The month has ended. The sales were good, the P&L is in profit and there’s nothing that appears to be suspiciously incorrect.
Check the bank account of the restaurant.
The number doesn’t match what you’d hoped for.
Restaurant owners, this is a problem because profit and available cash feel as though they should tell the same story. But they don’t. It’s not true. P&L is a measurement of financial performance. In contrast, the bank account is a representation of when money moves in and out.
Understanding the difference can change the way that a proprietor looks at restaurant finances.
Imagine what might happen during a typical workday. Customers pay for meals. The payment of employees is essential. Invoices will be sent out with drinks and food deliveries. Rent is nearing. Credit card payments are timed. The tax on sales is an obligation.
The shopping for the week ahead has already started.
If you focus solely on revenue or the number of dollars earned at the end it’s easy to miss out on the vast amount of activity.
The key to the answer may lie in the prime cost
Food, beverage and labour costs merit a closer at when profitability in restaurants begins to decrease.
Together, the cost of the goods sold and the labor cost are the main costs. Bookkeeping Chef’s guidelines place prime cost at roughly 60% to 65 percent of revenues for a variety of establishments, and emphasizes the importance of monitoring weekly rather than waiting until the close of each month.
Effective management of prime costs requires less focus on a single percent and more noticing any early movements.
Let’s say that a restaurant typically performs in line with its goals however, this week’s rate is higher. Maybe overtime is up. Maybe beverage costs were stable, but food costs increased. An increase in the percentage of food consumed might prompt the operator to look at buying, waste management portions and menus, or vendor costs.
The percent raises the issue. The answer lies in the underlying activities in restaurants.
Weekly reports allow this conversation to be held in the midst of everyone being aware of the events that have occurred.
After two or three weeks, it gets more difficult to reconstruct the specifics.
Then the Vendor Bills Show Up
The restaurant will pay an additional time for the items it purchases. It’s due to this fact that knowing profits alone will not resolve all cash-related issues.
Vendor invoices must be received and tracked. In a highly-competitive business with multiple suppliers, managing that manually could become an administrative task.
Automating the accounts payable process can help organize this by reducing the time-consuming handling of bills and payments. Bookkeeping systems that are integrated will give the owners a clear picture of obligations, even if they’ve not yet been paid.
It’s beneficial because, when viewed as a whole, the restaurant’s financial position could appear to be more healthy than its actual financial position.
Today, there may be $80,000 on the account. It could mean something different in the event that payroll, rent and vendors obligations will consume a large portion of it over the next several days.
That leads naturally to cash flow forecasting.
What will happen with our cash after we’ve gotten the funds we’ve expected and have met our obligations?
It is essential to be aware of the difference before deciding if this week is the best moment to upgrade equipment, buy additional products, or conserve liquidity.
The Cash Wasn’t Yours at All
Sales tax illustrates this in particular.
A restaurant receives money from customers which will need to be dealt with in accordance with its tax obligations. If the money is mentally mixed with operating cash, then the bank balance could offer a false impression of how much money is available.
Consistent record keeping helps restaurants comply with sales tax laws and also providing an accurate view of their financial position.
This is the reason restaurant accounting is better when financial obligations aren’t viewed as separate entities.
Prime cost affects margin. Vendor purchases impact COGS as well as future payments. Payroll affects the amount of cash available and also the labor percentage. Sales tax impacts cash availability. P&Ls keep track of financial performance and forecasting allows management to look ahead.
The pieces are interconnected.
Bookkeeping Chef combines restaurant-specific reports through system integrations. Bookkeeping outsourcing can benefit owners who do not wish to spend the night manually reconciling their financial data.
The last point is important.
It’s not the intention of restaurant owners to stop examining their books because somebody does. It’s essential that owners have access to information so that they know what’s going on.
If the P&L shows that the establishment is profitable however, the balance in the bank feels tight, do not assume that the P&L could be wrong.
What transpired between the two?
Answering this question can reveal more about the restaurant than just the name.