The month is over. The sales were good, the P&L had a profit, and there was nothing to be terribly off.
Check the bank account of the restaurant.
It wasn’t the number you would have expected.
This gap is a problem for restaurant owners since they think that profit and cash on hand should have the same story to tell. However, they aren’t. The P&L is a metric of financial performance, while the bank account is an indication of when money moves in and out.
Knowing the difference could change how a business owner is looking at the restaurant’s financials.
Imagine what goes on during a typical workday. Customers pay for meals. Employees need to be paid. The invoices for food and drinks are sent. Rent is getting closer. Deposits to credit cards are timed. Taxes on sales are collected but it’s also responsibilities.
The next week’s buying has already started.
If you are only looking at the amount of revenue or profit, then you will not be able to see a lot of this process.
The Key to the Mystery Could Be Hidden in the Prime Cost
Food, drink and labour cost are all worth a close examine when restaurant profitability begins to fall.
The prime cost is comprised of both the cost of materials and labor. The Bookkeeping Chefs’ guidelines place the primary cost between 60 and 65% of revenues for many restaurants. They also recommend regular monitoring of the week instead of waiting until the end of the month.
Effective prime cost management is less about obsessing over a single percentage and more about noticing movement early.
Suppose that normally the restaurant achieves its goals, but this week, it’s an increase in percent. Perhaps overtime was added. Perhaps beverage costs remained stable however food prices soared. The manager can review menus as well as waste, portions sizes along with vendor invoices and purchasing if the food portion is higher.
The percentage raises the question. The answer is found in the restaurant’s activity.
Weekly reports allow for this conversation to be held while everyone is still aware of what’s transpired.
Two or three weeks later After that, the details become harder to reconstruct.
Once the vendor invoices are received
A restaurant might purchase its ingredients this week but pay for the ingredients in the future. That timing helps explain why profits alone won’t be able to answer every cash question.
Vendor invoices have to be received and tracked. In a business that has multiple suppliers, managing that by hand can be an administrative burden.
Automating the process of paying bills can streamline this process by reducing the time-consuming handling of bills and payments. Bookkeeping systems that are connected allow owners to have a better image of their obligations even if they have not yet been paid.
This is because a bank balance viewed in isolation can look healthier than a restaurant’s current position.
It is possible that there are $80,000 in your account at the moment. The $80,000 figure means very little if vendors, rent or payroll are to take the majority of the coming days.
This leads to cash flow forecasting.
The most appropriate question to ask yourself is “What will happen to our cash once we receive the money and have fulfilled our obligations we’ve made?”
The distinction could be important in determining if this is an appropriate time to repair equipment, make an additional purchase, or preserve the liquidity.
You may not have been legally entitled to the full amount you believed.
Sales tax illustrates this particularly well.
Restaurants receive money from their customers, which they deal with in accordance with their tax obligations. If these funds are grouped together with operating cash, they can make a false impression about the money available to spend.
A consistent record helps restaurants stay in compliance with sales tax requirements while providing management a complete picture of their financials.
This is the reason that restaurant accounting functions better when financial responsibilities don’t are treated as separate islands.
Prime cost affects margin. Vendor purchases impact COGS and future payments. Payroll has an impact on both the labor percentage and cash. Cash flow is affected by the sales tax. The P&L records financial performance, while forecasting aids management in looking ahead.
The pieces link.
Bookkeeping Chef uses restaurant-focused reporting and system integrations to integrate these pieces. Outsourced bookkeeping can help users who don’t want to spend the night manually reconciling their financial information.
The final part is crucial.
Restaurant owners should never stop studying the literature regardless of whether they’re being handled by someone else. The goal is for owners to get information in a form 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 indicates that the restaurant made money.
Find out what happened between you and your partner.
This will reveal more about your business than any other number.