Balancing cash, commitments demands vigilance

Alex Woodie

In 2016 there seems to be one word on everyone's mind: revenue. And while revenue is on everyone's mind, restaurant operators can never forget the number in their bank accounts. Your business could be the next big thing, but if you do not have the cash to pay your bills and employees soon it will not matter how much revenue you have.

Here are four items you can focus on to give you a better handle on your cash situation. Once you have grown accustomed to looking at these four items, you can then begin to look at a number of different financial ratios that will help you maintain the correct level of cash.

1. Statement of cash flows

So often the first statement business owners look to is their income statement. Rightfully so, the income statement gives an owner insight into whether their business is appealing to their market and their expenses are kept in check. However, just because your business had a record month does not necessarily mean your bank account is healthy.

The statement of cash flows begins with the prior period ending cash balance. The statement will then walk through the monthly cash inflows and outflows. While some may think the cash flows statement should mirror your income statement, there is one glaring and simple exception:  a note payable. At first, your bank note will be almost entirely allocated to interest expense. All of this interest will hit your income statement, which means you will have an accurate picture of the cash leaving your bank. However, year after year the interest you pay will decrease and you will begin to repay more and more of your principal. This principal will never be shown on your income statement. Therefore, by running a cash flow statement you will be able to see the true amount of cash you are repaying to your bank every month.

2. Aging accounts receivable

As mentioned earlier, there is nothing more top of mind than revenue. However, revenue does not always translate into cash. More often than not, you will allow certain clients (catering clients, for example) time to pay for their purchases. While this type of credit program can certainly increase your business's appeal and revenue, you now must keep track of who owes you money and how long it has been since they paid their balance.

The accounts receivable aging summary report will help you manage your receivables or people with outstanding bills. This report is typically broken down by customer and 30-day increments, but you can customize the periods by what your expected collection period tends to be. We typically pull the report each week because we want to ensure we stay on top of those who are outside of their payment period or large receivables that will soon come due.

3. Aging accounts payable

The next step is to look at the payables side of your restaurant. You will often have a certain amount of time before your bills are due. If you have any doubt you are short on cash, we would recommend looking at an accounts payable aging summary to prepare for the upcoming cash outflows.

The next items to review are the cash discounts for prompt payment offered by suppliers. Depending on the supplier, you may get a discount for prompt payment. While prompt payment can certainly save a business money, one must also have the cash available. Therefore, it is important to plan for other large payments that will come due between the prompt payment deadline and the overall payment deadline. You may be forced to disregard the prompt payment to meet other obligations

4. Inventory

The final item involves current assets, or inventory. Inventory, in its simplest form, is a synonym for cash. As your inventory increases, your cash will decrease. While an restaurant owner needs to have menu ingredients and other supplies to produce meals, you must also ensure you are selling your inventory fast enough to recoup the spent cash, or maintain enough cash reserves to pay obligations that arise. In short, you must balance the on hand inventory to the cash reserves you maintain

Regardless of the business, cash is king. Properly leveraging these four items will help you better plan for your restaurant's future to ensure you can meet unexpected obligations.

Alex Woodie is the founder and CEO of Ledge, which provides users with online alternatives to traditional accounting departments.