The month has ended. Sales were solid, the P&L indicates a profit and nothing is seriously off.
You then check the restaurant’s bank account.
The number isn’t the one you were expecting.
Restaurant owners can find this disconnect frustrating, as they believe that cash flow and profits should be exactly the same. However, they aren’t. A P&L measures the financial performance of a firm for a particular time period, whereas it is a bank account that shows the actual timing of money moving into and out of he business.
Knowing the difference can change the way that a restaurant’s owner views their finances.
Have a look at what goes on in a typical week. The customers pay for food. Paying employees is necessary. Food and drinks are issued. Rent is on the way. Credit card deposits are also timed. Sales tax collected is an obligation.
Already the purchases for the week ahead have started.
When you look only at revenue and the end-profit number it’s easy to miss a a great deal of activity.
Prime Cost Could Hold the Key to the Answer
If the restaurant’s profitability begins to shift in the negative direction, then food, drinks as well as labor costs require the attention of restaurant owners.
Prime cost is composed of both items and labour. The Bookkeeping Chef’s guidance puts the prime cost at between 60%-65 percent of the revenue for many restaurants, focusing on the importance of monitoring weekly rather than waiting until the final day of the month.
Effective primary cost management requires not focusing on one percent, and more paying attention to earlier movement.
Imagine that the restaurant usually performs close to its target However, this week’s number increases. Maybe overtime was boosted. Maybe the costs for beverages were stable, but food costs increased. A higher percentage of food could lead the business owner to review purchasing, waste management, portions and menu mix, or vendor bills.
The percentage raises questions. The activity of the restaurant itself provides the answer.
Weekly reports allow for this discussion to occur in the midst of everyone being aware of what has happened.
The details are more difficult to remember after a couple of days.
Then the Vendor Bills Show Up
A restaurant might purchase its ingredients this week, but then pay for these items later. This timing helps to explain how profit alone will not be enough to answer all cash-related questions.
Vendor invoices must be accounted for, tracked and paid. Doing this manually in an organization with a lot of suppliers could become an enormous administrative burden.
Accounts payable automation helps organize this process by reducing repetitive handling of bills and payment information. Connected bookkeeping systems can also provide the owner with a clearer image of the obligations that haven’t yet been paid into the account of the bank.
It’s helpful because, when considered as a whole the bank balance of a restaurant could appear to be more healthy than its actual short-term financial situation.
It could be that there is $80,000 in the account as of today. It could mean something different when you consider that rent, payroll and vendors as well as other commitments consume a significant portion of it over the next several days.
Cash flow forecasting is a normal outcome.
What happens to our money after we’ve received the funds we’ve expected and have fulfilled all of our obligations?
It is essential to be aware of the difference between them when deciding whether this week is the ideal moment to upgrade equipment, buy additional products or save the cash flow.
You may not be eligible for all the money you believed.
Sales tax highlights this point very well.
Restaurants get money from clients, which they be able to manage according to the tax requirements. If the money is mentally mixed with operating cash, then the bank balance may be misleading about the amount of cash available.
Consistent records support sales tax compliance as well as providing management with a more accurate view of the restaurant’s finances.
Restaurant accounting is more efficient when the financial responsibilities of each restaurant are considered separately.
Prime cost affects margin. COGS and future payments are affected by the purchase of vendor products. Payroll affects both labor percentage as well as cash. Cash availability is impacted by sales tax. P&Ls are used to track the financial performance. Forecasting is also beneficial for management.
The pieces are connected.
Bookkeeping Chef combines restaurant-specific reports through system integrations. For business owners who don’t want to stay up all night reconciling financial data, specialized outsourcing of bookkeeping can take on most of the accounting work without removing the owner from the financial conversation.
It’s the very last one that is important.
Restaurant owners shouldn’t stop going through the manuals regardless of whether they’re being handled by someone else. Owners should receive information that can help them understand what’s happening.
So if the P&L states that the restaurant has made profits, but the account feels extremely tight, don’t assume some of the figures must be off.
Find out what happened between you and your partner.
This question will reveal more about your business than any other number.