The month is finished. The sales were great, the P&L was profitable and there was no sign of anything that appeared to be seriously incorrect.
You then check the restaurant’s bank account.
The number you received isn’t the one you’d expected.
This gap can be a source of frustration for restaurant owners since they believe that profit and cash on hand should be the same. However, they aren’t. A P&L evaluates the how well the company’s financials have performed over a certain time, while your bank account shows the time frame of money moving in and out of the company.
Understanding the difference can help owners change their views on the restaurant’s finances.
Take a look at what happens during an ordinary week. Customers pay for meals. Employees need to be paid. You will receive invoices for meals and beverages delivered. Rent is close to being paid. Credit card deposits come with their own schedules. The tax on sales is an obligation.
The shopping for the week ahead has already started.
Looking only at revenue or the number of profits at the end does not take into account a lot of the activity.
The Key to the Mystery Could Be Hidden in the Prime Cost
If the profitability of restaurants begins to fall, cost of food, beverages and labour costs should be taken into consideration.
Prime cost is made up from both products and labor. Bookkeeping Chef’s guidelines place prices for the prime cost at around 60% to 65% for many restaurant and stresses weekly monitoring 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.
Let’s say that typically, the restaurant does well, but this week, there’s more of a percent. Perhaps overtime was added. Maybe beverage costs were stable while food costs grew. The operator may review menus, waste, portion sizes as well as vendor invoices and purchasing if the proportion of food is greater.
The percentage raises questions. The underlying restaurant activity provides the answer.
The reason this conversation can be relived is because everyone can still remember the events that transpired.
After a period of two to three weeks, it becomes more difficult to reconstruct the particulars.
Once the vendor invoices are received
Restaurants can purchase ingredients the week before and pay for them the following week. Because of this, it is the case that understanding profits alone does not answer all cash issues.
Vendor invoices have to be received, recorded as well as tracked until they are paid. This is lots of work for an organization with several suppliers.
Automating the process of paying bills can streamline this process through reducing the repetition of bills and payments. Bookkeeping systems that are connected can give owners a better picture of obligations, even if they’ve not yet been paid.
This is useful, because the bank balance can seem healthier than a restaurant’s actual situation in the near future.
It could be that there is $80,000 in the account as of today. The $80,000 amount is tiny if rental, vendors or payroll take the majority of the next few days.
This leads to the cash flow forecasting.
Instead of asking “How much cash do we have?” the better question is “What is likely to happen to our cash after the money we expect to receive and the obligations we already know about?”
It is crucial to understand the difference before deciding if this week is the ideal moment to upgrade equipment, buy additional products, or conserve liquid funds.
You may not have been eligible for all the money you thought.
The example of sales tax is a good one.
The money that restaurants receive from their customers is eventually going to need to be handled in line of its tax obligations. If these funds are coupled with the normal cash flow, the bank balance could give an inaccurate impression of how much money is available.
Consistent record keeping helps restaurants comply with sales tax laws, while providing a complete view of their financial position.
This is the reason that restaurant accounting can be more effective when financial responsibility isn’t considered as distinct islands.
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. Cash flow is affected by sales tax. The P&L shows financial performance, while forecasting aids management in looking ahead.
Connect the pieces.
Bookkeeping Chef utilizes restaurant-specific reporting and system integrations to help bring those pieces together. Bookkeeping outsourcing services with specialization can be a good alternative for businesses that aren’t able to manually reconcile financial data. They can take care of much of the accounting work but without taking the owner away from discussions about finances.
That last part matters.
The aim isn’t to get restaurant owners to stop looking at the books because somebody else handles them. It’s for owners to receive information in a form that will help them understand the situation.
If the P&L reports that the restaurant earned money, but the bank account seems to be a bit tight, don’t assume any of the numbers can be wrong.
Ask about the events that occurred between them.
This question can tell you more about your company than any number.