The month is finished. The sales were great and the P&L reported a profit and there was nothing that appeared to be seriously wrong.
Check the restaurant’s account.
You didn’t get the number you were hoping for.
Restaurant owners might find this disconnect frustrating since they believe cash flow and profits must be the same. These two things don’t match in. A P&L measures the financial performance of a business over a specified time period, whereas it is a bank account that shows the exact timing of funds entering and leaving he business.
Understanding the difference could alter how a business owner looks at restaurant finances.
Imagine what happens on the typical week. Food is paid for by customers. Paying employees is necessary. The invoices for food and drinks are sent. Rent is on the way. Credit card payments are timed. Sales tax is collected, but it’s the responsibility.
On the other hand, the next week’s shopping has already begun.
If you are only looking at the revenue or the final income, then you’ll not be able to see a lot of this activity.
The Key to the Mystery Could Be Hidden in the Prime Cost
The cost of food, drinks and labour cost are all worth a close review when the profitability of a restaurant begins to fall.
Cost of sales combined with labor is the primary cost. The Bookkeeping Chef’s guidance puts the cost of goods sold at 60%-65% of revenue for many establishments, and emphasizes regular monitoring instead of waiting until the close of the month.
Effective cost management for primes involves less focusing on a single percentage and more attention to the early movement.
Imagine that the restaurant’s performance is usually close to its goal however this week, it was higher. Maybe overtime was boosted. Maybe beverage costs were stable while food costs jumped. The higher proportion of food could prompt the manager to examine the purchase, waste management, portions and menu mix or vendor costs.
The percentage raises questions. The underlying restaurant activity provides the answer.
Weekly reports allow this conversation to take place while everyone is still aware of the events that have occurred.
After a period of two to three weeks, it gets harder to reconstruct the particulars.
The Vendor’s Bills Are Received
A restaurant might purchase its ingredients this week but have to pay for these items in the future. It’s due to this fact that understanding profits alone can not solve all cash problems.
Vendor invoices must be tracked, accepted and paid. This can be quite a task in the case of a business with many suppliers.
Automating accounts payable can streamline the process by reducing routine tasks like handling payments and bills. The bookkeeping system that is connected to the internet can give the owner a clearer picture of obligations that haven’t yet hit the account of the bank.
That’s useful because the bank’s balance in isolation can look healthier than the restaurant’s real-time position.
There could be $80,000 in the bank account at present. The amount could have a different meaning if it is impacted by other factors such as rent, payroll, vendors and other obligations in the coming 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 occur to our cash after the money we expect to receive and the obligations we know about?”
It is important to know the difference between them when deciding whether this week is the ideal moment to upgrade equipment, purchase additional items or preserve liquidity.
You might not have been rightfully entitled to all the money you thought.
Sales tax illustrates the point especially well.
Restaurants receive money from their customers, which they must be able to manage according to their tax obligations. If the funds are combined with normal operating cash, then the bank balance could provide an inaccurate picture of how much money is available.
A consistent record helps restaurants stay in compliance with sales taxes while giving the managers a clear picture of their financials.
Restaurant accounting is more effective when the financial obligations of each restaurant are treated separately.
Prime cost affects margin. COGS (cost of goods sold) and future payments are affected by the purchases made by vendors. Payroll can affect both the labor and cash percentage. Cash flow is affected by sales tax. The P&L shows financial performance, and forecasting assists management to look ahead.
The pieces are linked.
Bookkeeping Chef integrates restaurant-specific reporting along with system integrations. If you don’t want to stay up all night reconciling financial data, outsourcing bookkeeping services can take care of most of the accounting work while removing the business owner from the financial discussion.
The final part is crucial.
The aim isn’t to get owners of restaurants to stop looking at the books because somebody else handles them. It’s for owners to receive the information they need in a format that will help them understand what’s happening.
When the P&L states that the restaurant has made profits, but the account is feeling a little unbalanced, don’t think that one of the numbers must be incorrect.
What was the difference between them?
This question will teach you far more about your restaurant than any other number could be on its own.