How Your Banker's Ignorance Can Hurt Your Business & What You Can Do About It

Many bankers don't understand the restaurant business. They look for the same financial ratios and financial "rules of thumb" in a restaurant as they expect in any other type of business. One of the most blatant areas of misunderstanding is evaluating liquidity, which is a measure of your business's ability to pay its bills when they come due.

To do this bankers usually go straight to a company's balance sheet and calculate the current ratio, i.e., the total current assets (cash, inventory, receivables) divided by total current liabilities (payables, taxes and other bills due within one year). Bankers like to see a current ratio of 2 to 1 ($2 in current assets to every $1 in current liabilities).

While this may be a good benchmark to evaluate some companies, it isn't a reliable indicator of liquidity for restaurants.