The month is over. The sales were excellent, the P&L was profitable and there was no sign of anything to be seriously wrong.
It is recommended to check the restaurant’s bank account.
The number isn’t exactly what you’d hoped for.
Restaurant owners can be dissatisfied with this because they believe that cash flow and profits should be the same. They don’t. A P&L measures the financial performance of a company over time and the bank account represents the exact timing of funds flowing into and out of the business.
Understanding the difference can change how a business owner considers restaurant financials.
Imagine what could happen during an ordinary week. Customers pay for meals. Paying employees is necessary. The invoices for food and drinks are sent. Rent is getting closer. Credit card deposits are also timed. Sales tax is paid, but that cash is subject to an obligation.
The purchasing for the coming week has already begun.
If you only look at revenues or the final profits, then you’ll not be able to see a lot of this action.
Prime Cost could be the Key to the Answer
If restaurant profits begin to decrease, costs of food, beverages and labor costs must be taken into the equation.
Prime cost consists of the price of goods and labor. Bookkeeping Chef’s guidelines place the primary cost at around 60%-65 percent of the revenue for many restaurants, focusing on daily monitoring, rather than waiting until the final day of each month.
Effective prime cost management is not about focusing on a single percentage and more about recognizing changes in the early stages.
If the restaurant is performing in line with its goals, but this week’s percentage is higher. Perhaps the overtime rate has increased. Perhaps the cost of beverages was stable while food costs grew. The manager can review menus, waste, portion sizes or vendor invoices, as well as purchasing if the food percentage is higher.
The percentage raises a concern. The answer lies in the activities in restaurants.
Weekly reports make the conversation possible, while everyone is still able to remember what happened.
The details are more difficult for you to recall two or three days later.
The Vendor’s Bills are Received
Restaurants may buy ingredients this week but pay for the items later. This timing helps to explain the reason why profit alone isn’t enough to answer all cash-related questions.
Vendor invoices must be accounted for, tracked and paid. This could be an enormous task for an operation that has numerous suppliers.
Automating the process for accounts payable can help organize this through reducing the repetition of payments and bills. Bookkeeping systems that are connected can give the user a better picture of debts that haven’t yet hit the account of the bank.
This is useful, because the balance of your bank account may seem healthier than a restaurant’s actual financial situation.
The current balance could be $80,000 on the account. That number means something very different when you consider that rent, payroll, vendors, and other commitments will consume a substantial portion of it over the next several days.
That leads naturally to the process of forecasting cash flows.
The best question to ask yourself is “What happens to our cash after we receive it and have fulfilled our obligations that we know?”
This distinction is essential in determining whether this is the best time to purchase an additional item or replace equipment, or keep liquidity.
The Cash Was Never Really Yours
The example of sales tax is an excellent one.
Restaurants collect money from their clients, which they then handle in accordance with their tax obligations. If those dollars are mentally associated with operating cash, the balance in the bank could create a false impression of what’s there to be spent.
Consistent records support sales tax compliance while also giving management a more realistic view of the restaurant’s finances.
This is one reason why restaurant accounting works better when financial responsibilities aren’t treated as separate islands.
Prime cost affects margin. COGS (cost of goods sold) and future payments are impacted by purchases from vendors. Payroll has an impact on both the labor and cash percentage. Cash availability is affected by sales tax. P&Ls record financial performance while forecasting allows management to look ahead.
Connect the pieces.
Bookkeeping Chef integrates restaurant-specific reporting along with system integrations. For those who don’t wish to work all night reconciling financial data, specialized outsourced bookkeeping services will handle much of the accounting workload without removing the owner from the financial conversation.
This last aspect is crucial.
Restaurant owners should not stop studying the literature simply because they’re handled by another. The goal is for owners to get the information they need in a format that helps them understand what’s going on.
Don’t believe that the P&L is incorrect if the bank account seems tight but the P&L shows the restaurant has generated money.
Find out what happened between you and your spouse.
That question can teach you much more about the restaurant than any number be on its own.