What Restaurant Owners Should Know About Managing Their Working Capital
Many restaurant owners find that one of the hardest aspects of their business is managing their working capital. With all the ebbs and flows of their cash daily, it can seem that all too often the cash balance is great one week, and horrible the next. These working capital shortages can be a big distraction from activities that are just as important in the restaurant business. When a business owner is worries about their working capital, the problem can trickle down to other areas, as lack of payment to employees, vendors, and other services can stop. This can be a huge damage to the business, and the business owner's, reputation when people do not get paid on time.
But managing working capital is not just a problem for unprofitable restaurants, it can be a large problem for any profitable restaurant also. So, how do restaurant owners go about keeping up with the working capital situation so that they can smooth over the peaks and lulls? Let's start with a look at how the dynamics of the working capital and how it flows differs from the income and expenses that are on a restaurant's P&L.
Working Capital is Different Than Your Net Income
We will start with the P&L, which is very easy for restaurant owners to understand. The main dynamic of their income is that you want more income and less expenses so that you can maximize the amount of your net income that is earned. Managing the working capital for a restaurant is mainly a timing issue and is all about managing when the working capital comes in and when items and invoices are paid out.
For example, if you know that you will have a great month this month, but next month will be slower, then you need to pay as many invoices and bills as possible to catch up for next month when working capital will be tighter. You should also start thinking of ways that working capital can be freed up during the slower months so that your bills, invoices, and payroll will always be met.
Another way that you can help to free up some working capital during the slower months is to try to delay some of the payments that are scheduled for those months to other months when the working capital is larger. Some payments, like payroll, can not be put off, but you can always work with vendors to work out any type of flexibility that they can offer you. You should always try to approach your vendor ahead of time so that you are not behind on payments and explain why your working capital will be shorter or in a crunch during those months. Most vendors will be more than happy to work with you, provided that you have a good reputation with them already. Just make sure that you take the time to contact them in advance.
A Key To Managing Working Capital For Restaurants
A great way to manage your working capital is to create a simple worksheet that will help to estimate weekly cash receipts and payments that you will have for your restaurant. By using this sheet each week, you will be able to determine which weeks you will need to save for and which ones will bring you extra cash. Since most restaurants find that their week to week working capital changes due to things like payroll, rent, and taxes, doing a weekly sheet is a great way to stay on top of everything that comes in and out of your restaurant. You can also use this sheet as a monthly worksheet to help determine which months will be good, and which will be slow.
There are many great ways that you can use simple sheets to keep track of your weekly, monthly, and yearly working capital. By keeping a close eye on what goes in and comes out, you can anticipate any problems that you might have and head them off at the pass before they become something that will cripple your restaurant.
Merchant Advisors can help your restaurant find the working capital it needs to make it through those slower months. Simply fill out our quick and easy form and you will be talking with one of our representatives in no time who can set you on your way to a better financial situation for your restaurant.