Habif, Arogeti & Wynne LLP’s Retail, Franchising & Hospitality Group
Candy may be king during Halloween season, but in the business world, cash is king every day. Nothing can be scarier to a restaurant than running out of cash because, simply put, cash is the lifeblood of a business. You need cash to make your lease and utility payments, pay your wait-staff, and stock your restaurant with food. But what happens when that normal flow of cash goes horribly wrong?
Let’s take the case of a hypothetical company, Danielle’s Bistro. Though revenue was $8 million last year, the owner takes a rosy view and anticipates revenue of $20 million this year, based largely on her recent menu research and development and the opening of a new location.
Unfortunately, despite the additions to her menu, Danielle’s Bistro posts much smaller revenue growth than anticipated while experiencing a significant growth in operating expenses. By the middle of the year, the owner is struggling to pay her rent, and she’s behind on payments to her vendors. Desperate, she approaches her bank to ask for a loan, but is sent to another bank, where the interest rates are twice as high. The owner then goes to her private equity partners, who helped her get off the ground, and discovers that she can get the money – if she gives up a significant percentage of the company. The owner is stuck between a rock and a hard place, and could lose her company if she doesn’t make a choice.
It’s a terrifying story, fitting for Halloween if it weren’t so often true. Not having enough cash can take you by surprise, and that surprise factor is something every management team wants to avoid. Any business can experience cash shortages despite showing ongoing accounting profits because cash receipts do not necessarily coincide with revenue or profit recognition.
To avoid the shock of finding yourself in the position above, keep a rolling 12-month projection, and prepare a best-case and worst-case scenario for your business. No matter where you come out, you’ll be better prepared and hopefully not experience a big surprise.
Some common pitfalls to avoid include:
- Excessive optimism when it comes to your top line. Base your expectations on your recent experience, realistic growth rates and known changes to the business.
- Understated expenses. Know exactly what your costs are and don’t let them run away from you. Update your rolling 12-month projection for known changes.
- Lack of understanding of the timing issues. Figure out what times of year your business needs the most cash and plan accordingly.
- Failure to consider capital expenditures and debt repayment requirements. Estimate how much cash you’ll need to expend on these items in advance.
- No margin for error. Making predictions about the future means you could be wrong, so leave yourself some room for mistakes. Update your forward projections as these will hopefully alert you months in advance of your cash needs.
Lack of cash can result in a business failing, regardless of reported profits or losses. By implementing cash flow projections and using them to plan, your business will be in a better position to handle any surprises that crop up.
Have you experienced a terrifying cash flow issue?
Share your cash flow horror stories with us during the Halloween season by contacting Sheldon Zimmerman at firstname.lastname@example.org.