The month is done. The sales were good, the P&L had a profit, and there was no sign of anything to be seriously off.
You then check the restaurant’s bank account.
The number may not be exactly what you’d hoped for.
Restaurant owners can find it difficult to reconcile this issue since they believe cash flow and profits ought to be the same. They aren’t. A P&L is a measure of the financial performance of a business over a specified time period, whereas it is a bank account that shows the exact timing of money moving into and out of the business.
Understanding the difference will alter the way a restaurant’s manager considers their financials.
Check out what goes on in a typical week. The customers pay for food. Employers must be paid. You will receive invoices with the delivery of food and drinks. Rent is due. Credit card deposits are also timed. The sales tax collected has an obligation.
Already the purchases for the week ahead have begun.
If you only look at the revenue or the final profit, then you will not be able to see a lot of this action.
The key may lie in the prime cost
When the profitability of restaurants starts to change in the wrong direction, the food, beverages and labor expenses require consideration.
Together, cost of items sold and labor make up prime cost. The Bookkeeping Chefs’ provided advice places the cost of goods sold between 60-65% of revenues for many restaurants. They also stress weekly monitoring instead of waiting until the end of the month.
Effective cost management for primes involves less focus on a single percent and more noticing early changes.
Imagine that the restaurant usually performs within its targets, but this week’s percentage rises. Maybe overtime is up. The beverage cost may have remained the same while food costs rose. Operators may examine menus, waste, portion sizes, vendor invoices, and purchasing if the food percentage is higher.
The percentage raises a question. The answer is found in the activity of the restaurant.
The reason this conversation can be relived is because everyone can still remember the details of what transpired.
After a period of two to three weeks, it becomes harder to reconstruct the specifics.
Then the Vendor Bills Arrive
A restaurant might purchase its ingredients this week but pay for the ingredients later. That timing helps explain why profits alone won’t be able to answer every cash question.
Invoices from vendors have to be tracked, accepted and paid. Doing this manually in an office with many suppliers could become an enormous administrative burden.
Automating the accounts payable process can assist in coordinating this process by reducing the repetitive handling of bills and payments. Systems for bookkeeping that are linked to accounting systems can provide owners with a clear image of their obligations even if they have not yet been paid.
This is beneficial, as the bank balance can appear to be healthier than the restaurant’s actual situation in the near future.
There may be $80,000 sitting in the account right now. This number can have a different meaning when it is affected by other elements like rent as well as payroll, vendors and other obligations for the coming days.
Forecasting cash flow is a natural result.
What will happen with our cash once we’ve received the amount we’ve hoped for and met all of our obligations?
This is a crucial distinction in determining whether this is the appropriate time to buy an additional purchase replacement of equipment, or maintain liquidity.
The money you receive may Not be Yours
Sales tax illustrates this especially well.
Restaurants take money from their clients, which they be able to manage according to the tax requirements. If the funds are mixed with cash flow, the bank balance could give an inaccurate impression of the amount of cash available.
Consistent records support sales tax compliance while also giving management a more realistic view of the restaurant’s finances.
This is why it is that restaurant accounting works better in situations where financial responsibilities aren’t treated as separate islands.
Prime cost affects margin. Vendor purchases impact COGS and future payments. Cash and labor percentage are affected by the payroll. Sales tax impacts the availability of cash. The P&L records financial performance, while forecasting aids management in looking ahead.
Connect the pieces.
Bookkeeping Chef can help bring these elements together, using restaurant-specific reports as well as system integrations. For operators who don’t want to spend their nights manually reconciling financial data, specialized outsourced bookkeeping services can handle most of the accounting work without removing the proprietor of the financial discussions.
It’s the last thing that matters.
It’s not the intention of restaurant owners to stop checking their books because someone else does. It is important that owners receive information so they understand the situation.
If the P&L indicates that the establishment is profitable but the bank balance seems unbalanced, don’t assume that the P&L is not accurate.
Find out what transpired between you and your spouse.
This will reveal more about your business than any other number.