The month is over. Sales were solid, the P&L is in profit and nothing is suspiciously wrong.
Make sure to check the restaurant’s account.
The number is not what you would have expected.
This gap is a problem for restaurant owners because they feel that profit and cash flow should tell the same tale. They are not. It’s not true. P&L is a gauge of financial performance. On the other hand, the bank account is a record of when money moves into and out.
Understanding the difference can alter the way that a proprietor examines the financials of a restaurant.
Imagine what could happen on a typical week. Customers pay for food. Employees are required to be paid. Food and drinks are issued. Rent is nearing. The time frame for credit card transactions differs. Sales tax has been collected, however that money is a legal obligation.
The shopping for the week ahead has already started.
When you look only at revenue and the final profit figure it’s easy to miss out on lots of activities.
Prime Cost could be the key to the answer
If the restaurant’s profitability begins to shift in the wrong direction, food, beverage and labor costs need focus.
Prime cost is composed of the price of products and labor. The Bookkeeping Chef’s guidance puts prices for the prime cost at around 60%-65 percent for most restaurants and stresses weekly monitoring as opposed to staying until the end of of the month.
Effective management of prime costs is less about obsessing over a single percentage and more about noticing movement in the early stages.
Let’s say that typically, the restaurant does well, but this week, there’s a higher percentage. Maybe overtime was boosted. The beverage cost may have remained the same, whereas food prices increased. The manager can review menus, waste, portion sizes, vendor invoices, and purchasing if the food percentage is higher.
The percentage raises the question. It is in the underlying food service activity.
This conversation is possible because everyone will be able to remember what transpired.
Two or three weeks later after that, the details become harder to decipher.
After the vendor bills are paid
Restaurants may purchase ingredients during a week and pay for them the next. This explains the reasons why profit alone isn’t enough to answer all cash related questions.
Invoices from vendors need to be accounted for, tracked and paid. In a busy business with many suppliers, doing this manually can become the company’s own administrative task.
Automating accounts payable helps to streamline the process, reducing the need to handle bills in a repetitive manner and payment details. Connected bookkeeping systems can also provide the owner with a clearer view of any obligations that haven’t yet hit the account of the bank.
This is useful, because the bank’s balance may seem healthier than a restaurant’s actual financial situation.
There might be $80,000 in the account right now. This amount could mean something different if payroll, rent and vendors obligations consume a significant amount over the next several days.
That leads naturally to cash flow forecasting.
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 money we’re expecting to receive and the obligations we are already aware about?”
It is crucial to understand the difference between them when deciding whether this week is the ideal opportunity to replace equipment, buy more items or save the cash flow.
It is possible that you weren’t legally entitled to the full amount you thought.
The example of sales tax is a good one.
Restaurants take money from their customers, which they then handle in accordance with the tax requirements. If these funds are placed in the same category as operating cash, they can provide a false perception of the money available to spend.
Consistent records support the tax compliance of sales while giving the manager a better understanding of the restaurant’s financials.
Restaurant accounting is more effective when the financial obligations of each restaurant are separated.
Prime cost affects margin. Vendor purchases impact COGS and future payments. Payroll has an impact on both cash and labor percentage. The availability of cash is influenced by the sales tax. The P&L records financial performance, while forecasting helps management look ahead.
The pieces connect.
Bookkeeping Chef is a restaurant-specific report that integrates and system integrations. Bookkeeping outsourcing can be beneficial to users who don’t want to stay up all night reconciling their financial data.
The last point is vital.
Restaurant owners shouldn’t be able to stop reading the books, even if they’re managed by someone else. It’s essential that owners have access to information so that they are aware of the situation.
If the P&L shows that the restaurant is profitable but the bank balance seems too tight, don’t think that the P&L could be wrong.
What was the difference between them?
This question will teach you much more about the restaurant than a single number could be on its own.
