateur dreams.
The Ctuit Guide to Restaurant Accounting provides some high-level accounting concepts and best practices for restauranteurs. In this series, we will cover the most basic accounting principles – the ones that you need to know to get a better understanding of how to run a profitable restaurant.
Read the complete series: