Learning to run our restaurant during a pandemic has been one of the greatest challenges of our lives. The restaurant industry was flourishing and then came March 2020, when, BOOM, we had to close our doors and literally learn to pivot our businesses so we could still have cash flow, even in a pandemic. Watch the video below or keep scrolling to read about your cash flow and how to make a plan for it.
Restaurants are cash flow businesses because cash pays the bills, not profits. Most restaurants are two weeks cash flow positive, meaning as long as there are sales coming in, you can pay two weeks’ worth of bills, food and payroll. You can pay your rent on time, put some nickels aside and get there. Many of you know exactly the panic you experienced in week three of this pandemic when the cash was gone and the pivot hadn’t come or hadn’t generated sales yet.
Taking PPP and EIDL out of this since most people no longer have those funds anymore, the most important thing to work out during this uncertain time is how to manage the cash you do generate.
Some restaurant owners are able to stay even and some are actually making money. But a lot of restaurant owners are losing money hand over fist. The goal is to bring that loss of money down to something bearable. Here I want to offer you some motivation: yes, it's tough, but your restaurant is your greatest asset. You may lose business today and it may cost you $30,000 to stay afloat over the next 12 months, but in a year from now, when things turn around and it's worth a $150,000, is it worth staying in there?
To many, the answer is yes, and I want to help you figure out your cash flow so you can get back to that kind of value in your restaurant. Here are four things you can do manage your restaurant’s cash flow.
Number one: know your breakeven point. That is at the point in time when every dollar that comes in, goes out. You make no money. You lose no money. The key to understanding your breakeven point, without going into the whole equation is to start with variable expenses and fixed expenses. The variable expenses are primarily those that go up and down with sales, such food cost, liquor cost, labor, advertising, paper expenses and anything that you use more of when you get busy.
Let's say it all totals up to 70 percent of sales. For every dollar that comes in, you use 70 cents for your variable expenses. That means when all is said and done, after you pay those bills, you have 30 cents left of every dollar. You use those 30 cents to pay your fixed expenses, like rent, until you’ve used paid that bill. You keep bringing in those dollars, dropping those three dimes on top of each other until you cover all of our fixed expenses. And at that point in time, that's your breakeven point.
Why is that important? When you can become more efficient and see the impact of reducing your food costs, you become more profitable sooner. When you can reduce your labor costs, you become more profitable sooner. When you get rid of the three services that were extra and don't need right now during a pandemic, you become more profitable sooner. The sooner you become profitable on the same dollars, you can start taking those three dimes and put them in your back pocket. That puts you at a 30 percent profit margin after your breakeven point. That's huge.
If you know where your breakeven point is, you can go around having to create a 12 or 13 period budget. This is especially helpful when things are as uncertain as they are.
Number two: your menu is on the table. Read this article to learn about finding your restaurant’s ideal, budgeted and actual food cost, which will help you determine your target for this time period. To reach that new lower food cost, you may have to re-engineer the menu, change menu items, raise prices, change ingredients, reduce portion sizes, and change what people buy to get that food cost percentage down. For some people that's damn near a concept change. Everything is on the table. You cannot fall in love with anything. Your menu is critical because why your labor costs is higher because many of us with 50 percent drop in sales and worse are seeing minimum staffing levels crushing us. I got two cooks on the line, one manager, one server. What do you want me to do? So we have to go into our tool box and reduce our food costs. Our cost of goods sold.
Number three: make a cash flow budget. You have to create a 12-week cash flow budget because it is how you create a plan. You have to ask questions like, “Can I pay rent, or do I need to defer it? Can I have that music service, or do I need to try some ‘alternatives’ for the time being?” What can you do to reduce those expenses so that you can determine when you can pay your bills based on the sales you have coming in? You need cash because profits don’t pay taxes. Once you pass that breakeven point, you can pay these additional services. If you want to learn more about this, look for episode 5 of my podcast where I interview Anne Gannon, CPA and principle of The Largo Group, a restaurant accounting firm. The episode is available Oct. 7. You can also visit Anne’s website to look for free courses on cash flow and planning.
Number four: Master Restaurant 101. Typically I talk about Restaurant 101 as hot food hot, cold food cold, and a clean, safe work environment for guests and employees. It includes WOW customer service, an incredible product and great hospitality. But since the “pivot,” you have to take that cleanliness to a whole new level. Now we're talking about sanitary conditions that masks, PPE, wiping down surfaces more often, sterilizing things, your methods for how you hand things to people. That matters and that's a part of your marketing to make people feel safe.
Restaurant 101 in this pandemic also includes delivery, if you didn’t have that a key revenue stream before. You have to make sure the guest has a great experience when the food gets to their home. That means when the third-party delivery representative shows up at your door, you did something to verify that it is exactly what's on the ticket, that all the condiments are in the bag, that there's napkins, that there's knives and forks and all the things your customers need. When the guest gets your product in the home, they’re not eating cold soggy French fries out of Styrofoam. You have to test your products in different delivery containers and make sure everything is received by the customer damn-near how they’d receive it in the restaurant.
Your cash flow is the most important thing to worry about and plan for right now. You can read how to create a 12-week cash flow budget, or you can visit The Largo Group’s website to schedule a free consultation with Anne to review your restaurant’s numbers.
For more help with your restaurant managers, sign up for my free webinar, The Secrets to Holding Your Restaurant Managers Accountable."
Be sure to visit my YouTube channel for more helpful restaurant management video tips.
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