The month is finished. The sales were good, the P&L shows a profit and there’s nothing that appears to be to be seriously incorrect.
After that, you can check the bank account of the restaurant.
This number isn’t exactly what you’d expect.
For owners of restaurants, this gap can be frustrating as profit and available cash feel as though they should tell the same story. But they don’t. A P&L measures the financial performance of a company for a particular period of time, while accounts in banks show the actual timing of money going into and out of he business.
Understanding the differences can allow owners to change their perspective on restaurant finances.
Imagine what goes on during an average week. The customers pay for food. Employees have to be paid. Invoices for food and drinks are issued. Rent is on the way. Credit card deposits have their own timing. Sales tax is collected, but it is an obligation.
The buying for next week has already started.
Looking only at revenue or the ending profit number misses much of that activity.
The clue could be hidden in the Prime Cost
If the profitability of restaurants begins to decline, the food, beverage and labor expenses should be taken into consideration.
Prime cost is made up of the price of products and labor. Bookkeeping Chef’s provided guidance places prime costs at approximately 60%-65% for many restaurant and focuses on weekly monitoring as opposed to waiting until the end of the month.
It is more important for you to recognize changes earlier than worrying about the exact percentage.
Let’s say that a restaurant typically performs in line with its goals however this week’s performance is higher. Maybe the number of overtime hours is up. Perhaps beverage costs were steady, but food costs increased. An increase in the percentage of food consumed could lead the business owner to examine the purchase, waste management, portions and menus, or vendor bills.
The percentage is what matters. The activity of the restaurant itself provides the answer.
A weekly report can make an opportunity for conversation while everyone will be able to recall what occurred.
Two or three weeks later After that, the details become harder to decipher.
The Vendor’s Bills Arrive
Restaurants may purchase ingredients during a week and pay for them next week. This timing helps to explain why profit alone is not enough to answer all cash questions.
Invoices from vendors need to be tracked, received and paid. This can be a lot of work in an operation that has several suppliers.
Accounts payable automation helps organize this process by reducing repetitive handling of bills and payment information. Systems for bookkeeping that connect allow owners to have a better image of their obligations even if they haven’t yet been paid.
It’s important because an account balance seen as a whole can appear healthier than the restaurant’s actual near-term position.
Today, there may be an amount of $80,000 in the account. The amount could have a different meaning when it is affected by other elements like rent or payroll, vendors, and other obligations that will be due in the next few days.
This is what leads to cash flow forecasting.
The better question to ask yourself is “What will happen to our funds after we receive the money and have met the obligations we have made?”
It is crucial to understand the difference when deciding if this week is the best opportunity to replace equipment, purchase more products or preserve liquid funds.
The money you receive may Not be Yours
The sales tax illustrates this particularly well.
Restaurants receive money from their customers, which they follow in accordance with the tax requirements. If these dollars are mentally added to cash flow, the balance in a bank can give an inaccurate impression of how much money is available.
A consistent record helps restaurants stay in compliance with sales taxes and provide management an accurate view of their financials.
This is one reason restaurant accounting is better when financial responsibilities aren’t treated as distinct islands.
Prime cost affects margin. COGS and future payments are affected by vendor purchases. Payroll has an impact on both the labor percentage and cash. Taxes on sales affect the availability of cash. The P&L shows financial performance, while forecasting aids management in looking ahead.
The pieces are connected.
Bookkeeping Chef utilizes restaurant-specific reporting and system integrations to help bring those pieces together. Outsourced bookkeeping services that are specifically tailored to your needs are an ideal alternative for those who don’t have time to reconcile their financial data. They are able to handle the bulk of the accounting work without taking the owner away from discussions about finances.
That last part matters.
It’s not the goal for restaurant owners to stop checking their books because somebody else does. Owners should be given information that can help them be aware of what’s happening.
Don’t think that the P&L is incorrect if the balance of the bank seems to be tight, however the P&L indicates that the restaurant has made money.
Find out what happened between you and your partner.
This question will reveal more about your business than any number.