The month is over. The month has ended.
After that, you can check the restaurant’s bank account.
The number may not be what you expected.
This can be very frustrating for restaurant owners because they feel that profits and cash flow should be the same. However, they aren’t. A P&L evaluates the financial performance of a business over a specified period of time, while it is a bank account that shows the exact time of money entering and leaving the business.
Understanding the difference could alter the way an owner is looking at the restaurant’s financials.
Imagine what might happen during an average week. Food is paid for by customers. Employees are required to be paid. Invoices for food and beverages are handed out. Rent is on the way. The time frame for credit card deposits is different. The sales tax collected has an obligation.
The shopping for the week ahead has already begun.
If you only look at the amount of revenue or income, then you’ll not be able to see a lot of this process.
Prime Cost could be the Key to the Clue
When restaurant profitability starts moving in the negative direction, food, drink as well as labor costs require attention.
Prime cost consists of both the cost of goods and labor. Bookkeeping Chef’s supplied guidance places prime cost at roughly 60% to 65 percent of the revenue for many restaurants, while focusing on the importance of monitoring weekly rather than waiting until the final day of each month.
Effective prime cost management is not about focusing on one percentage point and more about being able to spot changes in the early stages.
Imagine that the restaurant normally is performing at a high level, but this week, there’s a higher percent. Maybe overtime went up. Maybe beverage costs were stable, but food costs increased. A higher food percentage might lead the operator to review purchasing, waste, menu mix portions or vendor invoices.
The percentage is the most important. The restaurant’s activity is the answer.
This conversation is possible because everybody can remember what transpired.
The details are much harder to recall two or three days later.
The Vendor Bills are then delivered.
The restaurant is expected to pay later for the ingredients it buys. This is the reason that understanding profit alone isn’t the answer to all cash questions.
Vendor invoices should be received, recorded and tracked before being paid. In a business that has numerous suppliers, doing that manually can become the company’s own administrative task.
Automating accounts payable simplifies the process, cutting down on the time spent on tasks that are repetitive, such as managing payments and bills. Bookkeeping systems that are connected allow owners to have a better understanding of their obligations, even if they’ve not yet been paid.
This is beneficial, as the bank’s balance could appear healthier than a restaurant’s actual situation in the near future.
It might be that you have $80,000 on your account right now. This number could mean something different if rent, payroll, vendors, and other commitments consume a significant part of it in the next few days.
This leads naturally to cash flow forecasting.
The best question to ask is “What happens to our cash after we receive it and have fulfilled our obligations that we know?”
This is an important distinction to make when deciding which is the right week to buy an additional purchase to replace equipment or preserve liquidity.
The cash you received may Not Be Yours
The example of sales tax is a good one.
The cash restaurant owners receive from patrons will eventually have to be handled in accordance of its tax obligations. If these funds are combined with operating cash, they can create a false impression of the money available to spend.
Regularly maintained records allow restaurants to comply with sales tax requirements while providing management a complete picture of their finances.
This is one reason why restaurant accounting is better in situations where financial responsibility isn’t seen as separate islands.
Prime cost affects margin. Vendor purchases impact COGS and future payments. Payroll affects both the labor and cash percentage. The availability of cash is influenced by sales tax. The P&L tracks financial performance, forecasting can help management look ahead.
Connect the pieces.
Bookkeeping Chef assists in bringing the pieces together by providing restaurant-specific reports as well as system integrations. For operators who don’t want to spend their nights manually reconciling financial data, specialized outsourced bookkeeping services can handle much of the accounting workload without removing the owner from the financial conversation.
The last part is important.
It’s not for restaurant owners to not look at their books simply because someone else handles them. It’s to provide owners with details in a manner that helps them understand what is happening.
If the P&L says the restaurant made cash, yet the bank account is feeling a little tight, don’t presume that one of the numbers must be wrong.
Find out what happened between you and your partner.
This question will teach you more about your restaurant than any number by itself.