The month is over. The sales were strong, the P&L shows a profit, and nothing appears to be terribly incorrect.
Check the bank account of the restaurant.
You didn’t get the call you expected.
Restaurant owners can find it difficult to reconcile this issue because they believe that cash flow and profits must be exactly the same. They don’t. A P&L measures the financial performance of a company over time, while your bank account shows the time frame of money moving in and out of the company.
Knowing the difference could change the way a restaurant owner examines the financials of a restaurant.
Take a look at what happens during an ordinary week. The customers pay for food. Employers must be paid. You will receive invoices for meals and beverages delivered. Rent is getting closer. The timing of credit card transactions is different. Sales tax collected is an obligation.
Already the shopping spree for next week have started.
Concentrating on revenue or the end-of-year profit number leaves out a lot of the work.
The Clue May Be Hiding in the Prime Cost
If restaurant profitability begins to decline, the cost of food, drinks and labor costs must be taken into the equation.
Together, cost of goods sold and labor make up prime cost. Bookkeeping Chef’s provided guidance places prime costs at approximately 60% to 65% for many restaurant, and emphasizes weekly monitoring instead of staying until the end of the month.
Effective primary cost management is less about focusing on the exact percentages and more about recognizing changes in the early stages.
Suppose the restaurant normally performs close to its target However, this week’s number increases. Perhaps the overtime rate was increased. Maybe beverage costs were stable however food costs increased. The chef may look over menus and portions, waste as well as vendor invoices and buying if the percentage of food is greater.
The percentage is the most important. The answer is found in the activity of the restaurant.
Weekly reports allow the discussion to continue while everyone is still aware of what’s happened.
The details are much harder to remember two or three days later.
When the vendor bills arrive
The restaurant will pay in the future for the ingredients it buys. This timing helps to explain the reasons why profit alone isn’t enough to answer all cash related questions.
Vendor invoices must be received and logged. In the course of manual processing, an environment with many suppliers can become a huge administrative burden.
Automating the process for accounts payable can streamline this process by reducing the time-consuming handling of bills and payments. Connected bookkeeping systems can also give the user a better picture of obligations that haven’t yet hit the bank account.
That’s useful because a bank balance viewed as an individual can appear more healthy than the restaurant’s real-time position.
Today, there may be an amount of $80,000 in the account. That number means something very different in the event that payroll, rent and vendors obligations will consume a large part of it in the next few days.
This leads to cash flow forecasting.
What happens to our money after we’ve received the amount we’ve hoped for and have met our obligations?
The distinction is important when deciding whether this is the right time to repair equipment, make an extra purchase, or keep liquid funds.
You may not be legally entitled to the full amount you believed.
Sales tax illustrates the point in particular.
Restaurants receive money from their customers, which they must follow according to the tax requirements. If those dollars are mentally placed in the same category as operating cash, the balance in the bank may create a false sense of what’s available to spend.
The consistent records help ensure sales tax compliance, while giving management a more realistic picture of the financials of the restaurant.
This is the reason that restaurant accounting is more efficient when financial responsibility isn’t treated as separate islands.
Prime cost affects margin. COGS (cost of products sold) and future payments are affected due to purchases made by vendors. Payroll is a factor that affects the percentage of labor and cash. Cash flow is affected by sales tax. P&Ls are used to record financial performance. Forecasting is also helpful for management.
Connect the pieces.
Bookkeeping Chef combines restaurant-specific reports along with system integrations. For operators who don’t want to spend their nights manually reconciling financial data, specialized outsourced bookkeeping services can handle much of the accounting workload without removing the owner from the financial conversation.
That last part matters.
It’s not our goal for restaurant owners to not check their books because somebody else does. Owners need to be informed which will allow them to be aware of what’s happening.
If the P&L indicates that the restaurant is profitable however the balance of the bank seems tight, do not assume that the P&L may be inaccurate.
Find out what transpired between you and your partner.
Answering this question can reveal more about the restaurant’s reputation than the name.