The month is done. The sales were great and the P&L had a profit, and there was nothing to be terribly incorrect.
Check the restaurant’s bank account.
You didn’t get the number you would have expected.
Restaurant owners may find this disconnect frustrating, as they believe that cash flow and profits should be exactly the same. They don’t. A P&L evaluates the financial performance over a time and the bank account reflects the time frame of money being moved into and out of the business.
Understanding the difference can alter how a business owner looks at restaurant finances.
Check out what goes on in a typical week. Customers pay for meals. Paying employees is necessary. Invoices for food and beverages are handed out. Rent is on the way. Credit card deposits are subject to their own timetable. Taxes on sales have been collected, however that money is a legal obligation.
The shopping for the week ahead has already started.
If you focus solely on revenue or the number of dollars earned at the end, it is easy to miss out on the vast amount of activity.
The Clue May Be Hiding in the Prime Cost
If restaurant profitability begins to decline, the costs of food, beverages and labor costs must be taken in the equation.
Prime cost is made up of both products and labor. The Bookkeeping Chefs’ instructions place the main cost between 60 and 65 percent of the revenue for many restaurants. They also recommend weekly monitoring instead of waiting until the end of the month.
It is more important to be able detect changes early than obsessing about an exact percentage.
Imagine that the restaurant normally does well, however this week it’s a higher percentage. Maybe overtime was boosted. The price of drinks may be the same as food costs rose. An increase in the percentage of food consumed might prompt the operator to review purchasing, waste management, portions and menus, or vendor charges.
The percentage raises questions. The answer lies in the activity of the restaurant.
Weekly reports allow this conversation to take place while everyone is still aware of what’s transpired.
Two or three weeks later, the details become much more difficult to understand.
After the vendor bills are paid
Restaurants may purchase ingredients one week and pay for them the following week. That timing helps explain why knowing the profit isn’t enough to answer every cash question.
Vendor invoices have to be received and logged. The manual process of completing this task in an office with many suppliers could become an enormous administrative burden.
Automating accounts payable simplifies the process, cutting down on routine tasks like handling payments and bills. Owners can have better insight into the payments that haven’t been deposited into their bank accounts by utilizing connected bookkeeping systems.
It’s useful because, looked at as a whole a restaurant s bank balance may appear to be healthier than its actual financial situation.
Today, there may be $80,000 on the account. The figure of $80,000 means tiny if rental, vendors or payroll are to take an enormous amount over the coming days.
Cash flow forecasting is a normal outcome.
The most important question to ask is “What happens to our money after we receive the money and have fulfilled the commitments we’ve identified?”
This distinction is essential when deciding on which is the right week to make an extra purchase, replace equipment, or maintain liquidity.
The Cash Wasn’t Really Yours
The sales tax example is a great one.
A restaurant receives cash from its customers, which eventually will need to be dealt with in accordance with its tax obligations. If these cash-flows are placed in the same category as operating cash, it may give a false impression of the money available to spend.
Consistent records support sales tax compliance while also giving management a more realistic view of the restaurant’s finances.
Restaurant accounting is more efficient when the financial responsibilities of each restaurant are not considered separately.
Prime cost affects margin. COGS (cost of goods sold) and future payments are impacted due to purchases from vendors. Cash and labor percentage are affected by the payroll. Sales tax influences cash availability. The P&L tracks financial performance, while forecasting helps management look ahead.
The pieces are connected.
Bookkeeping Chef helps bring these pieces together using restaurant-specific reports as well as system integrations. For business owners who don’t want to work all night reconciling financial data, specialized outsourcing bookkeeping services can take care of most of the accounting work without having to remove the owner of the financial discussions.
The last point is vital.
Restaurant owners shouldn’t stop reading their books simply because they’re handled by another. Owners should be given information that can help them understand what’s happening.
If the P&L shows that the establishment is profitable but the bank balance seems insufficient, don’t believe the P&L could be wrong.
Find out what happened between you and your partner.
This will reveal more about your company than any number.