Cash flow management is vital to the immediate performance, stability, and long-term success of any restaurant business.
Closely monitoring your restaurant cash flow statement – a detailed record of the cash coming into your restaurant (the inflows) and leaving it (the outflows) – impacts your ability to pay staff, keep the lights on, stock the walk-in, and make distributions to owners. It will also influence your ability to pursue expansion opportunities or even upgrades to enhance the customer experience or improve operations.
While some restaurant leaders mistakenly gauge the financial health of their business by looking solely at their balance sheet or bank statement, such quick glances fail to tell a full and accurate story because restaurants do not operate entirely on a cash basis. This is why a restaurant cash flow statement is so critical. It provides a clear, crisp report of the business’ available cash, confirming its ability to meet its operating expenses, replenish its inventory, and compensate staff.
Positive cash flow signals a healthy business prepared to meet the needs of its staff, customers, and vendors. It enables you to run your restaurant with confidence. It empowers bold ideas and informs decision-making. And it delivers calm, allowing you to know your business is on solid ground and can meet its obligations.
The Cash Flow Statement: An Overview
The restaurant cash flow statement records incoming and outgoing cash over a specific period of time. With a defined reporting window, something simplified with the help of restaurant accounting partners like Back Office, you can gain an ongoing and accurate picture of your restaurant’s finances.
A cash flow statement shares two overriding figures – cash inflow and cash outflow – and it’s necessary to have accurate numbers.
- Cash inflow is every dollar coming into your business. It includes food and beverage sales, of course, but also other sources of income, such as merchandise, rental income, capital from loans, financial assets, and investments from owners or partners.
- Cash outflow is the cash leaving your restaurant. Most notably, it covers wages and salaries and operating expenses like utilities, inventory, and rent, but also includes financial expenses like payments of dividends.
In simple terms, cash flow is determined by subtracting total cash outflows from total cash inflows.
Operators should review their cash flow statement every period to understand where cash is going and where it is coming from, which will inform decision-making, whether it’s about increasing staffing levels or purchasing new patio furniture. In addition, a bank will use your cash flow statement to determine the creditworthiness of your business, and their decision can impact your ability to pursue enterprising plans, such as a remodel, investing in catering equipment, or adding a new location.
The Cash Flow Statement: A Deeper Look
By accounting convention, the cash flow statement is divided into three parts:
Operating Activities
Cash flow from Operating Activities lists the transactions accounting for the bulk of your restaurant’s cash flows, such as food and beverage sales, merchandise sales, and rental receipts. Additionally, the Operating Activities section of the cash flow statement also records wages and salaries, purchases of inventory, and all the miscellaneous expenses of keeping the doors open, from paying utilities to equipment repairs.
Investing Activities
Cash marked under Investing Activities covers changes in assets, such as the purchase or sale of land, the purchase or sale of equipment, loans to vendors, and changes in holdings of stocks or securities.
Financing Activities
Financing Activities represent cash flow related to loans, repayments, or investor activity, such as investments from partners and owners as well as withdrawals/distributions to owners.
Taken all together, the cash flow statement will provide a clear picture of your restaurant’s financial health, helping you identify cash trends, ensure your ability to cover operational costs, and plan for growth.
The Methods to Calculate Cash Flow
There are two conventional methods to calculate cash flow.
#1: The Direct Method
An Overview: The direct method, sometimes called the income statement method, is used by businesses run on a cash accounting basis. It draws its name from the fact that a company directly lists all cash inflows and outflows, accounting for all three sections of the cash flow statement (Operating, Investing, and Financing Activities).
The Benefits: The direct method provides a highly transparent, detailed view of all cash activity. Every individual transaction is listed, which provides leadership a one-stop, universal look at where money is coming from and where it is being spent. As a result, leadership can compare cash flow across different periods (or even different restaurants for a multi-location restaurant business), dig into specific transactions to optimize results, and make more informed, data-driven decisions to power the business and improve its financial health.
The Drawbacks: The direct method is the more time-consuming approach because it means identifying every cash transaction, a potentially sizable task as a business matures and transactions mount. A restaurant employing the direct method must also be on top of its recordkeeping, as it seeks to account for every dollar the business takes in or pushes out.
2: The Indirect Method
An Overview: The cash flow statement indirect method is used by companies that run their accounting on an accrual basis. More widely used than the direct method given its simplicity, it involves making additions and subtractions to the net income statement based on cash and non-cash transactions. Start with the net income statement, add in non-cash expenses like depreciation and amortization, and then account for changes in current assets and liabilities.
The Benefits: Speed and Ease. Because it borrows data from the net income statement and balance sheet, the indirect method does not factor every cash transaction into its results, which makes it much faster and more straightforward to prepare.
The Drawbacks: The indirect method fails to generate the detail of its direct method counterpart. Without such granularity, a restaurant leader could struggle to identify specific financial areas in need of attention.
Determining Cash Flow: A Simple Example
Now, let’s look at a cash inflow and outflow example to fully grasp your restaurant cash flow statement.
First, start with all money coming into your restaurant. This includes regular menu sales, merchandise income, revenue from catering, promos, and all other money you’re owed. Remember: cash inflow might also include capital from other sources, such as rental income or investor contributions.
Next, calculate all outgoing cash. This includes loan payments, rent, utilities, payroll, taxes, inventory expenses, supplies, and regular payments among them. When figuring out cash outflow for your restaurant cashflow, don’t forget atypical expenses like capital expenditures, overtime payroll, distributions, and similar costs.
If your cash inflow equals $100,000 for a fixed accounting period (say, monthly), and your outflow is $75,000 for the same period, your restaurant cash flow statement will show $25,000.
Cash Flow Projection – and Why It Matters
While an accurate, current cash flow statement is important to ensuring continued operations and driving financial decision-making, a cash flow projection paints a picture of your financial future. This can spark sharper, more strategic decisions around investments to enhance the customer experience, streamline operations, or expand.
As the name suggests, a cash flow projection predicts future cash flow based on historic and known numbers. To create a cash flow projection:
- Select a specific time period for the forecast – a month, quarter, or 12-month period.
- Identify cash inflows during the defined time period. This will include known numbers, such as rental income or a loan, as well as projections. For instance, you won’t know your future sales, but you can review historical trends to create a reasonable and fair forecast.
- List cash outflows during the defined time period. Again, this will be a combination of figures you know – rent/mortgage or loan payments, perhaps – as well as projections based on historical numbers. You will need to estimate, for example, the amount you might spend on labor, inventory, and utilities.
- Determine your running cash flow by subtracting cash outflows from inflows.
- Compare your projection to real numbers to ensure there’s not a wild, unexplainable difference between current results and what you’re forecasting.
A cash flow projection can empower you to make shrewd, strategic decisions to power the long-term financial health of your business. If, for example, projections show weaker cash flow than normal, you might craft marketing plans to boost dine-in traffic, re-evaluate advertising spend, alter menu prices, or ready your financials to pursue a loan.
Lead your restaurant with confidence
A regular cash flow statement and cash flow projection will help you understand your restaurant’s financial health – today and moving forward. As a result, you will:
- Have a better sense of the levers you can pull to control expenses and propel profitability.
- Gain the necessary knowledge to optimize payment schedules and pursue growth opportunities.
- Know when you need to pursue additional funding to support operations or expansion plans.
- Be better positioned to make sharper decisions around investments in marketing, staffing levels, the menu, and more.
Employing sound cash flow management practices will empower you to operate your restaurant with confidence and capture the results you work so hard to achieve.
An easier path to your cash flow statement and projection
From food and beverage sales (cash inflows) to wages and operating expenses (cash outflows), much of the necessary data to complete a cash flow statement and cash flow projection lives on a modern POS. Beyond POS data, a cash flow statement requires tracking your accounts receivable and accounts payable.
A comprehensive restaurant accounting software solution like Back Office integrates with POS systems, AR/AP tracking, and more to pull out data for easy categorization and review. It will automate calculations, track trends, and generate projections, which will save time, reduce errors, and give you an accurate cash flow statement and even-handed cash flow projection in a fraction of the time.
For multi-location operators, in particular, restaurant accounting technology can prove especially beneficial. With so much data coming in from one restaurant location to the next, technology can simplify cash flow management and projections for individual units as well as the entire company to support informed analysis and decision-making.
