The month is over. Sales were excellent, and the P&L indicates a profit and nothing appears to be seriously incorrect.
Make sure you check the account of the restaurant.
The number isn’t the one you’d expected.
This can be very frustrating for restaurant owners because they feel that profit and cash flow should be the same. They don’t add in. A P&L is a measure of how well the company’s financials have performed over a certain time in time, whereas your bank account shows the actual timing of money being moved into and out of the company.
Understanding the difference will alter the way a restaurant’s manager views their finances.
Check out what goes on in a typical week. Customers pay for food. Employees have to be paid. Invoices will be sent out with the delivery of food and drinks. Rent is close to being paid. Credit card payments have their own timing. Sales tax is collected, however that money is a legal obligation.
The buying for next week has already started.
Looking just at revenue or the ending profit number isn’t a good way to assess the full scope of what happens.
The Key to the Mystery Could Be Hidden in Prime Cost
When restaurant profitability starts moving in the wrong direction, food, beverage, and labor costs deserve focus.
Together, the cost of goods sold and labor make up prime cost. The Bookkeeping Chef’s guidance puts the prime cost at between 60%-65% of revenue for many restaurants, while focusing on weekly monitoring rather than waiting until the end of the month.
Effective prime cost management is less about focusing on one percentage point and more about spotting changes early.
Imagine that the restaurant usually performs at or near its goal, but this week’s percentage increases. Perhaps overtime has went up. The price of drinks may remain the same, while the food expenses increased. Operators may examine menus or waste, portion sizes along with vendor invoices and purchasing if the food percentage is greater.
The percentage is crucial. The restaurant’s activity is the answer.
Weekly reports make this conversation possible and everyone is still able to remember what happened.
Three or four weeks later The details are much harder to decipher.
Then, the Vendor Bills arrive.
Restaurants may buy ingredients this week but have to pay for the items later. This is the reason that understanding profit alone isn’t the answer to all cash questions.
Vendor invoices must be received and tracked. Manually completing this task in an environment with many suppliers could become an enormous administrative burden.
Automating the process of paying bills helps manage the process, reducing repetitive handling of bills and payment details. The owner can get a clearer view of the obligations that haven t hit their bank account by using connected bookkeeping systems.
It’s beneficial because, when considered as a whole the balance of a restaurant’s bank account may appear to be healthier than its actual financial position.
In the present, there could be $80,000 on the account. That number means something very different if rent, payroll vendors, or other commitments will consume a substantial portion of it over the next few days.
This naturally leads to cash flow forecasting.
Instead of asking “How many dollars of cash are we carrying?” the better question is “What could occur to our cash after the cash we anticipate to receive and our obligations that we already know about?”
The distinction could be important in deciding if this is the right time to repair equipment, make an addition purchase, or maintain the liquidity.
The cash you received may Not Be Yours
Sales tax illustrates this especially well.
Restaurants receive cash from its customers, which eventually needs to be handled in accordance with tax regulations. When these money are thought of as grouped together with operating cash, it may create a false impression of the amount available for spending.
Regularly maintained records help restaurants comply with sales tax laws while also providing a complete overview of their financial standing.
This is one reason why restaurant accounting can be more effective when financial obligations aren’t viewed as separate islands.
Prime cost affects margin. COGS (cost of goods sold) and future payments are affected due to purchases from vendors. Payroll can affect both the labor and cash percentage. The availability of cash is influenced by sales tax. P&Ls are used to track the financial performance. Forecasting is also beneficial for management.
The pieces are joined.
Bookkeeping Chef employs restaurant-specific reporting and system integrations that help put all the pieces together. For operators who don’t want to spend their nights manually reconciling financial data, specialized outsourced bookkeeping services can handle much of the accounting workload without removing the owner from the financial conversation.
The last sentence is vital.
Restaurant owners shouldn’t be able to stop reading their books simply because they’re handled by someone else. Owners should be provided with data in a way that will help them understand what’s happening.
Don’t think that the P&L is not correct if the bank account appears to be in good shape, but the P&L shows the restaurant has earned money.
What happened between the two?
This question will reveal more about your business than any other number.