The month is done. The sales were great, the P&L had a profit, and there was nothing to be seriously incorrect.
Check the restaurant’s bank account.
The number isn’t what you expected.
For restaurant owners, this gap can be frustrating as profits and cash flow seem to have the same meaning. They don’t. A P&L measures financial performance over a time and the bank account represents the time frame of money going into and out the business.
Understanding the difference can help owners change their perspective on restaurant finances.
Think about what happens in an ordinary week. Customers pay for meals. Employees have to be paid. Food and beverage deliveries arrive with invoices. Rent is approaching. Credit card payments come with their own schedules. Sales tax is collected but it’s responsibilities.
Already the purchases for the week ahead have begun.
Concentrating on revenue or the end-of-year profit number isn’t a good way to assess the full scope of what happens.
Prime Cost Could Hold the Key to the Clue
When restaurant profitability starts moving in the wrong direction, the food, beverages and labor expenses require focus.
The prime cost is comprised of both goods and labor. The Bookkeeping Chefs’ provided instructions place the main cost between 60% and 65% of revenues for many restaurants. They also suggest the importance of weekly monitoring rather than waiting until the end of the month.
Effective management of prime costs is not about focusing on one percentage point and more about noticing movement in the early stages.
Imagine that the restaurant’s results are usually within the range of its goals However, this past week, it went up. Perhaps the overtime rate went up. Maybe the costs for beverages were stable, but food costs increased. The operator may review menus, waste, portion sizes as well as vendor invoices and buying if the percentage of food is higher.
The percentage raises questions. The activities that underlie the restaurant provide the answer.
Weekly reports allow this conversation to be held in the midst of everyone being aware of what’s happened.
A few weeks later, the details become much harder to reconstruct.
Once the vendor invoices are received
A restaurant may purchase ingredients this week but have to pay for the ingredients in the future. This explains how profit alone will not be enough to answer all cash questions.
Vendor invoices must be tracked, accepted and paid. This is an enormous task for an organization with numerous suppliers.
Automating the process of paying bills can help organize this by reducing the repetitive handling of payments and bills. Systems for bookkeeping that are linked will give the owners a clear understanding of their obligations, even though they haven’t yet been paid.
It’s useful because, taken as a whole the balance of a restaurant’s bank account could appear to be more healthy than its actual financial position.
It might be that there are $80,000 in your account at the moment. The figure of $80,000 is little if rent, vendors or payroll take up a large portion over the coming days.
That leads naturally to cash flow forecasting.
The most appropriate question to ask yourself is “What happens to our funds after we receive the money and have met our obligations that we know?”
The difference can be crucial in deciding if this is a comfortable week to replace equipment, an additional purchase, or to preserve cash.
You may not be entitled to all the money you thought.
The sales tax illustrates this in particular.
Restaurants get money from customers, which they must deal with in accordance with their tax obligations. When these money are thought of as grouped together with operating cash, they can make a false impression about the amount available for spending.
Consistent records support sales tax compliance while also giving management a more realistic view of the restaurant’s finances.
This is the reason restaurant accounting works better when financial responsibilities aren’t treated as separate islands.
Prime cost affects margin. COGS and future payments are affected by vendor purchases. Payroll impacts both labor percentage as well as cash. Cash availability is impacted by the sales tax. The P&L records financial performance, and forecasting assists management to look ahead.
The pieces are interconnected.
Bookkeeping Chef assists in bringing these pieces together with restaurant-focused reports as well as system integrations. For operators who don’t want to spend their nights manually reconciling financial data, outsourcing of bookkeeping can take on large portions of the accounting burden without removing the owner from the financial conversation.
It’s the last part that is important.
It’s not the aim of restaurant owners to not check their books just because someone does. It’s for owners to receive the information they need in a format which helps them comprehend what’s going on.
So if the P&L states that the restaurant has made money but the bank account seems to be a bit tight, don’t assume any of the numbers can be wrong.
Find out what transpired between you and your spouse.
This question can tell you more about your company than any number.