The month is now over. Sales were excellent, and the P&L indicates a profit and nothing appears to be terribly off.
You should then check the bank account of the restaurant.
The number is not the one you were expecting.
This gap is a problem for restaurant owners since they feel that profits and cash flow should be the same. They don’t. It’s not true. P&L is a measure of financial performance, while the bank account is a representation of the time when money flows in and out.
Understanding the difference will change how a restaurant’s owner considers their financials.
Think about what happens in an ordinary week. Food is paid for by customers. Employers must be paid. Food and beverage deliveries arrive with invoices attached. Rent is on the verge of being due. Deposits to credit cards are timed. Sales tax is an obligation.
The shopping for the week ahead has already begun.
Looking only at revenue or the ending profit number misses much of that activity.
Prime Cost Could Hold the Key to the Solution
The cost of food, drinks and labour cost are all worth a close at when profitability in restaurants begins to fall.
Prime cost is composed of the price of goods and labor. The Bookkeeping Chefs’ provided guidelines place the primary cost between 60 and 65 percent of the revenue for many establishments. They also emphasize daily monitoring, not waiting until the end of the month.
Effective cost management for primes is less about obsessing over one particular percentage, and more about spotting changes early.
Imagine that the restaurant’s results are usually within the range of its goals However, this past week it increased. Perhaps overtime was increased. Maybe beverage costs were stable However, food expenses increased. A higher percentage of food could cause the manager to look at purchase, waste, menu mix portions and vendor invoices.
The percentage raises questions. The answer lies in the activity of the restaurant.
This conversation is possible because everyone is able to recall what transpired.
Two or three weeks later The details are much harder to reconstruct.
When the vendor invoices arrive
A restaurant may purchase ingredients this week, but then pay for them later. This timing helps to explain the reason why profit alone isn’t enough to answer all cash-related questions.
Vendor invoices must be received and tracked. In a busy business with numerous suppliers, doing that manually could become its own administrative workload.
Accounts payable automation helps organize this process by reducing repetitive handling of bills and payment information. The account owner will have a clearer view of the obligations that haven’t yet landed on their bank account by using connected bookkeeping systems.
It’s helpful because, when considered as a whole the balance of a restaurant’s bank account could appear to be more healthy than its actual short-term financial position.
There may be $80,000 sitting in the account today. The amount could be interpreted differently if it is impacted by other factors such as rent or other expenses, such as payroll, vendors or other obligations for the next few days.
This leads to the cash flow forecasting.
Instead of asking “How much cash do we have?” the better question is “What is likely to happen to our cash after the money we’re expecting to receive and the obligations we already know about?”
It is crucial to understand the difference when deciding if this week is the best opportunity to replace equipment, buy additional products, or conserve the cash flow.
The Cash You Received May Not be Yours
The sales tax illustrates this point very well.
Restaurants receive money from their clients, which they follow according to their tax obligations. If the money is mentally added to operating cash, then the balance of the bank account could provide an inaccurate picture of how much money is available.
A consistent record helps restaurants stay in compliance with sales taxes and provide the managers a clear picture of their finances.
Restaurant accounting is more efficient when the financial obligations of each restaurant are considered separately.
Prime cost affects margin. COGS and future payment are impacted by purchases from vendors. Payroll can affect both the percentage of labor and cash. Sales tax affects the availability of cash. The P&L tracks financial performance, forecasting can help management look ahead.
Connect the pieces.
Bookkeeping Chef helps bring the pieces together by providing restaurant-specific reports and system integrations. Bookkeeping outsourcing can benefit those who don’t want to spend the night manually reconciling their financial records.
The last part is important.
It’s not the goal for restaurant owners to stop examining their books just because someone else does. Owners should be given information that will help them to understand what’s happening.
If the P&L indicates that the restaurant is profitable but the bank balance feels insufficient, don’t believe the P&L must be incorrect.
Find out what happened between you and your spouse.
The answer to that question will reveal much more about the restaurant than any number by itself.