Cash flow in any business can vary widely from the profit and loss statement. Many small business owners struggle to understand the differences between them.
The primary activities that create the difference are changes in debt, and changes in the amount of equipment owned.
Borrowing money increases “cash”, but does not help the profit. Paying off those debts decreases cash, but also does not change profit.
Buying large equipment or furnishings (things that will last several years) decreases cash, but does not increase expenses, as least not by the full amount of the purchase. You can only depreciate a percentage of that purchase the first year. In later years, that purchase will continue to be depreciated, which will help profit, even though it has no effect on cash in those years.
There are, of course, other variables. For example, if food purchases are recorded as inventory as opposed to recording them directly as cost of sales, then changes in inventory amounts also cause differences between cash flow and profit. Or, selling a piece of equipment that has not yet been fully depreciated will bring in cash without necessarily having the same bump in profit.
Managing cash flow is mostly a matter of managing debt and long-term equipment purchases. If sales are sufficient to cover operating expenses, then it is possible to grow the business with additional debt, or reduce debt with the additional cash.
Since the restaurant business gets payment from customers immediately in most cases, there is little concern for the collections process that is emphasized in most cash flow discussions. On the expense side, however, it can be very helpful to get vendors to extend credit terms allowing you to pay for merchandise some time after receiving it. It makes a great business model if you can pay for your supplies only after you have sold them and collected payment.
Having limited cash for large appliance purchases may make leasing a better option. The monthly payments on a lease are 100% expense, so there is no large cash outlay followed by gradual depreciation.
But cash flow management is not a savior for insufficient business. It can help to balance slow spells with busier periods or allow the purchase of a new freezer. But if the steady income is not enough to pay the regular bills, debt will grow and assets will shrink. It can help a start-up to survive until sales surpasses expenses, but profit must eventually come to the rescue.