All too often, we are at a loss for words when it comes to talking finances. It’s no surprise. Money is one of those few things our mothers told us was impolite to discuss in public. More than that, discussing money can make a business owner feel vulnerable and open to scrutiny — especially if they’re not clear on how to describe it accurately. Knowing the difference between sales, revenue, profit, and cash flow (and how each one affects the other) is the first step to being able to represent yourself well among your peers, financial advisors, lenders, and investors.
Let’s begin with simple explanations:
Sales
The amount of money earned through the sale of products and services alone. For instance, if you sell 300 $10 specials in the course of a month, your sales on that special alone are $3000.
Revenue
Total amount of money earned by a business through the combination of sales, investment income, and licensing. For most restaurants, however, sales and revenue are mostly one and the same.
Profit
The amount left over when you subtract expenses and taxes from revenue. These expenses can include cost of goods sold, payroll, maintenance expenses, marketing costs, rent or mortgage, and capital purchases such as equipment, furniture, signage, and decor. Restaurants typically experience a fairly low profit margin by comparison to other industries, often in the neighborhood of 5–10%.
Cash Flow
The amount (and timing) of money you have coming in and going out of your business at any given time. It’s not just what you have left over at the end of the day, however — that’s profit. Cash flow is the total of what you make AND what you spend, understood to be positive or negative, and it can be a bit of a moving target.
For instance, if you generate $2,500 in sales in a given week, but have $3,000 in expenses to pay out, your cash flow is negative, regardless of what you made last week or have in savings. Likewise, if you have an amazing week and generate $10,000 in sales with the same weekly expenses, your cash flow is positive.
Negative cash flow in short periods of time (like a week or month) may not be desirable, but they are likely a part of the ebb and flow of business for most restaurateurs. As traffic changes by season or taxes come due, negative cash flow can be a crushing blow to your business if not balanced out by other periods of positive cash flow or the assistance of a merchant cash advance or other financing option.
All four of these metrics — sales, revenue, profit, and cash flow — build upon each other and can be their own meter of success. But the further down that progression you get, the more real the effects become for your daily operations. Profits — good or bad — can be a significant indication of the health of your business and the success of your ideas. But cash flow is what’s going to keep your doors open long enough to see the fruits of all your labor.
What do you share?
We’ve said it before: the restaurant industry hosts some of the most generous and accommodating businesspeople when it comes to sharing good ideas and trading information. You can see that every time you get two or more in a room together. It’s natural to be curious about how your competitors are doing financially. And heck, you’re all professionals. It’s just business.
But with so many restaurants owned by single operators or operated by single franchisees, the lines between personal and professional start to blur. How do you answer the question when others in the industry ask you how you’re doing? How much should you share?
First off, never share more than you’re comfortable with, and know that your comfort level (more or less) will not necessarily match anyone else’s. And even with that in mind, always present your success in a range. Presumably, the goal of any discussion is not to go through a lengthy audit, but to compare high-level notes and learn from each other. We recommend following this rule of thumb:
1. Sales, as a topic, is always fair game.
2. Revenue is not really anyone’s business, particularly since it includes more complex investment income.
3. Profit is your world, and yours alone. You never talk profit (although the factors that affect profit are fair game).
4. Cash flow is only important to you, your creditors, and your business partners. Everything about this is entirely off-limits for general discussion.
Even so, savvy restaurateurs can answer questions indirectly about sales with commentary on individual product cost or labor concerns, and talk about broader issues in the industry as a whole. You don’t need to discuss personal issues if there is a widespread trend in industry news publications you can refer to more comfortably.
This is where industry professionals can learn best from each other and narrow in on the common ground they have — maybe even forge solutions. The current atmosphere around no-tipping and minimum wage giving you trouble? How did Albert deal with it? Finding that a lot of your liquor stock seems to be unaccounted for? Maybe Jean has a system that keeps employees on track. Having trouble getting high quality chocolate for a reasonable cost? Everyone is in that boat these days, but maybe Brenda’s bakery has a good supplier recommendation.
Embracing the opportunity to learn from your peers without having to dig too deeply into financial dirt could keep ideas flowing and help you develop relationships that will support you for years to come. We’re all in this together, after all. When the restaurant industry as a whole is healthy and profitable, everyone benefits.
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