The month has ended. Sales were solid, the P&L is in profit and nothing is to be terribly to be wrong.
You then check the restaurant’s bank account.
The number you received isn’t what you’d hoped for.
This disconnect can be frustrating for restaurant owners since they feel that profits and cash flow should be the same. They don’t. A P&L examines the financial performance of a firm over a specific time period, whereas an account in a bank shows the exact timing of funds moving into and out of he business.
Knowing the difference could change the way that a proprietor considers restaurant financials.
Take a look at what happens during a normal week. Customers pay for meals. It is important to pay employees. The invoices for food and drinks are sent. Rent is on the way. The time of credit card transactions is different. Sales tax is paid, but that cash is a legal obligation.
In the meantime, next week’s purchase has already started.
If you focus solely on revenue and the final profit figure it’s easy to miss a the vast amount of activity.
The Key to the Mystery Could Be Hidden in Prime Cost
If restaurant profitability begins to fall, cost of food, drinks and labor expenses should be taken into consideration.
Together, the cost of items sold and labor together make up the bulk of the cost. The Bookkeeping Chefs’ guidelines place the primary cost between 60-65 percent of the revenue for many restaurants. They also stress daily monitoring, not waiting until the month ends.
Effective primary cost management requires not focusing on one percentage and more attention to the earlier movement.
Suppose that normally the restaurant achieves its goals, however this week it’s an increase in percent. Maybe overtime was boosted. The cost of beverages could remain the same, while food costs increased. A higher proportion of food may cause the manager to look at purchase, waste, menu mix portions or vendor invoices.
The percentage raises a concern. The underlying restaurant activity provides the answer.
Weekly reports allow this conversation to be held even though everyone is aware of what’s happened.
Three or four weeks later after that, the details become harder to decipher.
Then the Vendor Bills Show Up
The restaurant will be able to pay later for the food items it purchases. This is the reason knowing the profit isn’t enough to answer every cash question.
Vendor invoices need to be recorded, received then tracked and finally paid. In a highly-competitive business with numerous suppliers, doing that by hand can be an administrative burden.
Automating the process of paying bills helps manage the process by cutting down on repetitive handling of bills and payment details. These bookkeeping systems are also able to provide the user with a more clear picture of obligations that haven’t yet reached the bank account.
This is advantageous, since the balance of your bank account may appear to be healthier than the restaurant’s actual situation in the near future.
There is currently an amount of $80,000 in the account. This amount could be different depending on other variables like rent or payroll, vendors, and 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 be the fate of our cash following the money we expect to receive and the obligations we are already aware about?”
This distinction is crucial when deciding on whether this is the right week to purchase an additional item or replace equipment, or keep the liquidity.
and some of the cash Was Never Really Yours
Sales tax illustrates this particularly well.
Restaurants receive money from customers that eventually must be disposed of according to its tax obligations. If the money is mentally combined with normal operating cash, then the balance of the bank account could give an inaccurate impression of the amount of cash available.
The consistent records help ensure the tax compliance of sales while giving management a more realistic view of the restaurant’s finances.
This is the reason that restaurant accounting can be more effective when financial responsibility isn’t thought of as separate entities.
Prime cost affects margin. COGS and future payments are affected by the purchase of vendor products. Payroll can affect both the percentage of labor as well as cash. Cash availability is affected by the sales tax. P&Ls are used to track financial performance. Forecasting can also be useful to management.
Connect the pieces.
Bookkeeping Chef helps bring the pieces together by providing restaurant-specific reports and 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.
The last section is very important.
It’s not the goal for restaurant owners to not check their books just because someone does. The goal is for owners to get information in a form that will help them understand what’s happening.
Don’t think that the P&L is not correct if the bank account seems tight but the P&L indicates that the restaurant has earned money.
Find out what happened between you and your partner.
The answer to that question will reveal something more about the food you serve than a single number could by itself.