The month is finished. The sales were good and the P&L reported a profit and there was no sign of anything to be seriously off.
Then you check the bank account of the restaurant.
The number isn’t the one you were expecting.
Restaurant owners can find this disconnect frustrating as they believe profits and cash flow should be exactly the same. However, they aren’t. The P&L is a metric of financial performance. In contrast, the bank account is a record of when money moves into and out.
Understanding the difference can change the way an owner considers restaurant financials.
Imagine what could happen during an ordinary week. The customers pay for food. Employees must be paid. You will receive invoices for meals and beverages delivered. Rent is getting closer. Credit card deposits are also timed. Taxes on sales have been paid, but that cash has a responsibility.
The purchasing for the coming week has already begun.
If you focus solely on revenue and the end-profit number it’s easy to overlook the vast amount of activity.
The clue could be hidden in the Prime Cost
When restaurant profitability starts moving in the negative direction, the food, beverages and labor expenses require focus.
Cost of selling goods with labor is the prime cost. The Bookkeeping Chefs’ provided guidelines place the primary cost between 60 and 65% of revenues for many establishments. They also emphasize the importance of weekly monitoring rather than waiting until the month ends.
Effective prime cost management involves less focus on a single percent and more being aware of earlier movement.
Imagine that the restaurant’s results are typically within a certain range however this week, it grew. Maybe overtime is up. Perhaps the cost of beverages was stable, but food costs increased. An increase in the percentage of food items could prompt the owner to examine buying, waste, menu mix portions or invoices from vendors.
The percentage is crucial. The activities that underlie the restaurant provide the answer.
A weekly report makes that conversation possible while everyone is still able to remember what happened.
The details are much harder to recall after a couple of days.
The Vendor’s Bills are Received
A restaurant might purchase its ingredients this week but have to pay for the ingredients in the future. This is the reason that understanding profit alone isn’t the answer to every cash-related question.
Vendor invoices have to be recorded, received as well as tracked until they are paid. Doing this manually in an environment with many suppliers could become an enormous administrative burden.
Automating accounts payable can streamline the process, cutting down on tedious tasks such as managing invoices and payment information. Bookkeeping systems that are connected will give the owners a clear picture of obligations, even if they have not yet been paid.
This is beneficial, as the bank balance can seem healthier than a restaurant’s real near-term situation.
The current balance could be an amount of $80,000 in the account. This amount could mean something different when you consider that rent, payroll vendors, or other obligations consume a significant portion of it over the next several days.
That leads naturally to cash flow forecasting.
What happens to our money after we’ve received the money that we expect and have fulfilled all of our obligations?
This distinction is crucial in determining whether this is the appropriate week to make an extra purchase or replace equipment, or maintain liquidity.
A portion of the Cash Was Never Yours
The example of sales tax is an excellent one.
Restaurants receive money from customers and needs to be handled according to tax requirements. If these funds are added to operating cash, then the bank balance may be misleading about the amount of cash available.
Records that are consistent support sales tax compliance while also giving the management a better perspective of the restaurant’s financials.
Accounting for restaurant operations is more effective when the financial obligations of each restaurant are not separated.
Prime cost affects margin. COGS (cost of products sold) and future payments are affected due to purchases made by vendors. Payroll can affect both the percentage of labor as well as cash. Cash flow is impacted by the sales tax. The P&L documents financial performance while forecasting aids management in looking ahead.
Connect the pieces.
Bookkeeping Chef incorporates restaurant-specific reporting with system integrations. Bookkeeping outsourcing can be beneficial to operators who do not want to be tasked with reconciling their financial information.
It’s the last thing that is important.
Restaurant owners should not stop reading their books just because they are handled by another. Owners should be given information which will allow them to be aware of what’s happening.
Don’t think that the P&L is wrong 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 one question could teach you much more about the restaurant than a single number could on its own.