The month is over. The sales were excellent, the P&L had a profit, and there was nothing that appeared to be terribly wrong.
It is recommended to check the restaurant’s bank account.
You didn’t get the number you were hoping for.
For restaurant owners, that disconnect can be frustrating because profits and cash flow seem to have the same meaning. But they don’t. A P&L evaluates the financial performance of a firm over a specific period of time, while a bank account shows the exact time of money flowing into and out of the business.
Understanding the difference can alter the way that a proprietor looks at restaurant finances.
Imagine what could happen on a typical week. The customers pay for food. Employees need to be paid. Food and beverages are delivered with invoices. Rent is nearing. Credit card deposits are also timed. Taxes on sales have been paid, but that cash is a legal obligation.
Meanwhile, next week’s purchasing has already started.
If you focus solely on revenues and the numbers at the end of profits it’s easy to miss a the vast amount of activity.
The Key to the Mystery Could Be Hidden in the Prime Cost
If restaurant profits begin to move in the wrong direction, food, beverage and labor expenses require focus.
Cost of selling goods with labor is the main cost. Bookkeeping Chef’s provided guidance places the cost of goods sold at 60% to 65 percent for a variety of restaurants and stresses weekly monitoring instead of staying until the end of of the month.
Effective management of prime costs is less about worrying about the exact percentages and more about recognizing changes early.
Let’s say that typically, the restaurant achieves its goals, however this week it’s an increase in percentage. Perhaps the overtime rate increased. Perhaps beverage costs were steady, but food costs increased. The manager can review menus or waste, portion sizes, vendor invoices, and purchasing if the proportion of food is greater.
The percentage raises a question. The activities that underlie the restaurant provide the answer.
This is possible due to the fact that everyone can still remember what happened.
The details are much more difficult for you to remember just a few days later.
The Vendor’s bills arrive
Restaurants may buy ingredients this week but pay for the items in the future. This is a reason for understanding profit alone doesn’t answer all cash questions.
Vendor invoices must be recorded, received then tracked and finally paid. In a busy operation with numerous suppliers, doing that manually could become its own administrative workload.
Accounts payable automation helps organize this process by reducing repetitive handling of bills and payment information. These bookkeeping systems are also able to provide the owner with a clearer picture of debts that haven’t yet reached the account of the bank.
This is helpful, since the balance of your bank account may appear to be healthier than the restaurant’s real near-term situation.
There is currently an amount of $80,000 in the account. This number could mean something different if payroll, rent vendors, or other commitments will consume a substantial amount over the next few days.
This is what leads to cash flow forecasting.
The best question to ask is “What happens to our money after we have received the funds and have fulfilled our commitments we’ve identified?”
The distinction can matter in determining if this is an appropriate time to replace equipment, make an addition purchase, or maintain cash.
A portion of the Cash Was Never Yours
Sales tax illustrates this especially well.
The money that restaurant owners receive from customers is eventually going to need to be handled in line with its tax obligations. If these dollars are mentally added to operating cash, then the bank balance could provide an inaccurate picture of the amount of money available.
The consistency of the records helps restaurants comply with sales taxes while giving the management a realistic view of their finances.
It is for this reason that restaurant accounting can be more effective when financial obligations aren’t separated from other responsibilities.
Prime cost affects margin. COGS and future payment are affected by the purchase of vendor products. Payroll and cash availability are affected by the payroll. Cash flow is affected by sales tax. The P&L tracks financial performance, while forecasting aids management in looking ahead.
Connect the pieces.
Bookkeeping Chef is a restaurant-specific report that integrates and system integrations. Outsourced bookkeeping is a great option for owners who do not wish to work all night reconciling their financial data.
The final part is crucial.
The aim isn’t to get restaurant owners to stop looking at their books simply because they are handled by someone else. It’s for owners to receive details in a manner that helps them understand what’s happening.
So if the P&L indicates that the restaurant made profits, but the account feels extremely tight, don’t presume that any of the numbers can be wrong.
Find out what transpired between them.
This will reveal more about your business than any other number.