The month is over. Sales were solid, the P&L indicates a profit and nothing appears to be terribly wrong.
Make sure to check the restaurant’s account.
The number is not what you expected.
Restaurant owners, this gap can be frustrating as profit and available cash seem like they should be the same. They don’t add together. A P&L measures the financial performance of a company over a certain time period, whereas it is a bank account that shows the exact timing of money going into and out of the company.
Understanding the difference can alter the way a restaurant’s manager is able to view their financials.
Imagine what might happen during the typical week. Food is paid for by customers. Employees must be paid. Food and beverages are handed out. Rent is coming up. Deposits to credit cards are timed. Taxes on sales have been paid, but that cash has a responsibility.
On the other hand, the next week’s shopping has already started.
If you just look at the amount of revenue or the final profits, you’ll miss a lot of the activity.
Prime Cost could be the Key to the Answer
If the restaurant’s profitability begins to shift in the negative direction, the food, beverages as well as labor costs require attention.
Prime cost is made up from both materials and labor. Bookkeeping Chef’s guidelines place prime cost at roughly 60%-65 percent of the revenue for many restaurants, while emphasizing the importance of monitoring weekly rather than waiting until the final day of the month.
Effective prime cost management is not about focusing on one percentage point and more about noticing movement early.
Imagine that the restaurant normally performs near its target but this week, there’s more of a percent. Perhaps overtime has increased. Maybe beverage costs were stable while food costs jumped. The operator may review menus, waste, portion sizes along with vendor invoices and purchasing if the proportion of food is greater.
The percentage is a source of concern. The answer is found in the activity of the restaurant.
A weekly report makes that conversation possible while everyone is still able to remember what happened.
After a period of two to three weeks, it becomes much more difficult to reconstruct specifics.
When the vendor invoices arrive
The restaurant pays later for the food items it purchases. This is due to the fact that knowing profits alone will not address all cash issues.
Vendor invoices have to be received and tracked. Doing this manually in an environment with many suppliers can become a huge administrative burden.
Accounts payable automation helps organize this process by reducing repetitive handling of bills and payment information. Bookkeeping systems that are connected will give the owners a clear understanding of their obligations, even though they haven’t yet been paid.
It’s useful because, taken as a whole the restaurant’s financial position might appear to be better than its actual short-term financial situation.
It might be that you have $80,000 in your account right now. The $80,000 amount is tiny if rental, vendors or payroll are to take the majority of the coming days.
Cash flow forecasting is a natural result.
Instead of asking “How many dollars of cash are we carrying?” the better question is “What is going to transpire with our cash after the cash we anticipate to receive and the obligations we are already aware about?”
It is essential to be aware of the difference between them when deciding whether this week is an ideal time to replace equipment or buy more items or save liquidity.
The Money You Received Could Not be Yours
Sales tax highlights this point especially well.
The cash a restaurant gets from its customers is eventually going to need to be dealt with in accordance of its tax obligations. When these dollars are mentally grouped together with operating cash, they can provide a false perception of the money available to spend.
Consistent record keeping helps restaurants to comply with the sales tax laws as well as providing a realistic image of their financial condition.
This is a reason why restaurant accounting is more efficient when financial obligations aren’t viewed as separate islands.
Prime cost affects margin. COGS and future payment are affected by purchases made by vendors. Payroll is a factor that affects the amount of cash available and also the labor percentage. Cash flow is affected by the sales tax. P&Ls record financial performance while forecasting lets management take a look ahead.
Connect the pieces.
Bookkeeping Chef integrates restaurant-specific reporting with system integrations. If you don’t want to be slavishly reconciling financial information, outsourced bookkeeping services will handle the bulk of accounting tasks without removing the owner from financial conversations.
The final part is crucial.
It’s not for restaurant owners to stop looking at their books simply because they are handled by someone else. It’s crucial that the owners are informed so that they understand the situation.
If the P&L states that the restaurant has made cash, yet the bank account feels surprisingly insecure, don’t believe that any of the numbers can be wrong.
What was the difference between them?
This one question could teach you much more about the restaurant than any number alone.