The month is done. The sales were good and the P&L was profitable and there was nothing that appeared to be terribly in error.
You should then check the restaurant’s bank account.
The number isn’t exactly what you’d hoped for.
Restaurant owners may be dissatisfied with this since they believe cash flow and profits ought to be exactly the same. However, they aren’t. The P&L is a measure of financial performance, while the bank account is an indication of how much money is moved in and out.
Understanding the difference will alter the way that a restaurant’s owner is able to view their financials.
Look at what happens during a normal week. Food is paid for by customers. Employees need to be paid. Food and drinks deliveries arrive with invoices attached. Rent is coming. The timing of debits to credit cards differs. Sales tax is collected, but it is an obligation.
Already, the next week’s purchases have started.
If you focus only on the amount of revenue or profits, then you’ll miss a lot of this action.
The Secret Could Be Hidden in the Prime Cost
If the profitability of restaurants begins to decrease, cost of food, drinks and labor expenses should be taken into consideration.
Prime cost is composed of both the cost of materials and labor. The Bookkeeping Chef’s guidance puts primary costs between 60%-65 percent for a variety of restaurants, and emphasizes weekly monitoring as opposed to staying until the end of of the month.
Effective management of prime costs is not about focusing on a single percentage and more about being able to spot changes in the early stages.
If the restaurant typically achieves its goals, but this week, there’s at a higher percentage. Perhaps the overtime rate also increased. Perhaps beverage costs were steady while food costs grew. A higher proportion of food may lead the operator to review the menu, purchases, waste, mix portions and vendor invoices.
The percentage is the most important. The answer lies in the restaurant’s activity.
Weekly reports make an opportunity for conversation while everyone is still able to remember what happened.
After a period of two to three weeks, it becomes harder to reconstruct the details.
When the vendor bills arrive
Restaurants may buy ingredients during a week and make payments the following week. This timing helps to explain why profit alone is not enough to answer every cash question.
Vendor invoices should be received, recorded and tracked before being paid. In a business that has multiple suppliers, managing that manually can turn into its own administrative workload.
Automating accounts payable helps to streamline the process by cutting down on repetitive handling of bills and payment details. Bookkeeping systems that are connected can give the owner a clearer view of any obligations that haven’t yet reached the account of the bank.
This is advantageous, since the bank’s balance may appear to be healthier than the restaurant’s real near-term situation.
It is possible that you’ve got $80,000 in your account right now. The $80,000 amount is small if the cost of rent, vendors or payroll take an enormous amount over the next few days.
That leads naturally to cash flow forecasting.
The most important question to ask yourself is “What happens to our cash after we have received the funds and have met the commitments we’ve identified?”
The difference can be crucial in determining if this is the right time to upgrade equipment, make an additional purchase, or to preserve the liquidity.
The Money You Received Could Not Be Yours
Sales tax illustrates this particularly well.
Restaurants take money from their clients, which they then handle according to their tax obligations. When these dollars are mentally grouped together with operating cash, it can make a false impression about the amount available for spending.
Regularly updated records ensure sales tax compliance as well as giving the manager a better perspective of the restaurant’s financials.
This is why it is that restaurant accounting can be more effective when financial responsibilities don’t are treated as separate islands.
Prime cost affects margin. COGS (cost of goods sold) and future payments are impacted through purchases from vendors. Payroll affects both labor percentage and cash. Cash flow is impacted by the sales tax. P&Ls keep track of financial performance and forecasting lets management take a look ahead.
The pieces are connected.
Bookkeeping Chef combines restaurant-specific reports along with system integrations. Bookkeeping outsourcing can benefit owners who do not wish to spend the night manually reconciling their financial records.
It’s the very last one that matters.
Restaurant owners shouldn’t stop going through the manuals regardless of whether they’re being handled by someone else. The goal is for owners to get details in a manner that helps them understand the situation.
If the P&L says the restaurant made profits, but the account seems to be a bit tight, don’t presume that any of the numbers can be off.
Ask them about what transpired between them.
The answer to this question will provide more information about the restaurant than just a number.