We’ve worked with a lot of restaurant owners here at Keeping Your Balance, and we’ve learned that restaurants are really somewhat unique in the business world. For starters, there are these pesky statistics about the success / failure rate of restaurants. Although some absurdly inflated percentages are often bantered about, the real numbers are bad enough. According to a report by Cornell University, no less than 60% of restaurants fail within their first year of operation, and by five years, that number increases to 80%.
Looking in from the outside, it’s often difficult to really understand just why restaurants fail, especially when we’re talking about eateries that we really like. In most cases, it’s not the quality of the food that prevents a restaurant from achieving success. Of course, that’s a possibility, but if they were serving sub-par meals, they’d be likely to fail even sooner. Like any business, there are a variety of factors that could influence their success, including their location, ambience, a variety of management issues, and the quality of the service they provide. But more often than not, we scratch our heads, wondering why a place with good food, which always appeared to be busy, suddenly shutters its doors. In those cases, it generally turns out that it’s a cash flow problem that sank the restaurant. Many restaurant owners are so consumed with the more obvious concerns - perfecting the recipes, providing world-class service in a great atmosphere, and so on, that they fail to observe proper accounting practices, starting with good management of their cash flow.
For starters, the concept of cash flow is neither complicated or esoteric. It’s simply a comparison of the amount of cash coming in to the restaurant with the amount of cash that goes out. Of course, you’ll want that number to be positive. In order to accomplish that, it’s important to remember a few points about managing cash flow.
- Cash flow should be monitored on a daily, weekly, and monthly basis.
It’s crucial to understand just what your expenses will be, starting with the coming week. You’ll need to take into account your bills, including rent, payroll, and invoices from your vendors. This needs to be compared with your projection of sales for the same time period. Of course, this projection will be an estimate. Successful restaurant owners keep detailed records, so they always know how much they made this time last year, and even include factors like what the weather was at that time.
- Payroll is always a sticky point, and needs to be budgeted for carefully.
When you’ve got people working for you, they expect to get paid, on time, every time. You really can’t miss a payday. Smart restaurant owners will plan ahead, looking at trends from past months and years, to come up with a reasonable budget of how much they’ll need to set aside for payroll. They’ll try anticipate their needs to hire more staff, and look at rates of turnover. This won’t be a crystal ball, but it will certainly make it easier to deal with payday when it comes.
- Keep inventory levels low.
In most businesses, inventory can always be counted as an asset. A wise restaurant owner knows that this is not always the case in this business. Your inventory in food, most of which is perishable. If you buy too much of certain items, and can’t sell them quickly enough, your inventory won’t just be gathering dust in the warehouse as it is for most companies. You’ll have spoiled, unusable food on your hands, and that’s a total loss. Keeping inventory low and cash flow high is one of the keys to success for restaurants.