Running a cash flow positive restaurant is challenging even in the best of times. But in this Great Recession, marked by customers spending less and banks tightening or even shutting off access to funding, cash flow problems can invade your business, turning your dream of prosperity into the nightmare of barely surviving.
“[Cash flow] may be the most important breath of life for a restaurant,” says Anand Gala, president and CEO of Gala Corp. in Los Alamitos, California, which operates dozens of restaurants, including Applebee’s and Del Taco locations. “This allows a restaurant to weather the storm if there is enough cash flow to keep things going.”
Restaurants have been weathering the storm for a few years now. Though recent industry forecasts show promise—2010 should be the first year of flat and not negative growth as seen in 2008 and 2009, according to the National Restaurant Association—it’s still vital to think strategically, creatively and economically. Especially if you’re walking that line between red and black.
So amidst declining sales, rising rents and a near 10 percent national unemployment rate, how can you keep more cash flowing into—than out of—your restaurant? Here are four best practice recommendations.
Stay focused on the top cash flow burners. Labor and food and beverage costs certainly top the list. You should manage these costs “aggressively and daily,” says Gala. Too much food waste? Inaccurate forecasts need to be addressed. Paying full price for food when it’s cheaper elsewhere? That mistake can cost you. Overstaffed? Time to reevaluate who works and when. Most important menu items not moving? Train your staff to promote the products with the most profits. Employee theft also burns through serious cash without you even realizing it. Izzy Kharasch, president of Hospitality Works Inc., a global food service consulting firm in Deerfield, Illinois, is able to boost clients’ sales up to $3,000 per month after showing them how to make sure bartenders pour accurately and ring up every drink. “This is the difference of staying in business or failing,” he says.
Manage your cash daily and monthly. “Controlling the accuracy of how cash is handled on a daily basis will go a long way to increasing the amount of cash on hand,” says Kharasch. Regularly examining your budget, profit and loss statements and cash flow forecasts allows you to spot problems before they get out of hand. Also, keep an eye on when bills are due and always pay on time. You’ll minimize late fees and also build positive relationships with vendors.
These relationships can actually help you out of a financial jam, as Lou Palermo, owner of Tossed, a salad and sandwich franchise in Boston, discovered. Once when he faced the possibility of cash running short, “I called some vendors to negotiate a few days of leeway to free up some cash,” says the 38-year-old entrepreneur. They only agreed to do so because he’d always paid his bills on time.
Beware red flags. Certain problems are symptoms of serious issues and should not be ignored. According to Gala, these include declining sales despite a rise in food and payroll costs, high turnover of employees and managers, fewer customers than expected, missed deadlines on vendor payments, a property in dire need of maintenance and a significant erosion in food quality. “While one or even two of these issues can be explained, the presence of three or more calls for an immediate evaluation,” he says. “If you can’t get the business where it needs to be on your own, bring in someone who can.”
Spend smarter. Now is the time to evaluate every dollar you spend. Renegotiate contracts for better terms, upgrade equipment and hire employees only when needed, and be careful how fast you grow, as growth requires financing. “The restaurant business is a business of pennies,” says Kharasch. “Increasing cash flow will come from creative thinking on the entire operation, not just on a few parts of the operation.”