Chapter 33 — Key Takeaways

Cash Flow and Working Capital: The Thing That Actually Closes Restaurants

The core claims

Profit is an opinion; cash is a fact. Profit is a result computed over a period under accrual conventions. Cash is what is in the account on the Thursday payroll has to fund. The same restaurant, in the same month, can report both — pointing in opposite directions.

A restaurant closes when it cannot fund something, not when it stops being profitable. Every closure is a cash event with a date. The P&L has no dates on it.

Four wedges drive profit and cash apart, and every restaurant has all four. Debt principal never appears on the P&L. Owner draws never appear on it. Inventory build consumes cash at no cost to profit, because COGS is usage, not purchases. Everything else is timing.

Restaurants have a negative cash conversion cycle on the sales side and still fail — that is the interesting part. A mature restaurant on vendor terms really is financed by its vendors. But the advantage arrives late (year one has no credit history), it finances inventory rather than fixed costs, and instant collection creates a dangerous illusion of liquidity.

Your bank balance overstates your position, and by the most on the days it looks best. Sales tax collected, event deposits held, gift-card liability, accrued payroll — all sitting in the same account, none of it yours.

Working capital is funded when capital is raised, or it is not funded. Nobody raises working capital in week two.

Cash problems are scheduled events. You do not need a forecast to know February is going to be hard. You need a calendar, and you need to have looked at it in September.

The key numbers — Bellwether (constructed teaching example)

The formulas and rules of thumb

  Cash conversion cycle    CCC = DIO + DSO − DPO
                           Bellwether year 1: 23.5 + 1.4 − 4.0 = 20.9 days

  Working capital          current assets − current liabilities
                           Bellwether, opening day: $42,800 − $45,900 = −$3,100

  Runway (days)            cash ÷ (monthly fixed obligations ÷ 30)
                           $8,700 ÷ ($48,933 ÷ 30) = 5.3 days

  Working-capital need     pre-opening overrun + forecast trough + 30-day floor
                           $36,300 + $16,142 + $48,933 = $101,375
                           Cross-check: 60–90 days of fixed obligations
                           = $97,866 – $146,799

  Cost of skipping 2/10    (0.02 ÷ 0.98) × (365 ÷ 20) = 37.2% annualized

Rules of thumb. Open with 60–90 days of fixed obligations in cash, after every pre-opening bill is paid. Update the thirteen-week forecast every Monday, in fifteen minutes. Size a revolving line to the trough plus a floor you refuse to spend into. A line that has not touched zero in twelve months is not a line.

The two figures worth photographing

• Figure 33.6 — the thirteen-week forecast. The central artifact. Note the memo lines under the ending balance; without them the number is not information.
• Figure 33.4 — the timing calendar. Twelve months of scheduled obligations, with the four collision months named: February (lowest revenue plus $15,570 of annual items), **January** (December's larger tax remittance against January's smaller collection), **October** (the three-payroll month, $19,231 invisible on the P&L), June (rent commences; the abatement is spent).

Key terms

cash flow vs. profit · working capital · cash conversion cycle · accounts-payable terms · vendor float · seasonality · the 13-week cash forecast · runway · reserve · line-of-credit discipline

Where this connects

• Chapter 1 §1.4 named cash timing as one of the four killers. This chapter is the proof.
• Chapter 9 built the pre-opening budget that consumed the reserve.
• Chapter 13 set the $6,438-a-week food purchasing that drives the payables column.
• Chapter 26 established 1–2 day card settlement and the 2.81% processing cost.
• Chapter 29 gave the event terms that make an event cover finance you.
• Chapter 31 built the weekly flash report; add the cash line to it.
• Chapter 32 handed over the number this chapter is governed by: cash break-even, 77 covers.
• Chapter 34 is next, and it is a cash chapter: $53,122 of leak against $4,849 of controls.
• Chapter 39 answers the question a forecast cannot: not when do we run out, but should we continue.

What you should be able to do Monday morning

Build the thirteen-week forecast for the restaurant you are in. Open the bank balance, list the next thirteen Fridays, put payroll on its actual dates, rent on the first, sales tax on the twentieth, and every periodic bill on the week it lands. Forecast collections gross of sales tax and show the remittance as an outflow. Find the minimum. Then subtract the money that is not yours — tax collected, deposits held, gift cards unredeemed — and write that number at the bottom in a different color.

If the minimum is uncomfortable, you have found something in twenty minutes that most operators find in month nine.