Increase Cash Flow as a Caterer
Three Ways to Prevent Cash Flow Issues as a Caterer
By, Michelle Loretta, Sage Wedding Pros
The ebbs and flows of cash can be one of the most challenging aspects of being a business owner. Also, for catering companies, it can seem like one month you’re flush, and the next you’re poor as a pauper. This is not only impacted by the timing of sales versus costs in catering, but also because of seasonality in the hospitality and events industries.
How do we get past this financial ‘feast versus famine’ cycles? The best prevention is a little foresight and planning. Here are three ways to do so.
Create a Cash Reserve
The best way to prevent any big surprises is to start squirreling away cash into a business savings account. In an ideal scenario, you want to save enough money for the length of your typical dry spell. For a lot of Northern U.S. states, this is typically January through March. (The opposite might be true for Southern states who might slow down in the summer.) Savings that are equivalent to three months’ worth of expenses is likely ideal if you operate in this region.
Accruing cash can take a long time. Create a goal to begin hoarding a months’ worth of cash slowly, and grow from there. Having this reserve will not only give you the security to make it past a slow season, but it will also curb any reliance you might have on credit cards or debt to make it through slow periods.
Stay Away from Debt
It can be tempting to borrow money when you’re running low. Bills come due, expenses pile up, and getting a line of credit or placing purchases on a credit card seems like the ‘get out of jail free card.’
However, in the long run, what ends up happening is the opposite of what you want. Your debt will begin to suck up your incoming funds and cause the same cash flow issues you had hoped to prevent.
If you carry any debt balances in your business, the tendency is to pay it all off quickly as soon as possible. It’s ideal for getting rid of the interest so I understand that temptation. However, what I often see is that these businesses never get off the take-on-debt-pay-down-debt cycle. In an effort to quickly pay it all down, you haven’t amassed any savings, which means that you’re back to relying on that debt during the next slow season. My recommendation is to pay the debt down slowly WHILE building up a cash reserve at the same time. That cash reserve is key to ending your reliance on debt during the next slow season.
Create a Cash Flow Plan
A cash flow plan is a financial strategy tool for estimating the funds coming into your business and money going out over the upcoming year. It puts together your sales goals with your expense budget so that you can see exactly what is projected to come and go out during any given period of time. No one has a crystal ball as to what exactly will happen for a business. But, a cash flow plan is close to it.
By always looking forward and adjusting what you can expect (or guesstimate) to come in and go out, you won’t be hit with any surprises. You’ll see exactly when things are supposed to slow down and plan accordingly. A cash flow plan also allows you to make stronger, more intentional decisions such as when to replace your refrigerator, or when to add more staff. You can put these investments into the plan and see how it impacts your business over the long run so that you’re not operating blindly.
All in all, it’s about making the time to be proactive with your finances. Too many business owners let the financial aspects get out from under them. Committing time towards a financial strategy that includes saving cash, paying down debt, and planning for cash flow will make a huge difference in your catering business’s financial viability.
Michelle Loretta is a business consultant and financial strategist for wedding and event professionals. As founder of Sage Wedding Pros she blends her past as an accountant for Deloitte, a sales and marketing manager for DDLA, a merchandiser for Coach, and a stationery entrepreneur to strengthen wedding businesses worldwide. Michelle wakes up each day excited to create Financial Strategies for Wedding and Event Businesses. She has been asked to speak at a number of industry conferences, including NACE Experience, Biz Bash Live, and The Special Event.