Part 1 of 3: Are You The Owner or Manager of a Restaurant? There is a secret recipe for restaurant success. It has two ingredients. Today we will share with you the first of the two ingredients.
The Third Financial Statement
The Third Financial Statement, also known as the cash flow report, helps your restaurant flourish and it is a must learn for any restaurant owner or restaurant manager. Below we briefly explore the three main areas (Operating, Investing, Financing) that affect your cash flow and how to plan for growth.
The Operating Section
The operating section is where all your sales happen. It is inclusive of all your bank deposits, AP vendor payments and inventory purchases. The operating section is the first area of the cash flow statement. We relate this section to the run out of gas light on your car. When you check the distance to the nearest gas station against how many miles until your gas tank is empty, you have a problem if the miles are higher than the station distance. What will you do? When we’re low on gas, we slow down our vehicle to extend the life of the remaining gas.
Slowing down to extend the life of funds is the first step in helping to control cash when there is a shortage. The time to extend these terms is when there is a deficit, we can predict it to vendors, and we’ve got an short extension to cover the payables. This slow down helps manage the cash flow of the business.
The Investing Section
The investing section is where we think about the equipment purchased. This includes refrigerators, fryers, and other equipment or fixed assets, and is the sum of the investing section.
An investor knows sometimes you may not have a healthy cash position because you just sold off several assets. This is a useful source of cash. Liquidating equipment is another way to help when you need cash flow. Instead of going to a third party like a lender, a bank, or other outside investors for additional capital, you could increase your cash flow and help fund any shortfalls in the first section of your operations.
The Financing Section
The third part of the cash flow statement is the financing section. That’s where the investor money for the business is displayed. When you initially open your restaurant, any cash flow from investors or loans from a bank, goes through the financing section.
As you use that cash, pay out dividends, or pay your loans down, it all goes through the financing section. This shows you that you could pay loan principals out of funds that may not be generated from the first operating section, and that could show your cash as down.That’s where net income or profit doesn’t always equal cash in the bank.
We see many restaurants overextended on loans. They own too much equipment, have too many loans they can’t pay down on the principal, and their line of credit sits maxed out. That will show in the financing section that you’re able to pay it out versus paying interest.
So to quickly recap, there are three sections on your cash flow statement. The operating, investing, and financing section. Each plays a part in creating an overall picture about the health of your restaurant. We call this the Third Financial Statement and belief it’s vital to long term success.
The Third Financial Statement is the first of two ingredients to rate your growth and for restaurant success. Next month we will give you the second ingredient and share what can happen without these two very crucial parts in place.
Trusted CFO Solutions saves you time, delivers visibility, and gives you control to grow your restaurant by streamlining your financial operations. Click here to learn more how we help transform restaurants from chaos to order.