The month is finished. Sales were excellent, and the P&L indicates a profit and nothing is to be terribly incorrect.
You then check the bank account of the restaurant.
The number you received isn’t the one you’d expected.
For restaurant owners, this gap can be frustrating as the cash flow and profit seem like they should tell the same story. But they don’t. It’s not true. P&L is a metric of financial performance, whereas the bank account is an indication of how much money is moved in and out.
Understanding the difference can allow owners to change their perspective on restaurant finances.
Imagine what could happen during an ordinary week. The customers pay for food. Employees have to be paid. You will receive invoices along with drinks and food deliveries. Rent is on the way. The credit card deposit is also timed. Sales tax has been collected, but that money has a responsibility.
The buying for next week has already started.
When you look only at revenue and the end-profit number it’s easy to miss out on a great deal of activity.
Prime Cost Could Hold the Key to the Answer
Food, beverages and labor cost are all worth a close look when restaurant profitability starts to go downhill.
Prime cost is composed from both materials and labor. Bookkeeping Chef’s guidelines place the prime cost at between 60%-65 percent of the total revenue for many restaurants, while emphasizing daily monitoring, rather than waiting until the closing of the month.
Effective prime cost management is less about focusing on the exact percentages and more about being able to spot changes quickly.
Imagine that the restaurant’s performance is usually within the range of its goals However, this week it increased. Perhaps overtime has also increased. Perhaps beverage costs were steady, but food costs increased. A higher food percentage might lead the operator to review purchasing, waste, menu mix portions, or vendor invoices.
The percentage raised the question. The activities that underlie the restaurant provide the answer.
This conversation is possible because everyone is able to recall the events that transpired.
The details are much more difficult to remember after a couple of days.
Once the vendor invoices are received
The restaurant pays later for the ingredients it buys. It’s because of this timing that analyzing profits alone will not resolve all cash-related issues.
Invoices from vendors must be accounted for, tracked and paid. In the course of manual processing, an environment with many suppliers can result in a significant administrative burden.
Accounts payable automation helps organize this process by reducing repetitive handling of bills and payment information. Systems for bookkeeping that are linked to accounting systems can provide owners with a clear view of their obligations, even though they haven’t yet been paid.
That’s useful because a bank balance viewed in isolation may appear to be healthier than a restaurant’s current position.
Today, there may be an amount of $80,000 in the account. This amount could mean something different in the event that it is affected by other factors like rent as well as payroll, vendors and other obligations for the coming days.
Forecasting cash flow is a natural result.
Instead of asking “How many dollars of cash are we carrying?” the better question is “What is likely to transpire with our cash after the money we expect to receive and the obligations we are already aware about?”
This is a crucial distinction when deciding on whether or not this is the right week to buy an additional purchase replacement of equipment, or to maintain liquidity.
You might not have been entitled to all the money you thought.
The sales tax illustrates this especially well.
A restaurant receives money from customers which will need to be dealt with according to its tax obligations. If those funds are grouped with ordinary operating money, the bank’s balance may create a false sense of what is in the bank to spend.
The consistent records help ensure the tax compliance of sales while giving management a more realistic perspective of the restaurant’s financials.
Accounting for restaurant operations is more effective when the financial responsibilities of each restaurant are not handled separately.
Prime cost affects margin. Vendor purchases impact COGS as well as future payments. Payroll can affect both the percentage of labor and cash. Cash flow is affected by sales tax. P&Ls record financial performance while forecasting allows management to see the future.
Connect the pieces.
Bookkeeping Chef uses restaurant-focused reporting and system integrations that help connect the pieces. For operators who don’t want to spend their nights manually reconciling financial information, outsourced bookkeeping services can handle large portions of the accounting burden without having to remove the owner from financial conversations.
The last section is very important.
Restaurant owners shouldn’t stop studying the literature simply because they’re handled by someone else. Owners should be given information that helps them understand what’s happening.
If the P&L shows that the establishment is earning money but the bank balance feels tight, do not assume the P&L must be incorrect.
Find out what happened between you and your partner.
That question can teach you far more about your restaurant than any number on its own.