The month is done. The month is over.
Make sure to check the restaurant’s account.
It wasn’t the number you were hoping for.
Restaurant owners might find this disconnect frustrating as they believe cash flow and profits ought to be identical. They aren’t. A P&L examines financial performance over a time while the bank account represents the exact timing of funds being moved into and out of the business.
Understanding the difference could alter the way a restaurant owner looks at restaurant finances.
Have a look at the typical week. The customers pay for food. Paying employees is necessary. Food and beverage deliveries arrive with invoices. Rent is coming. The time frame for debits to credit cards differs. Taxes on sales have been collected, however that money is a legal obligation.
Already the purchases for the week ahead have begun.
If you are only looking at revenues or the final profits, then you’ll miss a lot of this action.
The Key to the Mystery Could Be Hidden in the Prime Cost
If the restaurant’s profitability starts to decrease, cost of food, drinks and labor costs must be taken in consideration.
Prime cost is made up of both materials and labor. The Bookkeeping Chef’s guidance puts the prime cost at between 60%-65% of revenue for many restaurants, while emphasizing weekly monitoring rather than waiting until the end of each month.
Effective cost management for primes is less about worrying about the exact percentages and more about noticing movement in the early stages.
Imagine that the restaurant normally achieves its goals, but this week, it’s an increase in percentage. Perhaps overtime was increased. The cost of beverages could have remained the same, whereas food prices increased. The chef may look over menus and portions, waste, vendor invoices, and purchasing if the food percentage is greater.
The percentage raises questions. It is in the underlying restaurant activity.
A weekly report can make that conversation possible while everyone is still able to remember what happened.
After a period of two to three weeks, it becomes more difficult to reconstruct the details.
Then the Vendor Bills Show Up
A restaurant might purchase its ingredients this week, but then pay for them later. This explains the reasons why profit alone isn’t enough to answer all cash-related questions.
Vendor invoices must be tracked, received and paid. In a busy business with numerous suppliers, doing that manually could become an administrative burden.
Automating the accounts payable process can streamline this process by reducing the repeated handling of payments and bills. Bookkeeping systems that are connected can give owners a better image of their obligations even if they have not yet been paid.
This is important since a bank balance viewed in isolation may appear to be healthier than the restaurant’s real-time position.
The current balance could be an amount of $80,000 in the account. This amount could mean something different when it is affected by other elements like rent, payroll, vendors and other obligations over the next few days.
This is what leads to cash flow forecasting.
Instead of asking “How many dollars of cash are we carrying?” the better question becomes “What is going to be the fate of our cash following the cash we anticipate to receive and the obligations we already know about?”
The distinction can matter when deciding if it is an appropriate time to repair equipment, make an extra purchase, or keep liquidity.
The Cash Wasn’t Yours at All
The sales tax example is a good one.
Restaurants receive money from customers and will need to be dealt with in accordance with tax regulations. When these money are thought of as placed in the same category as operating cash, it can provide a false perception of the amount of money that is available for spending.
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 functions better when financial responsibilities don’t are considered as distinct islands.
Prime cost affects margin. COGS (cost of products sold) and future payments are impacted by the purchases made by vendors. Payroll is a factor that affects both the labor and cash percentage. Cash flow is impacted by the sales tax. P&Ls are used for recording financial performance. Forecasting can be helpful for managers.
The pieces are connected.
Bookkeeping Chef combines restaurant-specific reports with system integrations. For business owners who don’t want to work all night reconciling financial data, outsourcing of bookkeeping can take on large portions of the accounting burden without removing the owner from financial conversations.
The final part is crucial.
It’s not for restaurant owners to stop looking at their accounts because they are handled by someone else. Owners must be provided with information that helps them be aware of what’s happening.
If the P&L indicates that the restaurant is earning money but the bank balance seems insufficient, don’t believe that the P&L is not accurate.
Ask them about what transpired between them.
This question will teach you much more about the restaurant than a single number could by itself.
