The month is now over. Sales were solid, the P&L shows a profit and there is nothing to be seriously off.
Check the restaurant’s bank account.
The number is not what you would have expected.
Restaurant owners, this disconnect can be frustrating because profits and cash flow seem like they should provide the same information. They don’t. A P&L evaluates the performance of the business’s finances over a specific time period, whereas accounts in banks show the exact timing of funds moving into and out of the company.
Understanding the difference can alter how a restaurant’s owner is able to view their financials.
Imagine what goes on during a typical week. The customers pay for food. Employers must be paid. Food and beverages are delivered. Rent is getting closer. Credit card payments are timed. Sales tax is collected however it’s the responsibility.
Already the shopping spree for next week have started.
Concentrating on revenue or the number of profits at the end isn’t a good way to assess the full scope of what happens.
Prime Cost Could Hold the Key to the Answer
When restaurant profitability starts moving in the negative direction, food, beverage, and labor costs deserve attention.
Together, cost of products sold and labor make up prime cost. The Bookkeeping Chefs’ guidelines place the primary cost between 60-65 percent of the revenues for a variety of establishments. They also suggest weekly monitoring instead of waiting until the month ends.
Effective cost management for primes involves less focusing on a single percent and more noticing earlier movement.
Imagine that the restaurant’s performance generally within its target, but this past week, it went up. Perhaps overtime was increased. Perhaps the cost of beverages remained steady while food costs jumped. A higher proportion of food may prompt the owner to examine purchase, waste, menu mix, portions and vendor invoices.
The percentage raised the question. The answer lies in the underlying activity in the restaurant.
Weekly reports allow for the discussion to continue as everyone is conscious of what’s transpired.
After a period of two to three weeks, it gets harder to reconstruct the details.
Then, the Vendor Bills arrive.
Restaurants may buy ingredients this week but pay for these items later. It’s due to this fact that understanding profits alone does not address all cash issues.
Invoices from vendors have to be tracked, received and paid. In a busy business with many suppliers, completing that by hand can be an administrative burden.
Accounts payable automation helps organize this process by reducing repetitive handling of bills and payment information. The account owner will have better insight into the obligations that haven t hit their bank accounts through the bookkeeping software that is connected to.
It’s advantageous because, considered as a whole the balance of a restaurant’s bank account may appear to be healthier than its actual financial situation.
It could be that you’ve got $80,000 in your account right now. The $80,000 figure means very little if rent, vendors or payroll take an enormous amount over the next few days.
Cash flow forecasting is a natural outcome.
The better question to ask yourself is “What happens to our cash once we receive it and have met the obligations we’ve made?”
It is vital to recognize what the distinction is when deciding if this week is a good opportunity to replace equipment, purchase more products or preserve the cash flow.
A portion of the Cash Was Never Yours
The sales tax example is a great one.
Restaurants collect money from customers which has to be managed according to its tax obligations. If the money is mentally mixed with cash flow, the bank balance may give an inaccurate impression of how much money is available.
Regularly maintained records allow restaurants to comply with sales tax regulations while also providing the managers a clear picture of their financials.
This is one reason why restaurant accounting is more efficient when financial responsibilities aren’t considered as distinct islands.
Prime cost affects margin. COGS and future payments are affected by vendor purchases. Payroll has an impact on both the labor and cash percentage. Sales tax influences cash availability. P&Ls are used for recording financial performance. Forecasting can be helpful to management.
The pieces are connected.
Bookkeeping Chef integrates restaurant-specific reporting with system integrations. Bookkeeping outsourcing can benefit operators who do not want to be tasked with reconciling their financial records.
The last part is important.
Restaurant owners shouldn’t be able to stop studying the literature simply because they’re handled by another. It’s important that the owners receive information so they know what’s going on.
So when the P&L states that the restaurant has made profits, but the account seems to be a bit tight, don’t assume some of the figures must be off.
What transpired between the two?
This question will reveal more about your business than any other number.