The month is over. The sales were excellent, the P&L showed a profit and there was no sign of anything to be seriously off.
Check the restaurant’s bank account.
The number you received isn’t the one you’d expected.
For owners of restaurants, this is a problem because profits and cash flow seem to be the same. However, they aren’t. A P&L measures the financial performance of a company over time in time, whereas the bank account reflects the actual timing of money being moved into and out of the company.
Understanding the difference will help restaurant owners adjust their perception of restaurant financials.
Imagine what goes on during a typical week. Customers pay for meals. Employees have to be paid. Deliveries of food and beverages arrive with invoices attached. Rent is close to being paid. Credit card transactions come with their own schedules. The sales tax collected has an obligation.
The purchase for next week has already begun.
Concentrating on revenue or the ending profit number misses much of that activity.
The clue could be hidden in the Prime Cost
When restaurant profitability starts moving in the negative direction, food, beverage as well as labor costs require focus.
Together, cost of products sold and labor comprise the primary cost. Bookkeeping Chef’s guidelines place prime costs at approximately 60%-65 percent for a wide range of restaurants and emphasizes monitoring on a weekly basis instead of waiting until the end the month.
Effective cost management for primes involves less focusing on a single percent and more being aware of any early movements.
Suppose the restaurant normally performs in line with its goals however, this week’s rate increases. Perhaps the overtime rate increased. The beverage cost may have remained the same while the food expenses increased. The manager can review menus as well as waste, portions sizes or vendor invoices, as well as purchasing if the food percentage is higher.
The percentage raises questions. The activities that underlie the restaurant provide the answer.
This is possible due to the fact that everyone is able to recall what transpired.
The details are much more difficult for you to recall after a couple of days.
Then the Vendor Bills Show Up
Restaurants might purchase food items during a week and pay for them the next. This can help explain the reason why profit alone isn’t enough to answer all cash-related questions.
Invoices from vendors must be tracked, received and paid. This is lots of work for the case of a business with many suppliers.
Accounts payable automation helps organize this process by reducing repetitive handling of bills and payment information. The owner can get better insight into the obligations that haven’t yet landed on their bank accounts through automated bookkeeping systems that are connected.
It’s helpful because, when looked at as a whole a restaurant s bank balance may appear to be healthier than its actual financial position.
There is currently an amount of $80,000 in the account. The figure of $80,000 means little if rent, vendors or payroll make the majority of the coming days.
This leads to the cash flow forecasting.
What will happen with our cash after we’ve gotten the amount we’ve hoped for and have fulfilled all of our obligations?
This distinction is crucial in determining which is the appropriate time to make an extra purchase or replace equipment, or to maintain the liquidity.
The Cash Was Never Yours
The example of sales tax is a good example.
The cash restaurants receive from their customers will eventually need to be dealt with in accordance with its tax obligations. If the money is mentally mixed with operating cash, then the bank balance could offer a false impression of how much cash is available.
Consistent record keeping helps restaurants to comply with the sales tax laws while also giving a clear picture of their financial situation.
This is the reason restaurant accounting can be more effective when financial obligations aren’t viewed as distinct islands.
Prime cost affects margin. COGS (cost of goods sold) and future payments are impacted due to purchases from vendors. Payroll can affect the percentage of labor and cash. Cash flow is affected by sales tax. The P&L records financial performance, and forecasting assists management to look ahead.
Connect the pieces.
Bookkeeping Chef assists in bringing these pieces together with restaurant-focused reports as well as system integrations. For business owners who don’t want to stay up all night reconciling financial information, outsourced bookkeeping services will handle the bulk of accounting tasks while removing the business owner of the financial discussions.
It’s the last thing that matters.
The aim isn’t to get restaurant owners to stop looking at their accounts because someone else handles them. It’s important that the owners get information so they know the situation.
If the P&L shows that the restaurant is earning money however, the balance in the bank feels unbalanced, don’t assume the P&L could be wrong.
What happened between the two?
The answer to that question will reveal more about your restaurant than a single number could on its own.