You’ve heard the old adage that parents drilled into our heads, “what’s right isn’t always popular, and what’s popular isn’t always right?” That saying still rings true – turns out mom and dad were right. There are a few urban legends with regards to managing your cash that are by far the most popular choices in the industry; However, they rank high amongst the most inefficient ways for managing cash flow.
BUSTED: Vendor Terms for payables and Bi-Weekly Payroll
We see both used as a standard practice on 90% of our new clients. The myth here is that by paying your vendors every 14, 21, or 30 days (also known as net 14, 21, and 30) you save money. The same is understood for paying your employees every two weeks, or twice a month. The reality is that despite the fact that everyone does it, that doesn’t make it correct. In fact, both practices have a negative effect on your ability to successfully manage your cash flow. Many owners/operators have a pretty difficult time when we tell them that steering clear from Vendor Terms and performing Weekly Payroll are both truly critical pieces to proactively managing your cash flow. Now don’t get me wrong here, I’m not saying that Vendor Terms and Bi-Weekly Payroll are 100% wrong, they’re simply not the best choice if you want to find success. I’m sure you’re keenly aware that your daily cash flow is about as consistent as the highs and lows on a roller-coaster. The days where all of your bills have been paid, your orders placed, and paychecks have been cashed, are clearly not the best days to manage cash – you’re cash poor at that point. It’s the nature of the beast to experience the fluctuation, but believe me when I say there are ways to get ahead of the game while enabling yourself a true sense of your cash position EVERY SEVEN DAYS. It’s all about being proactive and making the best decisions, although maybe not the most popular, that will positively affect your operation, especially your team members.
Vendor Terms. At this point I’m sure you’re thinking, there’s no possible way that my choice to negotiate Vendor Terms can impact my team. Wrong-O. Vendor Terms do not equal good cash flow. They simply give you a blurry vision of your true cash position since your weekly sales, and whatever terms your vendors have offered, are out of sync. This skewed view has the potential to build up debt and leave you susceptible to run your restaurant deficient of the money that’s necessary for you to provide your staff with the proper tools that are essential to their own success. I’m not only talking about the literal tools, like enough silverware or glassware for service, but the other imperatives as well. I.E. Proper training. How frustrating is it for someone who’s trying to carry out YOUR dream, to be deprived of suitable training because you didn’t manage your cash well enough to provide it for them; do you know what that leads to? Higher rates of employee turnover and a staff that’s unhappy and untrusting of the ownership at hand. Pay your vendors the week you receive, and you will be more likely to stay out of debt.
Similarly, you should pay your team members the week they work. There are a plethora of benefits to Weekly Payroll. For starters, who doesn’t like to get paid on a weekly basis? Not only does it fall more in line with your team members’ cash flow needs, it essentially makes it easier for them to manage that money – which is good for you too. You’re now putting yourself in a position where you’re no longer making daily “loans” to your staff. So the next time Jessie’s car breaks down and he needs some help for the auto-shop bill, he has the money to pay for it himself! Oh and here’s a big one: Weekly Payroll allows for tips on checks – your employees are ensured that they aren’t waiting a long time to get their tips from the prior week (quite honestly, operators running Bi-Weekly Payroll shouldn’t even be thinking about putting credit card tips on checks). This also reduces the need to continuously replenish the House Bank with varying amounts of credit card tip money; a great way to decrease the amount of potential cash handling mistakes your team could make. Additionally, placing charge tips on checks guarantees that at least ALL of your employees’ charge tips are included in their wages as reported income on their W2. On the flip side, if those tips aren’t included on their W2’s, it becomes an administrative nightmare to verify that they’re claiming their full income – this is especially important with when considering ACA compliancy.
So maybe you won’t fit in with “cool kids” anymore by nixing those Vendor Terms and taking on Weekly Payroll, but who cares? You and your non-popular, but oh-so-effective cash management tactics, will be laughing all the way to the bank. Oh and you know who you will be popular with? Your team – your very best ambassadors. Win-win if you ask me.