The month has ended. Sales were solid, the P&L is in profit and there is nothing to be terribly off.
Make sure you check the account of the restaurant.
It wasn’t the number you had hoped for.
Restaurant owners may find this disconnect frustrating since they believe cash flow and profits should be exactly the same. But they don’t. A P&L is a measure of the financial performance of a business over a specific period of time, while it is a bank account that shows the actual timing of money going into and out of the company.
Understanding the difference can change the way that a proprietor looks at restaurant finances.
Imagine what happens on a typical week. Customers pay for food. The payment of employees is essential. The invoices for food and drinks are sent. Rent is coming. Credit card deposits come with their own schedules. Sales tax is collected, but that money is subject to an obligation.
Already the purchases for the week ahead have started.
If you focus only on the amount of revenue or profits, you’ll overlook a significant portion of this activity.
The Clue May Be Hiding in Prime Cost
If restaurant profits begin to decline, the cost of food, drinks and labor expenses should be taken into consideration.
Prime cost is made up from both goods and labor. The Bookkeeping Chefs’ guidance places the prime cost between 60-65 percent of revenue for many restaurants. They also emphasize the importance of weekly monitoring rather than waiting until the month ends.
Effective primary cost management is less about obsessing over one percentage point and more about recognizing changes early.
Imagine that the restaurant’s results are generally within its target, but this past week it increased. Perhaps the overtime rate was increased. The beverage cost may have remained the same, whereas food costs rose. A higher proportion of food could prompt the manager to consider examining purchasing, waste management, portions and menus, or vendor bills.
The percentage is what matters. It is in the food service activity.
This is possible due to the fact that everyone will be able to remember what happened.
The details are more difficult for you to remember the next day or two.
Then the Vendor Bills Show Up
Restaurants may buy ingredients the week before and pay for them the following week. That timing helps explain why profits alone won’t be able to answer every cash question.
Vendor invoices must be tracked, accepted and paid. Manually completing this task in an office with many suppliers can be a massive administrative burden.
Automating accounts payable helps to streamline this process by eliminating the need to handle bills in a repetitive manner and payment information. The bookkeeping system that is connected to the internet can provide the user with a more clear picture of obligations that haven’t yet hit the bank account.
It’s important because the bank’s balance in isolation may appear to be healthier than the restaurant’s actual short-term position.
In the present, there could be an amount of $80,000 in the account. This amount could mean something different when you consider that rent, payroll and vendors commitments consume a significant portion over the next few days.
Forecasting cash flow is a normal outcome.
What will happen with our cash once we’ve received the funds we’ve expected and fulfilled all our obligations?
It is vital to recognize the difference before deciding if this week is the best time to replace equipment, buy additional products or preserve liquidity.
The money you receive may Not Be Yours
The sales tax example is an excellent one.
A restaurant collects money from customers which will need to be dealt with in accordance with its tax obligations. If these funds are put together with operating cash, it can provide a false perception of the cash available for spending.
Records that are consistent support sales tax compliance while also giving the manager a better view of the restaurant’s finances.
This is one reason why restaurant accounting is more efficient when financial responsibilities aren’t considered as separate islands.
Prime cost affects margin. COGS (cost of goods sold) and future payments are impacted due to purchases from vendors. Payroll affects both labor percentage as well as cash. Cash flow is affected by the sales tax. P&Ls report financial performance, and forecasting allows management to examine the future.
The pieces are connected.
Bookkeeping Chef integrates restaurant-specific reporting with 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 sentence is vital.
It’s not our goal for restaurant owners to not check their books because somebody does. Owners must be provided with information that will help them to comprehend what’s happening.
Don’t assume that the P&L is wrong if the accounts appear to be in a good state, yet the P&L indicates that the restaurant earned money.
Find out what transpired between you and your spouse.
That question can teach you far more about your restaurant than a single number could alone.