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What’s the Correlation Between Cash Flow and Profit for Restaurants?

Dec 30, 2015 4:15:33 PM / by Brian Paulson posted in restaurants



Looking at your restaurant profit and loss statements will show how sales are driving your bottom line. But, restaurant cash flow is a separate entity from your profit-making activities.

Profit doesn't equal cash flow in a restaurant business.

Understanding the nuances between cash flow and profit can be a bit challenging at first. Fluctuations in debt and changes in the amount of equipment owned are the primary drivers, especially for new establishments with high up-front expenses.

Managing Restaurant Debt

Taking on debt is a reality for many restaurant owners. However, not all debt is created equal. Debt used to mask deficiencies rather than used to expand profitability as growth capital is a poor decision. Taking a proactive approach to saving for unexpected expenses is a way to avoid taking on bad debt, which may lead to a slippery slope if profits aren’t leading the charge in covering operational costs.

While borrowing money increases available cash reserves, the action does not directly affect profit. At the same time, paying off debt decreases cash, but doesn’t change profits.

Managing Restaurant Equipment Purchases

Large equipment purchases (such as a new stand-up mixer or walk-in freezer) decrease cash flow, but do not increase expenses by the full amount of the cost as you can depreciate a percentage of the purchases over time. Moving forward, equipment purchases will continue to depreciate, helping profit without affecting cash flow.

Restaurants are hard on equipment and appliances do eventually fail. If you have limited cash flow for large equipment purchases when the time arises, leasing may be a better option. Rather than a large upfront cash payment followed by depreciation, the monthly payments on a lease become a fixed expense over time.

Selling equipment, on the other hand, will only provide profit if the piece of equipment has been fully depreciated. Otherwise, you will see positive cash flow without an increase in profit.   

Key Takeaways for Restaurant Owners

In the food service game, managing cash flow largely revolves around managing debt and equipment purchases. Once you have identified that sales are enough to cover operating expenses, then it may be possible to take on additional debt to grow the business, or reduce debt with additional cash flow.

Cash management, nevertheless, will not save a business with continual profit loss. While cash reserves may help you navigate short-term periods of slow business, if profits fail to cover expenses on a regular basis, debts will continue to grow.

There is no steadfast correlation between profit and cash flow. They may be linked in certain instances, but don’t assume that making a profit increases cash in the same amount. A restaurant’s cash flow may fluctuate due to influences other than profit.

Download our Restaurant Profitability Checklist to explore if you're maximizing profits for your establishment.



Brian Paulson

Written by Brian Paulson

Brian began working at CSI in 1996, and he purchased the business in 2002. As Owner, his primary role is in the management and growth of the firm. Since 2002, the firm has more than quadrupled in size. In 2009, Brian started CSI’s payroll service to complement CSI’s accounting and tax services. Brian received his Bachelor’s degree from the University of North Dakota, with a double major in Accounting and Financial Management. He’s a member of both the National Society for Tax Professionals and the National Society for Accountants, and he serves on the board of directors for the Professional Association of Small Business Accountants, where he was once president. Brian also serves on the business advisory council for Opportunity Partners, an organization that helps people with disabilities find employment. He’s also contributed to several business books, including Six Steps to Small Business Success and The Lean Mean Business Machine. Fun Fact: To help put himself through college, he used student loans, delivered pizzas, and worked summers in a salmon processing plant in Alaska.