Cash course

“A business plan is the cornerstone of everything you do, including managing your cash flow,” says Tim Sanford, Prince Group purchasing manager.

“A business plan is the cornerstone of everything you do, including managing your cash flow,” says Tim Sanford, Prince Group purchasing manager.

A cash flow crisis is one of the fastest ways to trigger a managerial meltdown. Nicole Azzopardi tracks down the experts to help you take control of your cash.

On paper, things are looking good. The restaurant is packed, the staff is working flat out and you’re taking money hand over fist. You just need to stall those creditors for a couple more weeks. Sound familiar?

Knowing what causes kinks in your cash flow is the first step to avoiding a crisis, and relying solely on profit and loss statements will do little to reveal where problems may lie.

Purchasing manager of the Prince Group Tim Sanford knows a thing or two about managing cash. After 30 years in the hospitality trade, he now advises on buying for restaurants within the Melbourne-based Prince Group, which includes Circa, Longrain, Stokehouse, Il Fornaio and Carousel.

For Sanford, keeping a close eye on the market helps with purchasing decisions—and keeps cash moving. “For example, dairy is going up between 16 and 17 per cent at the moment,” he says.

“Last year, canola went through the roof when talk began about using it to make bio fuel. The question is: do you have contracts in place that insulate you from those rises?”

Maintaining good relationships with suppliers will help you get advance warning when changes are about to occur, Sanford says. “If there’s a relationship already in place, there’s a mutual respect.

“Look at the top 40 products you buy in your business and work out what can be contracted. This is going to be more essential in the next six months than it has been in the past 10 years. Everything is going up. You can hide 4 per cent, but you can’t hide 10 per cent. It’s like fixing your home loan,” he says.

Over-capitalising is another cardinal sin that is often made, despite the warnings, he says. “Don’t spend what you haven’t got. Often people don’t realise you’ve got to run a business for more than three years before you can make a dollar. You need that much capital to keep yourself afloat.”

Put a business plan in place to display how you’re going to stay afloat over the three-year adolescence, Sanford advises.

“A business plan is the cornerstone of everything you do, including managing your cash flow. Too many people go into hospitality thinking it’s an easy way to make a dollar and get hooked up in the romance. In essence, there’s no romance, there’s a lot of work, overtime, overheads and huge competition.”

Australian financial planner Anna-Louise Brown of Madison Financial Group also believes people fall into the trap of starting with ideas that are too grandiose.

“Concentrate on motivating staff and keeping them,” she says. “It’s more important than having the most expensively laundered linen. Too many restaurants start with the silver service and have to cut back.”

For Brown, it’s the difference between finding that golden front-of-house staff member who can cater to 50 per cent more tables than another person who’s less effective on the floor.   It’s important to find ways to reduce costs.

“You can have the most brilliant chef, but if he or she is no good at ordering, lets produce go to waste and can’t plan requirements, that will also end up costing,” Brown says.

It’s also vital to have enough staffing numbers for different serving times. Theft is a risk that also needs to be factored into the mix.

“Almost as important as doing a business plan is putting in place strategies for managing the till so you know you are receiving all of your takings. Theft occurs not just on the till but on meat and alcohol, too.”

Take the time to train staff about where the cash cows are on the menu, she says. “Make sure staff realise they need to sell soft drinks. You don’t make that much on a lobster or a fillet steak. Salads, pasta and soft drinks are where the profits lie.”

Keep the bank informed if you have a financing agreement with them. It will assist your peace of mind, and they may offer advice.

“Don’t try to hide the truth from them; they’d prefer to hear something negative so they can be there for you if necessary,” Brown says. “The last thing they want to do is lose you as a client or have a loan go bad.”

A sound marketing strategy also affects cash flow, Brown says. “If you can push staff to work 10 per cent harder it will free up some cash. If you can bring it home to them the concept of ‘we’re all in this together’, the staff will be more proactive and on your side. Essentially, they are sales reps when it comes to the bottom line.”

Brown also advises putting in place mechanisms to protect personal assets before opening a restaurant or catering business:  “If you are in a relationship, you may want the house to be owned by one partner not involved in the business and the other in your name, or you may even want to hold your property in trust. Though it can be an expensive process, it offers some protection.”

Assets in superannuation are already protected from bankruptcy and small investments can be protected from creditors by investing them in a trust or by selling them and placing the proceeds in imputation bonds, she says.

“People panic when there’s a cash flow problem and begin to cash in their investments. They mortgage the house and it escalates from there,” Brown says. “Essentially keep your personal assets distinct from the business.”

Accountant Stephen Moran says the main problem he sees is when business owners don’t meet their tax office debt. There are about 600,000 entities that currently owe money to the Australian Tax Office. People who don’t provide for GST, fall behind when the next financial quarter arrives.

“Or, we tend to see people who wait and lodge two or three of them late and end up with a massive debt,” Moran says.

“It’s the same thing for wages, they don’t hold that cash aside either. They haven’t made any provisions against it.”

The tax office can charge fairly high penalties for late lodgements, which can be about $110 a month. At the same time you can be slugged for interest rates around 13 per cent.

“It’s like having a credit card debt,” he says. “It’s best to keep up-to-date with what you owe the tax man—even if you just create a separate account and put some money aside.’’

Moran advises putting 20 per cent aside from takings each week, which would reduce risk and the possibity of liquidation.

National Australia Bank’s general manager of major projects and channels Serge Premier says you must ensure you know exactly where all your cash is.

“Have you billed all your customers and collected on invoices? Make sure you invoice promptly. You can lose track when you’re busy getting the job done,” Premier says.

Consolidating funds into the one account is also a useful tool.

“Small businesses often have dribs and drabs of money in different accounts, but if they could be put into one account they could generate a higher interest rate, “ says Premier. “It helps with cash and generates more income.”

For caterers, accept credit cards if available, Premier advises. That way the transaction happens within 24 hours with no mucking around with trading terms.

Facilities that work directly from a mobile phone that allows you to take an EFTPOS machine anywhere increases  efficiency as well as your potential cash flow.

Finally, understanding the cyclical nature of your business is crucial. Make provisions for events such as the Melbourne Cup and Christmas parties.

They are going to require much more cash to produce a solid cash projection. “A lot of people tend to dip into their overdraft account, which is an expensive way to do things,” Premier says.

“A credit card can be useful. Used wisely, you can generate an extra 30 to 40 days of payment terms.”

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