The month is over. The sales were strong, the P&L indicates a profit and nothing appears suspiciously off.
Then you check the bank account of the restaurant.
The number is not exactly what you’d hoped for.
Restaurant owners might be dissatisfied with this because they believe that cash flow and profits should be exactly the same. They don’t. A P&L evaluates the the financial performance of a company over time and the bank account reflects the time frame of money going into and out the business.
Understanding the difference can change how a business owner looks at restaurant finances.
Imagine what might happen during the typical week. Customers pay for meals. Employees have to be paid. The invoices for food and drinks are issued. Rent is on the verge of being due. Deposits made with credit cards have their own specific timing. Sales tax collected is an obligation.
Already the purchases for the week ahead have begun.
If you just look at the amount of revenue or the final profits, you’ll not be able to see a lot of the activity.
Prime Cost could be the key to the answer
Food, beverages and labor costs merit a closer examine when restaurant profitability begins to decrease.
Cost of the goods sold with labor is the prime cost. The Bookkeeping Chefs’ advice places the cost of goods sold between 60-65% of revenues for many establishments. They also stress the importance of weekly monitoring rather than waiting until the end of the month.
Effective cost management for primes is less about worrying about a single percentage and more about being able to spot changes in the early stages.
Imagine that the restaurant usually performs within its targets, but this week’s percentage rises. Perhaps overtime was increased. Perhaps the cost of beverages remained steady as food costs rose. An increase in the percentage of food consumed could prompt the manager to look at purchasing, waste management, portions and menu mix, or vendor costs.
The percentage is what matters. The activity of the restaurant itself provides the answer.
A weekly report can make an opportunity for conversation while everyone still remembers what happened.
After two or three weeks, it becomes more difficult to reconstruct particulars.
The Vendor’s Bills are Received
A restaurant might purchase its ingredients this week, but then pay for these items later. This is the reason that understanding profit alone isn’t the answer to all cash questions.
Vendor invoices should be recorded, received and tracked before being paid. This can take quite a task in an operation that has many suppliers.
Accounts payable automation helps organize this process by reducing repetitive handling of bills and payment information. Bookkeeping systems that are integrated will give the owners a clear view of their obligations, even though they haven’t yet been paid.
This is because an account balance seen in isolation may appear to be healthier than the restaurant’s actual near-term position.
It might be that you have $80,000 on your account right now. It could mean something different if rent, payroll and vendors as well as other obligations will consume a large part of it in the next several days.
This leads to cash flow forecasting.
What will happen with our cash after we’ve gotten the funds we’ve expected and fulfilled all our obligations?
It is essential to be aware of what the distinction is when deciding if this week is the best moment to upgrade equipment, buy more items or preserve liquid funds.
The money you receive may Not be Yours
The sales tax example is a great one.
Restaurants receive money from their customers, which they have to deal with in accordance with their tax obligations. If the funds are mixed with cash flow, the balance of the bank account could offer a false impression of the amount of cash available.
Regularly maintained records help restaurants to comply with the sales tax laws while also providing an accurate picture of their financial situation.
This is the reason that restaurant accounting works better when financial obligations aren’t considered as distinct islands.
Prime cost affects margin. COGS and future payment are affected by purchases made by vendors. Payroll has an impact on both the labor percentage as well as cash. Sales tax affects cash availability. The P&L documents financial performance and forecasting assists management to look ahead.
The pieces link.
Bookkeeping Chef uses restaurant-focused reporting and system integrations to integrate these pieces. Outsourced bookkeeping services that are specifically tailored to your needs can be a good option for owners who aren’t able to manually reconcile financial information. They can handle a large portion of the accounting duties while removing the proprietor from the financial discussion.
The last point is important.
Restaurant owners shouldn’t be able to stop reading their books even if they’re managed by someone else. It is important that owners have access to information so that they understand the situation.
If the P&L shows that the restaurant is earning money but the bank balance seems tight, do not assume the P&L is not accurate.
Ask what happened between them.
That question can teach you much more about the restaurant than either number can by itself.