Finance: How's the cash flow?

Managing your finances properly can help you survive and grow your business.

Cash flow is as vital to any business as the blood in your veins. If it stops pumping your pub could keel over and die. It's especially important in the first year of a new operation, when you're getting to grips with things - and it's in these early months that your business is most likely to fail.

In fact, cash flow is an important consideration even while you're preparing to move into your new pub, forming the backbone of the business plan required these days by most tenanted and leased pub companies as well as by lenders considering whether they should be investing in your venture.

Once you are up and running, cash flow becomes a useful measure of how the new business is performing, tracking your progress on a monthly basis.

Even if you have made a successful start you face the tricky challenge of growing the business at a sustainable rate. Failure can be caused not only by a lack of financial controls - spending money without measuring it - but by getting excited by an early success and over-stretching your resources in a bid to get big fast. Analysing your cash flow will give a truer picture of just how much you can afford to invest and the best times to invest it.

As licensee turned accountant Steve Carter explains, cash flow gives you a budget to work to - "what gets measured gets done".

"If you aren't clear about the objectives you set your business, you've got no chance of attaining them," he says.

So what exactly is a cash flow and how does it work?

The cash flow analysis produced by Steve's company Milestone for clients such as the franchisees of Scottish & Newcastle Pub Enterprises comprises three elements - a budgeted profit and loss account, a cash flow projection and a graph of your bank balance.

Profit and loss account​

This tells you how much money you expect to take, for example on beer sales, and deducts how much that beer will cost you to give you a gross profit, month by month.

From that figure, your overheads are deducted. It's important, of course, to be honest and bring in everything you can think of, including beer lost through line cleaning, food wasted, the wage bill, cleaning, flowers for the garden, food for the guard dog, the telephone bill and so on.

You also need to deduct money for repairs and maintenance, bank charges, VAT, your accountant's bill, licences and an estimate of depreciation of fixtures and fittings and equipment.

After all that you will still, hopefully, have a number with a plus-sign in front of it. This is your net profit and the figure you are most interested in.

Cash flow projection​

This is a one-page summary of the profit and loss account showing total income for each month, expenditure and overheads, leaving a figure at the bottom that is the cash that forms your cash flow - literally the bottom line. This is the money you should have in the bank at the end of each month.

Bank balance​

As you've probably guessed, this is your cash flow shown as a bar chart so you can clearly see the rise and fall in your bank balance all through the course of a year.

All this gives you a nice wad of paper to wave in front of your bank manager or the person from the pubco. But you should also use it as a business tool, both so that you can deal with a problem as soon as it shows up and stop yourself going bust, and to grow your business at the optimum pace.

The graph shows you at a glance when cash flow is likely to be pinched. As you approach these tricky months you know you need to watch your expenditure — and not splash out too much on personal luxuries. Maybe put off buying that Porsche for a while.

If things are looking really tight, you might also think of ways of boosting your income, by getting more people into the pub. Perhaps you could run a loyalty promotion or host a party night. But don't forget to include any expenses incurred as extra overheads for the next cash flow projection.

On the positive side, you can also see when you'll have enough cash in the bank to comfortably bear the cost of a major investment. This is the time when you should build the extension and sow the seeds of future expansion.

"There's more to cash flow than just making sure you can pay the bills," says Steve. "It is important to use realistic figures - anyone can create an over-inflated forecast - and a cash flow is only a benefit if at least monthly and regular comparisons are made to actual results.

"But managed well it can have an impact across your business and help you plan how you want the pub to develop into the future."

The uses of cash flow​

• Before taking on a pub​

A cash flow will be a key element of any business plan and help a potential lessee or tenant demonstrate to a pub company that they have the necessary plans in place to make a pub not only economically viable but successful.

It should take into account any liabilities from the previous licensee, whether they spring from the business itself or personal circumstances, and should address the question of how the new business is going to sustain these liabilities.

A cash flow analysis will also help raise finance with a bank as it will convince the lender that the aspirations of the licensee can be supported financially.

In the pub​

Putting together a cash flow has a wide range of applications that can help you run the business better. It can:

• Give you a budget to work to
• Help you focus on cash - is more important than profit in the early months of a business
• Enable you to predict when the business may need an injection of cash. For instance, will the
  payment of a large personal tax bill require an overdraft or loan?
• Predict when you will have some surplus cash that could be invested
• Be useful in deciding whether a capital expenditure project is viable
• Provide a good tool to help you review the progress of the business
• Enable you to adjust costs if there is a variance against budget.

Leasing your equipment​

One possible way of investing in improvements to your business without putting a strain on your cashflow is to lease your new equipment.

Lease deals are available on a wide range of equipment and David MacQueen (pictured)​, managing director of Daikin Airconditioning UK North, is keen on the idea of the licensed trade taking up the option.

"Small businesses, particularly fast growing businesses, are invariably cash flow-hungry," he says. "The individual rentals paid when you lease will only be a proportion of the equipment's value and, as a result, will have an effect on cashflow.

"It enables buyers to purchase the best equipment rather than the equipment they think they can afford. Capital is not tied up, leaving more money available to invest in your pub."

As well as your accounts avoiding the big hit of capital expenditure, he explains that "as an operating expense, lease rentals are fully tax deductible".

"It is not unusual for the amount of tax saved on a lease to more than cover any charges, in contrast to a straightforward cash purchase, where only a proportion of capital value can be claimed against taxable profit each year," he says.

You can often choose from a range of funding solutions with flexible repayment schedules that can be tailor-made to meet specific requirements and make budgeting easier. David believes leasing air conditioning equipment should become increasingly common among licensees.