The month has come to an end. The sales were decent and the P&L was profitable and there was nothing that appeared to be terribly wrong.
Check the bank account of the restaurant.
The number isn’t what you’d expect.
Restaurant owners may find it difficult to reconcile this issue because they believe that cash flow and profits should be the same. The two don’t line together. A P&L examines the financial performance of a company over time, while the bank account represents the exact timing of funds flowing into and out of the company.
Understanding the differences can allow owners to change their perspective on restaurant finances.
Have a look at what goes on in a typical week. The customers pay for food. Paying employees is necessary. The invoices for food and beverages are handed out. Rent is coming. The time frame for debits to credit cards differs. Sales tax is collected but it’s also a responsibility.
The shopping for the week ahead has already begun.
If you focus solely on revenue and the final profit figure, it is easy to overlook lots of activities.
Prime Cost Could Hold the Key to the Answer
If restaurant profits begin to move in the negative direction, the food, beverages and labor costs need attention.
Cost of the goods sold with labor is the main cost. The Bookkeeping Chef’s guidance puts primary costs between 60%-65 percent for a variety of restaurants, and emphasizes weekly monitoring as opposed to waiting until the end of the month.
Effective prime cost management is less about obsessing over a single percentage and more about noticing movement early.
Let’s say that a restaurant typically performs in line with its goals however, this week’s rate rises. Maybe overtime was boosted. Maybe beverage costs were stable while food costs jumped. A higher proportion of food could lead the business owner to examine the purchase, waste management, menu mix and portions, or vendor bills.
The percentage raises the question. The answer lies in the underlying restaurant activity.
The reason this conversation can be relived is because everyone is able to recall the details of what transpired.
After two or three weeks, it gets more difficult to reconstruct details.
The Vendor’s Bills Arrive
Restaurants may buy ingredients in one week, and then pay for them next week. This is a reason for understanding profit alone doesn’t answer every cash-related question.
Vendor invoices must be received, tracked and paid. This could be lots of work for an organization that has many suppliers.
Automating accounts payable simplifies the process, cutting down on tedious tasks such as managing bills and payment details. Connected bookkeeping systems can also provide the user with a more clear picture of debts that haven’t yet hit the bank account.
This is advantageous, since the bank balance can seem healthier than a restaurant’s actual situation in the near future.
It could be that you have $80,000 in your account right now. This number can mean something different when it is affected by other factors such as rent or payroll, vendors, and other obligations in the next few days.
This is what leads to cash flow forecasting.
What happens to our cash once we’ve received the cash we’ve been expecting and met all of our obligations?
This is a crucial distinction in determining the appropriateness of the appropriate time to purchase an additional item, replace equipment, or keep liquidity.
The money you receive may Not Be Yours
Sales tax illustrates this especially well.
The cash a restaurant gets from its customers will eventually need to be managed in accordance with the tax requirements. If the money is mentally placed in the same category as operating money, the bank’s balance may create a false sense of what’s there to be spent.
A consistent record-keeping system helps restaurants comply with sales tax laws, while providing a complete view of their financial position.
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 and future payments are impacted by purchases from vendors. Payroll can affect both the labor and cash percentage. Cash flow is impacted by sales tax. The P&L tracks financial performance, while forecasting helps management look ahead.
The pieces are connected.
Bookkeeping Chef combines restaurant-specific reports with system integrations. Outsourced bookkeeping is a great option for operators who do not want to stay up all night reconciling their financial records.
The last sentence is vital.
The idea isn’t for owners of restaurants to stop looking at their books since somebody else handles them. It’s crucial that the owners have access to information so that they are aware of what’s going on.
Don’t believe that the P&L is incorrect if the bank account seems tight but the P&L confirms that the restaurant made money.
Find out what transpired between them.
The answer to this question will tell you more about the restaurant, more than just an identifying number.