The month has ended. The sales were strong, the P&L indicates a profit and there’s nothing that appears to be seriously wrong.
After that, you can check the restaurant’s bank account.
The number you received wasn’t what you had hoped for.
Restaurant owners, this disconnect can be frustrating because profit and available cash seem like they should provide the same information. They aren’t. It’s not true. P&L is a gauge of financial performance, while the bank account is a reflection of the time when money flows in and out.
Understanding the differences will help restaurant owners adjust their perception of restaurant financials.
Check out the typical week. The customers pay for food. Employees need to be paid. Food and beverages are delivered. Rent is getting closer. The time of the credit card deposit is different. Sales tax is paid, but that cash is a legal obligation.
The purchasing for the coming week has already started.
If you only look at the revenue or the final profits, you’ll not be able to see a lot of the activity.
The Key to the Mystery Could Be Hidden in Prime Cost
If restaurant profitability begins to fall, cost of food, beverages and labour costs must be taken in the equation.
Cost of goods sold combined with labor is the prime cost. The bookkeeping chef’s guideline places prime costs at approximately 60%-65% for many restaurant, and emphasizes weekly monitoring as opposed to staying until the end of the month.
Effective prime cost management involves less obsessing on a single percent and more being aware of early changes.
If the restaurant is performing close to its target however, this week’s rate rises. Perhaps overtime was added. Maybe the costs for beverages were stable while food costs grew. An increase in the percentage of food consumed could lead the business owner to look at the purchase, waste management, portions and menu mix or vendor costs.
The percentage is the most important. The answer lies in the underlying activities in restaurants.
The reason this conversation can be relived is because everybody can remember the details of what transpired.
After a period of two to three weeks, it becomes much harder to reconstruct the particulars.
After the vendor bills are paid
Restaurants might purchase food items the week before and pay for them the following week. That timing helps explain why that understanding profit alone isn’t the answer to all cash questions.
Vendor invoices need to be recorded, received and tracked before being paid. The manual process of completing this task in an office with many suppliers can result in a significant administrative burden.
Automating the process of paying bills will help to organize the process by reducing the repeated handling of bills and payments. Bookkeeping systems that are integrated to accounting systems can provide owners with a clear picture of obligations, even if they haven’t yet been paid.
It’s advantageous because, viewed as a whole, the bank balance of a restaurant might appear to be better than its actual financial position.
It could be that there is $80,000 in the account today. This number can mean something different when it is affected by other factors like rent as well as payroll, vendors and other obligations over the coming days.
This is what leads to cash flow forecasting.
The better question to ask yourself is “What happens to our funds after we receive the money and have fulfilled the commitments we’ve identified?”
The difference can be crucial when deciding whether this is an appropriate time to replace equipment, an addition purchase, or maintain liquid funds.
The cash you received may Not be Yours
Sales tax illustrates the point in particular.
The money that restaurants receive from their customers will eventually need to be handled in line with its tax obligations. If the funds are coupled with the normal cash flow, the bank balance could offer a false impression of the amount of money available.
Consistent records support sales tax compliance while also giving management a more realistic view of the restaurant’s finances.
This is one reason why restaurant accounting can be more effective in situations where financial responsibility isn’t seen as separate islands.
Prime cost affects margin. COGS and future payment are affected by the purchase of vendor products. Payroll can affect the percentage of labor and cash. Cash flow is affected by the sales tax. P&Ls track financial performance, while forecasting allows management to look ahead.
The pieces join.
Bookkeeping Chef uses restaurant-focused reporting and system integrations to integrate these pieces. Bookkeeping outsourcing can be beneficial to operators who do not want to work all night reconciling their financial records.
The last part is important.
Restaurant owners shouldn’t stop reading the books, just because they are handled by someone else. It’s to provide owners with data in a way which helps them comprehend what is happening.
So when the P&L indicates that the restaurant made profits, but the account feels extremely insecure, don’t believe that any of the numbers can be off.
Find out what transpired between them.
This question will tell you more about your business than any other number.