By William J. Lynott
Never Idle: New technology encourages faster, simpler direct transfer of money.
No Hurry: Waiting to pay bills will help your money accrue more interest.
Cash Flow—How much money is flowing into and out of your cash registers—is an easy concept to understand. Still, not every restaurateur is fully aware of the impact that well-managed cash flow has on the bottom line. That's probably because the importance of cash flow is much easier to recognize in some types of businesses than it is in others.
Take home building, for example. When a builder takes on hundreds of thousands of dollars in short-term debt to build some new homes, it's obvious that he must generate substantial positive cash flow in a hurry if the business is to survive.
The situation in the typical restaurant is not that dramatic, of course, but generating and managing cash flow is critically important in even the smallest of food operations. Losing control of money has put more entrepreneurs out of business than temporary red figures on the bottom line. On the other hand, a sensible cash management system can provide a life-sustaining cushion during those inevitable slow times when the phone just isn't ringing as often as you'd like and the customers aren't streaming in.
Once you accept the importance of managing cash flow in your restaurant, you'll find it easier to stick to the rules of profitable cash management. Here are nine powerful techniques for improving cash flow and profits in your business right now:
1. Never allow any of your money to lie idle.
If you don't already have one, open a money market account at your bank and have it linked to your business checking account to allow for telephone or online transfers. From that point on, deposit all of your daily receipts into the money market account where they will immediately start drawing interest. This step may not seem worth the effort at today's somewhat anemic interest rates, but this is a temporary situation. Rates have already begun inching upward toward a more normal level. Setting up a smooth money management system now will pay permanent dividends in your future business operations.
Never deposit receipts directly into your checking account. Keep a minimum balance in the checking account and transfer cash by phone or online only as needed to cover checks written. Modern technology has made telephone and online money transfers so quick and easy that you can't afford to pass up this profit-enhancing technique.
Worst money sin of all: leaving checks or cash lying around in a desk drawer until you can get to the bank. Using every cent of your money to make money is the mark of a professional money manager.
2. Don't be timid about using other people's money.
We've all heard stories about entrepreneurs who have built large business empires without ever borrowing a cent, but they are the rare exceptions. At today's extraordinarily low interest rates, careful use of credit can be one of your most effective business-building tools.
I've never been comfortable with extensive use of credit for personal affairs. When it comes to business, though, it's a different matter. To begin with, the costs of borrowing are legitimate tax deductions for businesses. It makes more sense to spread out the cost of capital purchases than to put stress on your cash flow by laying out large amounts of cash that you could put to productive business use. Credit, when used in a sensible and controlled manner, can be a powerful profit enhancer.
3. Consider leasing.
Leasing products like cars or vans for personal use is generally not economically advantageous. Most accountants agree that leasing is the most expensive way to maintain a car exclusively for personal use.
But the rules change for business.
"The nature of business accounting is such that leasing can be the most sensible approach to many types of capital investments, including vehicles," says CPA Thomas Normoyle, Huntingdon Valley, PA. "It usually makes sense to lease if you will be able to use the cash in your business or in your investments to earn a better return than the cost of leasing."
Talk to your tax advisor about this the next time you're considering any purchase of capital equipment that might be available on a lease basis.
4. Don't be in a big hurry to pay your bills.
There's a good reason why checks are slow to come in from people who owe you money: Hanging on to your cash as long as possible keeps that money available to draw interest or to work in your business.
Take the time to set up a system that provides for paying bills only when they are due. It's easy to do and is another rung on the ladder of professional cash management.
Important: Don't go overboard and jeopardize your credit standing by paying bills late. Pay your bills when they are due—not before, not after.
And keep an eye on the state of postal deliveries during this uncertain time. If it appears that deliveries may be delayed, avoid those oppressive late-payment fees by allowing a little extra time.
5. Be aggressive about collecting accounts receivable.
If you do any of your own billing, if you run any private tabs, even in relatively small amounts, it's important not to allow those receivables to go untended. You've earned that money; you have a right to it; you need it. If your customers learn that you are cavalier about money owed to you, you can be certain they will stretch your patience (and your cash flow) to the limit.
6. Maintain a cash cushion.
Whenever possible, keep enough business cash in interest-bearing accounts to cover normal operating expenses for three to six months. There is nothing like the peace of mind and self-confidence that comes when you don't have to sweat out next week's payroll during a slow spell. Also, keep in mind that your cushion money is making money for you in those interest-bearing accounts.
7. Develop a personal relationship with your banker.
Handling money is a banker's job, and most are very good at it. Even if your restaurant is a tiny operation, it's a good idea to have a personal relationship at the bank where you do business. Discuss your financial picture honestly with the manager of your local-branch. You'll get some good ideas and a favorable ear should you ever need a little financial help.
8. Harness the Magic of Impulse Sales
Ever notice those inexpensive items on display at the cash registers of your local supermarket or drugstore? They're known as impulse items - products that are inexpensive enough to be bought on impulse.
Don't be misled by the low selling price of these items (almost always in the $2-$5 range). An impulse sale will produce a higher percentage of net profit than your normal transactions. That's because almost all of the gross profit on impulse sales moves directly to your bottom line. The meal you served has paid for your operating and labor costs, so any additional sale increases your costs only by the cost of the product.
If you have a cashier's station at your entrance, you have a natural opportunity for a profitable impulse display. It's here, where the customer stops to pay his or her check, that many impulse items will sell themselves. Whether you feature take-home bakery goods, candy, inexpensive gadgets totally unrelated to the restaurant business or anything else that strikes your fancy, every impulse sale will boost your bottom line.
The more cash you generate every day, the more you will benefit from good cash management, and the more impulse sales you generate, the more cash you will have to manage.
9. Let your computer help you manage your cash flow.
Whether your restaurant is large enough to make use of one of those heavyweight commercial software packages designed exclusively for foodservice, or whether you use Quicken or Money on a desktop PC, trust every financial aspect of your restaurant, as well as personal investments, to your computer. The financial reports and analyses that modern software can produce at the touch of a button are now critically important tools for improving cash flow and bottom-line profits.
All of the popular software packages designed for small business and personal finance are infinitely easier to use than they were as recently as a couple of years ago. More important, they will teach you in dramatic fashion how much you can benefit from a sensible cash management system.
Taken individually, good cash management techniques may seem inconsequential. However, when you blend them together in a consistent manner, they will form a significant and permanent contributor to your bottom line.
William J. Lynott is a former management consultant and corporate executive who writes on business and financial topics for a variety of consumer and trade publications. You can reach Bill at [email protected] .