Effective Cash Flow Management for Restaurants

At a glance

• The main takeaway: Times of economic uncertainty come with concerns about financial stability. When people are concerned about the economy, they are concerned with their cash flow, which potentially results in cutting down spending, such as dining out at restaurants or booking a staycation at a hotel.
• Impact on your business: This shift in consumer behavior can pose a ripple effect on the restaurant, franchise, and hospitality industries, especially if the economy deteriorates.
• Next steps: If you need assistance with cash flow analysis, cost segregation, WOTC, tax compliance and planning, payroll, or outsourcing CFO advisory services, Aprio’s Restaurant, Franchise & Hospitality team is here to help.

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The full story:

Times of economic uncertainty come with concerns about financial stability. When people are concerned about the economy, they are concerned with their cash flow, which potentially results in cutting down spending, such as dining out at restaurants or booking a staycation at a hotel. This shift in consumer behavior can pose a ripple effect on the restaurant, franchise, and hospitality industries, especially if the economy deteriorates.

In light of these challenges, business owners must proactively plan to assure effective cash flow management, as the future remains unpredictable. Here are a few ways restaurant, franchise, and hospitality owners can navigate the changing times:

Review of current expenses

Review your expenses to identify which non-essential costs can be trimmed without compromising operations and maintaining a good level of expenditure. You can also consider establishing a line of credit with a bank to help manage seasonal fluctuations. Maintaining a modest cash reserve is advisable, as excess cash can provide a buffer during challenging months. If any aspect of your business is underperforming, prioritize fixing or improving it to enhance overall financial health.

Effective cash flow management processes

Conducting a thorough cash flow analysis is essential for restaurants to understand their financial health. A cash flow analysis involves examining cash flow coverage and key ratios to interpret the financial statements. By analyzing these ratios, restaurant owners can make informed decisions that can enhance their operational efficiency and overall profitability.

Benchmarking against industry standards is another strategy for restaurants targeting operational improvement. Implementing effective benchmarking techniques enables establishments to identify the best practices within the industry and integrate them into their strategic planning.

Chargebacks, particularly from delivery services, pose significant challenges for restaurants. To manage these chargebacks, restaurants should collaborate closely with their delivery partners to understand chargeback reasons and effectively dispute unjust fees.

Proactive planning for the upcoming months assures restaurants remain agile and responsive to market changes, positioning them for sustainable growth. Engaging with a knowledgeable advisor in implementing these processes is vital so restaurant owners can safeguard their revenue and enhance their cash flow, contributing to a more stable financial foundation.

Strategies for improving cash flow

Monitoring pricing strategies is essential for maintaining healthy margins in the restaurant industry. One key area to focus on is the relationship between labor costs and overall pricing. Restaurant owners must regularly analyze labor expenses to assure they align with industry benchmarks. A detailed examination of margins can show opportunities for improvement, whether through adjusting menu prices or optimizing staff allocation.

Discussing lease agreements with landlords is another strategy for improving a restaurant’s financial health. Restructuring lease agreements may become necessary if rent is disproportionately high compared to foot traffic and revenue. Open communication is encouraged so restaurant owners can negotiate better terms or get temporary relief during slow periods.

Payroll is often one of the most significant expenses for any restaurant, and effectively managing this cost is imperative. Make sure staffing levels are appropriate for customer demand to refrain from unnecessary overstaffing, which can directly affect cash flow. Restaurant owners must maintain a balance: having enough staff to provide excellent service without inflating payroll expenses.

Driving foot traffic is essential for the financial success of any restaurant. Even if a restaurant is not consistently at full capacity, maintaining a steady flow of customers can significantly improve cash flow and contribute to long-term sustainability.

Tax implications to help manage cash flow

The Work Opportunity Tax Credit (WOTC) provides financial incentives for hiring targeted groups, boosting cash flow, and unlocking tax savings. This credit encourages businesses to consider the demographics of their employee base and the locations of their operations. In addition to creating opportunities, WOTC is a financial incentive; eligible employers can receive tax credits ranging from $1,200 to $9,600 per qualifying employee, which can substantially offset federal tax obligations for businesses with a large workforce.

Bonus depreciation enables hotels, restaurants, and other hospitality-related businesses to write off a large percentage of the cost of their capital asset expenditures upfront rather than spreading the expense over many years as required by standard depreciation rules.

Under the Tax Cuts and Jobs Act (TCJA), businesses could deduct 100% bonus depreciation for qualified property from September 2017 to the end of 2022, compared to 50% in previous years. Bonus depreciation began to phaseout in 2023 with a 20% reduction, decreasing by another 20% each subsequent year until January 1, 2027. Remember, different states have varying rules regarding bonus depreciation, so it’s important to consult with a CPA who understands the specific state regulations.

Restaurants businesses that are considered flow-through entities may be able to take advantage of the state pass-through entity tax (PTET) deduction. The state PTET is a state-level tax that allows certain business to pay the state incomes taxes at the entity level rather than having the owners pay it on their individual returns.

This system can be particularly advantageous for restaurants owners as it could lower their individual Federal tax burden which as a result would allow the restaurant to retain more earnings that can be reinvested into the business for improvements or growth initiatives.

The FICA tip credit enables employers to recoup a portion of the Social Security and Medicare taxes on tipped wages, offsetting the costs associated with payroll taxes. When employees earn tips exceeding the federal minimum wage ($5.15 an hour), the FICA tip credit is a financial relief mechanism, recognizing that much of the tip income is directly received from customers rather than through employer wages.

Importance of planning ahead

It’s recommended that restaurant owners and operators begin financial planning well in advance of tax season. Consult with your financial advisor to identify potential opportunities and mitigate surprises during tax season. Early planning will give restaurant owners and operators ample time to make strategic decisions that can impact their overall financial health.

The bottom line

Aprio’s Restaurant, Franchise & Hospitality team provides fast access to specialized tax, restaurant accounting services, back-solutions, and advisory services for your restaurant or franchise. If you need assistance with cash flow analysis, cost segregation, WOTC, tax compliance and planning, payroll, or outsourcing CFO advisory services, our team is fully prepared to help.

Related Resources/Assets/Aprio.com articles/pages

• Restaurant, Franchise & Hospitality Page
• Making the Most of Tax Deductions with Declining Bonus Depreciation
• Navigating Tax Credits and Incentives in the Hospitality Industry