You may run a tidy pub, achieve good margins on food and drinks, keep your costs and staffing at an optimal level, in short, run a good pub business, but unless you understand the old adage of “cash is king” you run the risk of damaging or even (in the worst case scenario) destroying your business unless you understand the principles and management practices of cash flow.
What is cash flow?
Cash flow is the measure of your business’ ability to pay its bills on a regular basis and within time limits set by third parties, such as your staff, HMRC and your suppliers. It is wholly dependent on the amount and timing of money flowing into and out of the your pub each week/month/quarter. Achieving a positive or ‘good’ cash flow will enable your business to pay its bills on time, from the cash balance available to it, from time to time.
Cash balances include:
- coins and notes
- current accounts and short-term deposits
- unused bank overdrafts and short-term loans
Cash balances do not include:
- long-term deposits
- long-term borrowing
- money owed by customers
- stock
The importance of a good cash flow
As I said in the introduction no matter how tight a ship you run if your pub business can’t pay its bills on time you are, ultimately, destined to fail. To trade on an ongoing basis and grow your business, you need to build up cash balances by ensuring the timing of cash movements puts you into positive cash flow. This doesn’t mean just a huge bank balance, as dead cash not earning interest is as bad for your business as dead stock in the cellar.
Cash In and Cash Out
In an ideal world you’ll have money coming into your business that more than match the amount you are paying out, however as we all know pub businesses exist in the real world where even a drop of rain can affect your business and reduce your takings, thus creating periods of negative cash flow; where the money going out is less than the money coming in. In a lot of instances pubs are playing “catch up” on bills as they buy stock and plan activities in advance of their customers paying for them. The trick is to speed up times when cash comes in and slow down times when it goes out, it’s called cash flow management.
Cash In
- Payment for goods or services from your customers
- Customer deposits and other advanced booking charges for private functions etc
- Receipt of a bank loan
- Interest on savings and investments
- Increased bank overdrafts or loans
Cash Out
- Purchase of wet and dry stocks
- Wages, rents/mortgages and daily operating expenses
- Purchase of fixed assets – kitchen kit, furniture etc
- Loan repayments
- Income or corporation tax, VAT, PAYE payments, business rates, Machine Game Duty
- Reduction in ones overdraft limit or other credit arrangements such as drinks suppliers
When you pay for things is often determined by third parties such as HMRC, your suppliers and your staff; making sure you have sufficient funds to pay them is crucial to the survival of your business.
Ways to improve cash flow include:
- ask your customers to pay sooner, for instance asking private function bookings to pay the bulk of their bill in advance
- not allowing customers credit or ‘tabs’ and if you do making sure they’re settled quickly
- ask for extended credit terms with suppliers and if possible order less stock but more often
- lease rather than buy equipment
- improve profitability by controlling costs, minimising waste and effective staff rostering
- borrow money or inject your own money into the business (my least favoured option)