• Susan Eder

Why Cash Flow matters.

We all know the money is important in business. In the restaurant business, it's usually the timing of the funds coming in and going out that matters the most. This, my friends, is Cash Flow.

cash flow /ˈkaSH ˌflō/

noun the total amount of money being transferred into and out of a business, especially as affecting liquidity.


The Cash Flow statement is the single most important report to reference in running a restaurant, more important than the Balance Sheet, more important than the Income Statement. Why? Because a business can run for a long time at a loss, but cannot run one day without Cash.


Think about that: if your restaurant has money in the bank - either through previous profits or from investor capital - you are able to pay for a loss in the short-term. Vendors will still get paid, Employees will still get paid. If you have money in the bank, you can sustain those expenses until your Sales really get going.


How do you keep money in the bank? In a restaurant environment, the key is to keep a just-in-time inventory. Do not fill the shelves with food, liquor, beer and wine at an amount any greater than what you will sell in the next 14-21 days. A practical inventory amount is the same dollar cost amount that is sold at retail each week. For instance, if Food Revenue per week averages $15,000, then a $15,000 Inventory is warranted. If Liquor Revenue averages $7k per week, then the Liquor Inventory should not exceed $7k. Why is that? Because Food and Liquor products are readily available through purveyors, can be delivered almost every day of the week, and are better managed when they are minimized. In turn, money spent on building up inventory is better off in the bank account, where it can be utilized to cover the shortages in Cash, which often occur right before the weekend.


In addition, an Inventory Overage is a direct contributor to higher costs and lower profits. The costs of storing the Inventory, protecting the Inventory, managing the Inventory, counting the Inventory, over-portioning the Inventory and wasting the Inventory are all increased when an Inventory is too large.


Train your food and bar managers to run lean. Limit their ability to spend on product each week. Teach them to experiment with inventory levels. Let a few items run out. Be ready to 86 something on the menu. And teach the sales team (Servers, Bartenders) how to sell the entire menu, for when an item has been 86'd.


Restaurants should never be considered a passive investment - but time spent on limiting the Inventory levels will lead to increased profit and Cash Flow.


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