Cashflow basics
This Cashflow basics Info Guide covers the basics of cashflow, including the cashflow cycle and the differences between profit and cashflow.
Cashflow is the movement of cash in and out of your business over a period of time.
You sell meals to your customers from whom you collect cash. You then use cash to pay suppliers, staff, lenders and Revenue. In this way the cashflow cycle is repeated again and again – cash in, cash out, cash in, cash out….
This continuously repeated cycle of cash inflows and cash outflows determines your ability to have enough funds to pay all your outgoings and keep your business running.
Positive cashflow
During each cashflow cycle the amount of cash coming into your business should ideally be greater than the amount of cash going out. To have a positive cashflow your long-term cash inflows from customers and lenders, such as your bank, need to exceed your long-term cash outflows, such as employee salaries, and payments to suppliers and creditors.
Negative cashflow
Your cash may be tied up in debtors (customers who owe you money) and stocks (goods that you have bought but have not yet sold). There will be periods when your expenditure exceeds your income for a period, leading to negative cashflow.
Negative Cashflow Example
- If your total unpaid purchases at the end of the month are greater than the total sales due, you may be spending more cash than you receive in the next month.
- Meanwhile, you need cash to pay next month’s overheads and payroll, and to make loan repayments, but you may experience a short-term cash shortfall.
Cash management
Cash management is concerned with the timing of the cash received (not what is promised!) and the timing of the cash paid out, including VAT, from all your transactions.
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In an ideal world, you would always collect more money than you pay out during each cashflow cycle. But in reality you need to carefully monitor your cashflow so that you can take action on those occasions when less money flows into your business than flows out.
Many restaurant owners fail to recognise that cash is the lifeblood of their business. Be realistic when forecasting your future cashflows and anticipate when future shortfalls may occur. Carefully monitor your cashflow during cash outflow periods and be prepared to take corrective action, if necessary.
Remember!
Your employees, suppliers, lenders and Revenue expect their payments when they fall due. Preparing a simple Cashflow Forecast helps you to know when cash is expected to flow in and out of your business. You can then identify when cash shortfalls may occur and carefully plan all due payments.
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Cash is the actual money that flows:
- into your business when your customers pay you.
- out of your business when you use cash to pay expenses and other outgoings.
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Cash arises from trading transactions and non-trading transactions.
Cash typically comes into your business from these three sources:
1. Customers
2. Investors
3. Lenders
Restaurants have an advantage over many other businesses in that they receive payment immediately from customers at the point-of-sale, or shortly afterwards via credit card transactions. But a restaurant business won’t survive if insufficient money is received from customers. You need to put controls in place to:
- ensure that customers are charged for all food and beverages served.
- ensure customers don’t leave without paying.
- follow up with credit card companies or accounts that you give credit to.
Most restaurant businesses need start-up funds and often require an injection of cash as they develop. The first investor is usually you, followed by your family and friends. When these sources are exhausted you may need to find an external investor in order to further develop your business.
Lenders such as banks may provide a bank overdraft to get you through tough times in the short-term. If you are investing in assets, such as new equipment or premises, you may be able to secure longer-term finance such as leases, term loans and mortgages.
It’s more difficult to secure this type of funding during an economic downturn and you will need to satisfy your bank manager’s two major concerns: security and ability to repay.
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It’s essential that you learn to balance the needs of each payee and the timing of your payments.
The typical restaurant business pays:
Employees are your most valuable resource as they are the people who meet your customers on a daily basis.
Remember!
You need to pay yourself as well as your staff either by salary or by drawings if self-employed; surprisingly this is often overlooked by restaurant businesses when preparing Cashflow Forecasts.
Payment terms
- Agree payment terms with suppliers – negotiate the best deal and stick to it.
- Depending on your situation, you may have some flexibility with regard to payment method or payment timings.
Lenders usually make the rules of the deal and will tell you when you need to pay them. They are in a stronger position than other suppliers as they often have security over an asset, or a personal guarantee from you.
Remember!
Missing agreed payments to lenders can negatively impact your credit rating and your ability to borrow in the future.
- Many businesses have gone out of business as a result of unpaid taxes!
- Difficulties arise because taxes are payable one month or more after you have taken in cash or paid your employee wages - the cash may be gone by the time you need to make tax payments.
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Making a profit does not necessarily mean money in the bank! To fully understand cashflow, you need to understand the following key differences between profit and cashflow.
1. Activity
2. Timing
3. Non-cash items
Remember!
If you are VAT-registered, profit is calculated from VAT exclusive transactions, while cashflow includes VAT in receipts and payments.
Remember!
Depreciation is the amount that the value of equipment or other assets reduces by in the year – calculated as a percentage of their original purchase price.
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