The month is over. The sales were good, the P&L indicates a profit and there is nothing suspiciously wrong.
Then you check the bank account of the restaurant.
It wasn’t the number you would have expected.
For owners of restaurants, this disconnection can be a source of frustration because profit and available cash appear to have the same meaning. But they don’t. The P&L is a measurement of financial performance, while the bank account is a reflection of the time when money flows in and out.
Understanding the differences could help restaurant owners shift their view of the financials of their restaurant.
Imagine what goes on during an average week. The customers pay for food. Employees must be paid. Food and beverages are handed out. Rent is coming up. Deposits made with credit cards have their own timing. The sales tax collected has an obligation.
Already, the next week’s purchases have started.
If you only focus on revenues and the numbers at the end of profits it’s easy to overlook the vast amount of activity.
Prime Cost Could Hold the key to the answer
Food, drink and labour costs merit a closer at when profitability in restaurants begins to go downhill.
Prime cost is composed of both materials and labor. Bookkeeping Chef’s provided guidance places prices for the prime cost at around 60%-65% for many restaurant and stresses weekly monitoring rather than waiting until the end of the month.
Effective primary cost management requires less focusing on a single percentage and more attention to the early changes.
Suppose that normally the restaurant does well, but this week, there’s at a higher percentage. Perhaps overtime has also increased. Maybe beverage costs were stable but food costs increased. Operators may examine menus, waste, portion sizes, vendor invoices, and purchasing if the food portion is higher.
The percentage raised the question. The restaurant’s activity is the answer.
Weekly reports allow this conversation to take place even though everyone is aware of what’s happened.
A few weeks later after that, the details become harder to understand.
The Vendor’s Bills are Received
The restaurant will pay later for the food items it buys. It’s due to this fact that understanding profits alone does not address all cash issues.
Vendor invoices need to be received, recorded and tracked before being paid. In a busy business with numerous suppliers, doing that by hand can be an administrative burden.
Accounts payable automation helps organize this process by reducing repetitive handling of bills and payment information. These bookkeeping systems are also able to give the user a better image of the obligations that haven’t yet been paid into the bank account.
It’s helpful because, when looked at as a whole the bank balance of a restaurant may appear to be more stable than its actual financial situation.
There is currently $80,000 on the account. The amount could mean something different if it is impacted by other factors like rent or payroll, vendors, and other obligations in the next few days.
This leads to the cash flow forecasting.
What will happen with our cash after we’ve gotten the funds we’ve expected and have met our obligations?
This is a crucial distinction when deciding on which is the best time to buy an additional purchase or replace equipment, or keep the liquidity.
You might not have been eligible for all the money you believed.
Sales tax illustrates this especially well.
The money restaurant owners receive from customers will eventually have to be managed in accordance of its tax obligations. If these funds are divided into operating cash, the balance in the bank can create a misleading sense of the amount in the bank to spend.
Regularly maintained records help restaurants to comply with the sales tax laws, while providing a complete overview of their financial standing.
Accounting for restaurant operations is more effective when the financial obligations of each restaurant do not have to be considered separately.
Prime cost affects margin. COGS (cost of products sold) and future payments are affected due to purchases made by vendors. Payroll affects the amount of cash available and also the labor percentage. Cash availability is impacted by sales tax. P&Ls report financial performance, and forecasting lets management examine the future.
Connect the pieces.
Bookkeeping Chef employs restaurant-specific reporting and system integrations that help put all the pieces together. Specialized outsourced bookkeeping services are a great option for operators who do not have time to reconcile their financial data. They are able to handle the bulk of the accounting duties while removing the proprietor from the financial conversation.
The last point is vital.
The aim isn’t to get restaurant owners to stop looking at the books because they are handled by someone else. Owners should receive information which will allow them to understand what’s happening.
So when the P&L indicates that the restaurant made cash, yet the bank account feels extremely insecure, don’t believe that one of the numbers must be incorrect.
What happened between the two?
Answering this question can provide more information about the restaurant, more than just the number.