The month is finished. The sales were good and the P&L showed a profit and there was nothing that appeared to be terribly wrong.
Then, you should check the restaurant’s bank account.
The number you received wasn’t what you were hoping for.
Restaurant owners might find this disconnect frustrating, as they believe that cash flow and profits ought to be identical. The two don’t line in. A P&L is a measure of the financial performance of a firm for a particular period of time, while a bank account shows the exact timing of money moving into and out of the business.
Understanding the difference could help restaurant owners shift their view of the financials of their restaurant.
Take a look at what goes on in a typical week. Customers pay for meals. Employees must be paid. You will receive invoices for food and beverage deliveries. Rent is on the way. The time of debits to credit cards is different. Sales tax is collected but it’s also the responsibility.
The purchase for next week has already started.
When you look only at revenue and the end-profit number, it is easy to overlook lots of activities.
The key to the answer may lie in the prime cost
The cost of food, drinks and labour costs are worth taking a closer at when profitability in restaurants begins to fall.
Cost of goods sold combined with labor is a major cost. The Bookkeeping Chefs’ provided advice places the cost of goods sold between 60 and 65 percent of the revenue for many restaurants. They also stress weekly monitoring instead of waiting until the end of the month.
It is more important to be able to detect the changes before they occur rather than obsessing over a specific percentage.
Suppose that normally the restaurant is performing at a high level, however this week it’s a higher percentage. Perhaps overtime was also increased. Maybe the costs for beverages were stable however food costs increased. A higher proportion of food could cause the owner to examine purchasing, waste management, portions and menu mix or even vendor invoices.
The percentage raises a question. The activities that underlie the restaurant provide the answer.
This conversation is possible because everyone will be able to remember what transpired.
The details are harder to remember two or three days later.
Then, the Vendor Bills arrive.
A restaurant might purchase its ingredients this week, but then pay for the ingredients later. This is a reason for that understanding profit alone isn’t the answer to all cash questions.
Vendor invoices should be recieved and logged. In a highly-competitive business with many suppliers, completing that manually could become its own administrative workload.
Automating accounts payable speeds up the process, cutting down on repetitive tasks such as handling payments and bills. The owner can get more precise information about the obligations that haven’t yet landed on their bank account by using connected bookkeeping systems.
It’s helpful because, when taken as a whole the balance of a restaurant’s bank account might appear to be better than its actual short-term financial situation.
There could be a possibility that you have $80,000 on your account at the moment. This number could mean something different if payroll, rent, vendors, and other obligations will consume a large amount over the next few days.
That leads naturally to cash flow forecasting.
The best question to ask is “What happens to our cash once we receive it and have fulfilled our obligations we’ve made?”
This is an important distinction to make when deciding on the appropriateness of the best time to purchase an additional item to replace equipment or preserve liquidity.
The money you receive may Not be Yours
Sales tax illustrates this in particular.
The money that restaurant owners receive from customers will eventually have to be dealt with in accordance with its tax obligations. If the money is mentally placed in the same category as operating money, the bank’s balance can create a misleading sense of the money in the bank to spend.
A consistent record helps restaurants stay in compliance with sales tax regulations while also providing management an accurate view of their financials.
It is for this reason that restaurant accounting is more efficient in situations where financial responsibilities aren’t thought of as separate entities.
Prime cost affects margin. COGS (cost of products sold) and future payments are affected due to purchases made by vendors. Both labor and cash percentages are affected by payroll. Cash flow is impacted by the sales tax. P&Ls keep track of financial performance and forecasting lets management examine the future.
Connect the pieces.
Bookkeeping Chef utilizes restaurant-specific reporting and system integrations that help bring those pieces together. Outsourced bookkeeping is a great option for users who don’t want to be tasked with reconciling their financial records.
It’s the final part that counts.
Restaurant owners shouldn’t be able to stop studying the literature simply because they’re handled by another. Owners should receive information that can help them understand what’s happening.
Don’t be fooled into thinking that the P&L is not correct if the accounts appear to be in a good state, yet the P&L confirms that the restaurant made money.
Find out what transpired between you and your partner.
Answering this question can tell you more about the restaurant’s location than the number.