The month has ended. The sales were great and the P&L showed a profit and there was no sign of anything to be seriously in error.
You then check the bank account of the restaurant.
The number may not be the one you were expecting.
This gap is a problem for owners of restaurants because they believe that profit and cash availability should speak the same truth. However, they aren’t. A P&L is a measure of the financial performance of a company over time and the bank account is a reflection of the actual timing of money flowing into and out of the business.
Understanding the difference will alter the way that a restaurant’s owner considers their financials.
Have a look at what goes on in a typical week. Food is paid for by customers. Employees are required to be paid. Invoices will be sent out with food and beverage deliveries. Rent is on the way. The time frame for credit card deposits differs. Taxes on sales have been paid, but that cash comes with an obligation.
The next week’s buying has already started.
If you focus solely on revenue and the end-profit number it’s easy to miss out on a great deal of activity.
The Secret Could Be Hidden in Prime Cost
When restaurant profitability starts moving in the negative direction, food, drink, and labor costs deserve focus.
Prime cost consists of the price of materials and labor. The Bookkeeping Chef’s guidance puts the cost of goods sold at 60% to 65 percent of revenues for a variety of restaurants, while focusing on weekly monitoring rather than waiting until the closing of each month.
Effective prime cost management is less about worrying about a single percentage and more about recognizing changes in the early stages.
Imagine that the restaurant normally is performing at a high level, but this week, there’s a higher percent. Perhaps the overtime rate was increased. The price of drinks may have remained the same while food costs increased. The operator may review menus and portions, waste or vendor invoices, as well as purchasing if the food portion is greater.
The percentage is the key. The answer is found in the activity of the restaurant.
This conversation is possible because everybody can remember what happened.
A few weeks later, the details become much harder to decipher.
When the vendor invoices arrive
Restaurants may buy ingredients this week but have to pay for them in the future. This timing helps to explain the reasons why profit alone isn’t enough to answer all cash related questions.
Vendor invoices must be received, recorded as well as tracked until they are paid. In a busy business with many suppliers, doing this by hand can be the company’s own administrative task.
Accounts payable automation helps organize this process by reducing repetitive handling of bills and payment information. These bookkeeping systems are also able to give the owner a clearer picture of obligations that haven’t yet hit the account of the bank.
It’s important because the bank’s balance as a whole can appear healthier than the restaurant’s real-time position.
It might be that you have $80,000 on your account as of right now. This amount could be different when it is affected by other factors such as rent or payroll, vendors, and other obligations that will be due in the next few days.
Forecasting cash flow is a natural outcome.
The most important question to ask is “What will happen to our cash once we receive it and have met the obligations we have made?”
This is a crucial distinction when deciding the appropriateness of the best time to buy an additional purchase to replace equipment or preserve liquidity.
You may not have been rightfully entitled to all the money you thought.
Sales tax highlights this particularly well.
Restaurants collect money from their clients, which they follow in accordance with their tax obligations. When these dollars are mentally combined with operating cash, it may create a false impression of the money available to spend.
Regularly updated records ensure sales tax compliance while also giving the manager a better perspective of the restaurant’s financials.
It is for this reason that restaurant accounting can be more effective in situations where financial responsibilities aren’t treated as separate islands.
Prime cost affects margin. COGS and future payments are impacted by purchases from vendors. Cash and labor percentage are affected by the payroll. Cash flow is impacted by sales tax. P&Ls are used to track financial performance. Forecasting can be helpful to management.
Connect the pieces.
Bookkeeping Chef helps bring these pieces together with restaurant-focused reports and system integrations. Bookkeeping outsourcing can be beneficial to owners who do not wish to be tasked with reconciling their financial information.
The last point is important.
It’s not for owners of restaurants to stop looking at their accounts because someone else handles them. Owners need to be informed that will help them to know what’s going on.
If the P&L shows that the establishment is earning money but the bank balance feels too tight, don’t think that the P&L is not accurate.
Find out what happened between you and your spouse.
This question will teach you more about your restaurant than any number on its own.
