Part 3 of 3 - Do You Know The Three Ideas To Keep An Investor Mindset And Position Your Restaurant For Success?
In the past two months (Part 1, Part 2) we have covered the two crucial ingredients for restaurant owners and managers to position themselves for growth and success.
First, we talked about the Third Financial Statement and that 59% of restaurants fail within the first three years due to not understanding and using this crucial tool.
In our most recent article, we talked about the importance thinking like an investor matters, the second most important part of preparing for restaurant success.
Today, we will unfold the 3 WHYS for keeping that investor mindset, positioning your restaurant for success, and how you can answer the well-known question, “When will I get my investment back out of my business?”
Why should you as restaurant owners or managers care about the cash flow statement? It’s about the return of your investment, the return of your money, the return of the business worth. You’ll want to know if it’s still worth as much as you put into it, and investors require this return on investment.
A restaurant owner’s spouse wants a return on their investment, too. When you put money into the business, shouldn’t you be earning a return? How can you measure that? The cash flow statement is one way to know when you can pull money back out of the restaurant as opposed to allowing the money to be gobbled up in operations.
Investors look at several different reports, but the cash flow statement is usually the first. The types of questions investors care about involve generating cash, losing cash, and if the assets are properly structured for generating required sales. Investors want to see that your processes are sound. They will want to see your P&L, but the cash flow statement is what gives them precise vision of what’s happening.
Investors predict growth and they are willing to give you more money if you can show them that you’re growing and that your operations are producing cash. The best time to ask investors for more money is when you don’t need it!
On Shark Tank, investors always tell the fund seeker that if they get volumes of sales, they’ll fund the growth of the inventory, but they don’t simply need a generic aspiration, they want a specific map of how that will happen.
How much cash is operations throwing off? How much cash is in the investing section for your fixed assets and equipment? How much do you have from investors in the financing section, and how much have you given back through dividends to your investors?
The Right Thing
The cash flow statement reconciles or connects the dots between the profit and loss statement, and the balance sheet. Most businesses make money, but few know how to manage it well. About 75% of the businesses we've spoken to in our journey might have a profit but lack accessible cash. Because of timing issues and the way that things get booked, due to accounting rules, you’ve got to use a cash flow statement to thoroughly understand the cash in and cash out of the business.
Accountants leverage periods of time to generate a statement of cash flow. You, as restaurant managers and restaurant owners, must look at the trends of the operating section. Has it gone up? Has cash gone up in the operating section? If so, your business is generating cash, and that’s good.
Now, what about the investing section? Is it going up or down (Important!) ? And also the financing, have you received funding from investors? Have you had to put more money into the business personally? Have you had to get loans from banks? Are you having to increase the financing section because your operations are draining dollars?
The accountant makes accruals to ensure the balance sheets are accurate. They look at your bank statements to make sure the balance is right. They look at your loan statements to make sure your liability section is correct. They look at your fixed assets to make sure they have appropriately depreciated. So, they make sure the balance sheet is right and then they report on the cash that flowed in and out of your business. In general, that’s what accountants do.
The cash flow statement didn’t exist before 1998. Why was it created? Business owners, business professionals, and professional investors demanded from the accounting standards board that we see the cash inflows clearly, where cash comes into and goes out of the business without having to look at all the bank accounts. So began the cash flow statement that is now the Third Financial Statement.
Predicting the Flow of Money
The third reason you've got to start learning how to use the cash flow statement and why it's so important in business is that it gives you the ability to predict shortfalls and surpluses in your restaurant business.
We had a client who, several years ago, opened a restaurant. They had ten investors with $10K each for a total of $100K invested in the restaurant. Payback was intended to happen within two years, but the restaurant did so well the investors received payback in nine months! Immediately, the investors wanted to reinvest those funds and open a second restaurant location.
How you get the money out of your business can predict when investors get their money back or predict that you’re going to need money from investors to fund payroll, and you need to explain why.
When you think like an investor and know how to use the third financial statement, you’ll have the answer to the vital question, “When will we get our investment back out of the business?”
If you’d like to learn more about the third financial statement we created a webinar with the GRA that will take you deeper into learning the third financial statement and how to measure success in your restaurant.