The month has ended. Sales were solid, the P&L indicates a profit and there’s nothing that appears to be suspiciously to be wrong.
Check the restaurant’s account.
The number may not be exactly what you’d hoped for.
This gap is a problem for restaurant owners as they feel that profits and cash flow should be the same. They aren’t. A P&L examines the financial performance of a company over time and the bank account is a reflection of the timing of money actually moving in and out of the business.
Knowing the difference can change how a restaurant’s owner is able to view their financials.
Imagine what might happen during a typical workday. The customers pay for food. Employees have to be paid. Food and drinks are issued. Rent is approaching. The timing of the credit card deposit is different. Sales tax is an obligation.
The shopping for the week ahead has already started.
If you only focus on revenues and the numbers at the end of profits, it is easy to overlook the vast amount of activity.
The Secret Could Be Hidden in the Prime Cost
If the restaurant’s profitability begins to shift in the negative direction, food, beverage and labor expenses require consideration.
Cost of goods sold combined with labor is the prime cost. Bookkeeping Chef’s guidelines place prime cost at roughly 60%-65 percent of revenues for a variety of restaurants, while focusing on the importance of monitoring weekly rather than waiting until the final day of the month.
Effective prime cost management involves less focusing on a single percentage and more attention to the early changes.
Imagine that the restaurant’s performance is generally within its target However, this past week it increased. Perhaps overtime was is up. Perhaps, the costs for beverages remained constant but food costs increased. A higher proportion of food may cause the manager to look at purchasing, waste, menu mix portions or vendor invoices.
The percentage raised the question. The answer is found in the restaurant’s activity.
Weekly reports allow for this discussion to occur as everyone is conscious of what has happened.
Two or three weeks later, the details become much harder to decipher.
The Vendor’s bills arrive
Restaurants might purchase food items during a week and pay for them the next. This can help explain why profit alone is not enough to answer every cash question.
Vendor invoices must be received, recorded, tracked, and ultimately paid. This is quite a task in an organization that has many suppliers.
Accounts payable automation helps organize this process by reducing repetitive handling of bills and payment information. Connected bookkeeping systems can also provide the user with a more clear picture of debts that haven’t yet been paid into the account of the bank.
This is important since the bank’s balance as an individual can appear more healthy than the restaurant’s actual near-term position.
It might be that there are $80,000 in your account right now. The figure of $80,000 is small if the cost of rent, vendors, or payroll will take up a significant portion of the account in the coming days.
Cash flow forecasting is a natural result.
What will happen with our cash after we’ve gotten the funds we’ve expected and have fulfilled all of our obligations?
This distinction is essential when deciding the appropriateness of the best time to buy an additional purchase or replace equipment, or maintain liquidity.
You may not be legally entitled to the full amount you thought.
The sales tax illustrates this point particularly well.
A restaurant receives money from customers that eventually needs to be handled according to its tax obligations. If these cash-flows are grouped together with operating cash, it can give a false impression of the money available to spend.
Consistent records help restaurants comply with sales taxes while giving management an accurate view of their financial situation.
Accounting for restaurant operations is more effective when the financial responsibilities of each restaurant are not treated separately.
Prime cost affects margin. Vendor purchases impact COGS and future payments. Payroll can affect the amount of cash available and also the labor percentage. Taxes on sales affect the availability of cash. P&Ls record financial performance while forecasting allows management to examine the future.
Connect the pieces.
Bookkeeping Chef integrates restaurant-specific reporting along with system integrations. Outsourced bookkeeping services that are specifically tailored to your needs are a great alternative for businesses that don’t have the time to reconcile their financial data. They are able to handle the bulk of the accounting tasks without removing the owner from the financial conversation.
That last part matters.
The idea isn’t for restaurant owners to simply stop looking at the books because someone else handles them. The goal is for owners to get the information they need in a format that helps them understand what’s going on.
If the P&L indicates that the establishment is profitable however, the balance in the bank feels tight, do not assume the P&L must be incorrect.
Find out what happened between you and your spouse.
This question will teach you something more about the food you serve than any other number could on its own.