The month is over. The sales were decent and the P&L was profitable and there was no sign of anything to be terribly in error.
Check the restaurant’s bank account.
This number isn’t exactly what you’d hoped for.
Restaurant owners might be dissatisfied with this because they believe that cash flow and profits should be the same. They are not. A P&L measures the performance of the business’s finances for a particular time period, whereas a bank account shows the exact timing of funds moving into and out of the business.
Understanding the difference can alter the way a restaurant owner is looking at the restaurant’s financials.
Imagine what might happen during the typical week. Customers pay for meals. Employees need to be paid. You will receive invoices with drinks and food deliveries. Rent is nearing. The time frame for credit card deposits differs. Taxes on sales have been collected, but that money comes with an obligation.
The purchase for next week has already begun.
If you just look at the amount of revenue or the final income, then you’ll overlook a significant portion of this process.
The Secret Could Be Hidden in Prime Cost
If restaurant profits begin to decrease, food, beverage and labor costs must be taken in the equation.
Prime cost consists of both the cost of materials and labor. Bookkeeping Chef’s provided guidance places prices for the prime cost at around 60% to 65% for many restaurant and focuses on weekly monitoring as opposed to waiting until the end of the month.
Effective cost management for primes is less about obsessing over one percentage point and more about recognizing changes early.
Imagine that the restaurant normally achieves its goals, but this week, there’s more of a percentage. Perhaps overtime has also increased. Perhaps, the costs for beverages remained constant however food prices soared. A higher proportion of food may lead the operator to review purchase, waste, menu mix portions and vendor invoices.
The percent raises the issue. The answer is found in the activity of the restaurant.
A weekly report makes the conversation possible, while everyone still remembers what happened.
After two or three weeks, it becomes much more difficult to reconstruct specifics.
Then the Vendor Bills Arrive
Restaurants might purchase food items in one week, and then make payments the following week. It’s because of this timing that understanding profits alone does not resolve all cash-related issues.
Vendor invoices must be received and tracked. In a highly-competitive business with many suppliers, completing that manually can turn into its own administrative workload.
Automating the process of paying bills will help to organize the process by reducing the time-consuming handling of bills and payments. The bookkeeping system that is connected to the internet can give the owner a clearer picture of debts that haven’t yet hit the account of the bank.
This is beneficial, as the bank balance can 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. That number means something very different if payroll, rent vendors, or other commitments will consume a substantial portion of it over the next several days.
That leads naturally to cash flow forecasting.
Instead of asking “How many dollars of cash are we carrying?” the better question is “What is going to happen to our cash after the money we hope to receive and the obligations we know about?”
This is an important distinction to make in determining the appropriateness of the best time to buy an additional purchase, replace equipment, or preserve liquidity.
The Cash Wasn’t Really Yours
Sales tax illustrates the point particularly well.
The money a restaurant gets from its customers will eventually need to be managed in accordance to its tax obligations. If these cash-flows are combined with operating cash, it could give a false impression of the amount of money that is available for spending.
Regularly updated records ensure sales tax compliance as well as giving management a more realistic perspective of the restaurant’s financials.
This is the reason that restaurant accounting is more efficient in situations where financial responsibilities aren’t separated from other responsibilities.
Prime cost affects margin. COGS (cost of goods sold) and future payments are impacted due to purchases made by vendors. Payroll affects both cash and labor percentage. Taxes on sales affect cash availability. The P&L records financial performance, and forecasting assists management to look ahead.
Connect the pieces.
Bookkeeping Chef combines restaurant-specific reports through system integrations. Specialized outsourced bookkeeping services are an excellent option for operators who don’t have time to reconcile their financial information. They can handle a large portion of the accounting work without removing the owner from the financial conversation.
The final part is crucial.
It’s not the aim of restaurant owners to stop examining their books just because someone does. Owners should be provided with the information they need in a format that allows them to understand the situation.
If the P&L shows that the establishment is earning money but the bank balance seems insufficient, don’t believe the P&L could be wrong.
Ask about the events that occurred between them.
This will reveal more about your company than any other number.
