Surviving Growth - Cash Forecasting to Success
“My bookkeeper just called me. I’m two months behind on payroll tax deposits, a month behind in rent and I have payroll due on Monday and cannot make it. The opening of my second restaurant, Dumpsters, opens three weeks from now,” said a distraught Norm Brinker. “My opening manager told me he would walk if I don’t pay the back wages I owe.”
Norm left the Cheesebake Factory four years ago and opened a hot Latino concept called Lolos. He was able to convert an old hair salon on a busy street into the 75-seat restaurant and bar, working with his brother and no professional design team. The funding came half from the SBA and the rest from friends on personal notes. Three months ago, he signed a lease in a good retail location to open a second larger version of the concept. He started the new project with $75k of cash in his bank from profits.
He personally signed on the new lease. He thought the cash; along with a loan from the bank was all he needed. Norm is looking at a $50 -100,000 cash shortfall to open on time. If he cannot get some quick cash from someone, he stands to lose everything.
This happens all the time and can be avoided if you can forecast cash!
To prepare cash forecast, you will need to do the following:
- know your starting cash balance.
- project cash flows from your existing operation.
- accurately project the construction costs and the timing of all payments.
- know what your lender is willing to do and when.
- project soft costs prior to opening, including bank loan fees, legal and accounting, design services, management and training salaries, permits and fees, etc. and the time for payment.
- project your cash flow from operations from the opening forward and take into account initial labor and food cost challenges, etc.
No sweat you say? If you have this information, you can prepare a forecast that will project your cash balance by month. Initially, it tells you exactly how much you need to raise. Per our own experience, add at least a 10% cushion to the total project cost for safety. After that, you can compare your forecast to your actual cash balance and use it as a tool to highlight unforeseen circumstances.
A cash forecast and some attention to the numbers would have given Norm the lead time to solve his cash shortfalls or change plans to save his project.
