The month is over. The sales were excellent, the P&L was profitable and there was nothing that appeared to be terribly off.
Then, you should check the restaurant’s bank account.
You didn’t get the number you had hoped for.
Restaurant owners, this is a problem because profits and cash flow feel as though they should tell the same story. Both of them don’t match up. A P&L measures the financial performance of a company over a specific time period, whereas a bank account shows the actual timing of money flowing into and out of the business.
Knowing the difference can change the way a restaurant’s manager views their finances.
Have a look at what goes on in a typical week. Customers pay for meals. It is important to pay employees. Food and beverages are handed out. Rent is coming. Credit card transactions are subject to their own timetable. Sales tax is collected but it comes with an obligation.
The next week’s buying has already started.
Looking only at revenue or the end-of-year profit number does not take into account a lot of the activity.
The clue may be hidden in the prime cost
If the restaurant’s profitability starts to decrease, costs of food, beverages and labor costs should be taken into the equation.
Prime cost consists of both the cost of goods and labor. The Bookkeeping Chef’s guidance puts primary costs between 60% to 65 percent for a wide range of restaurants and emphasizes monitoring on a weekly basis rather than waiting until the end of the month.
Effective management of prime costs is less about obsessing over one percentage point and more about recognizing changes quickly.
Imagine that the restaurant’s results are usually within the range of its goals however this week, it went up. Perhaps the overtime rate went up. Perhaps the cost of beverages remained steady while food costs jumped. A higher proportion of food may make the supervisor think about reviewing purchase, waste, menu mix portions or vendor invoices.
The percentage raises questions. The answer is found in the restaurant’s activity.
This is possible due to the fact that everyone will be able to remember what transpired.
Three or four weeks later The details are much harder to reconstruct.
After the vendor bills are paid
The restaurant will be able to pay in the future for the ingredients it buys. This is a reason for knowing the profit isn’t enough to answer every cash question.
Invoices from vendors have to be accounted for, tracked and paid. In a business that has multiple suppliers, managing that by hand can be the company’s own administrative task.
Automating accounts payable simplifies the process by reducing repetitive tasks such as handling invoices and payment information. Systems for bookkeeping that are linked can give owners a better view of their obligations, even if they haven’t yet been paid.
This is helpful, since the balance of your bank account may appear more healthy than the restaurant’s current situation.
It could be that there is $80,000 in the bank account at present. The amount could have a different meaning in the event that it is affected by other factors such as rent or other expenses, such as payroll, vendors or other obligations for the next few days.
This naturally leads to cash flow forecasting.
Instead of asking “How many dollars of cash are we carrying?” 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?”
This distinction is crucial in determining whether this is the best time to make an additional purchase to replace equipment or maintain liquidity.
You may not have been entitled to all the money you believed.
Sales tax illustrates the point especially well.
The money that restaurant owners receive from customers will eventually need to be handled in line of its tax obligations. When these money are thought of as grouped together with operating cash, they can provide a false perception 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.
Accounting for restaurant operations is more effective when the financial obligations of each restaurant do not have to be considered separately.
Prime cost affects margin. Vendor purchases impact COGS as well as future payments. Payroll is a factor that affects both cash and labor percentage. The availability of cash is influenced by sales tax. P&Ls keep track of financial performance and forecasting allows management to take a look ahead.
Connect the pieces.
Bookkeeping Chef employs restaurant-specific reporting and system integrations that help put all the pieces together. For those who don’t wish to be slavishly reconciling financial records, outsourced bookkeeping services will handle much of the accounting workload while removing the business owner from the financial conversation.
It’s the final part that is important.
The goal isn’t for restaurant owners to stop looking at their books simply because someone else handles them. Owners should receive information that will help them to understand what’s happening.
Don’t be fooled into thinking that the P&L is incorrect if the bank account seems tight but the P&L confirms that the restaurant earned money.
Ask about the events that occurred between them.
This question will tell you more about your company than any number.