The month is over. The month has ended.
It is recommended to check the restaurant’s bank account.
The number you received isn’t what you expected.
Restaurant owners might find this disconnect frustrating, as they believe that profits and cash flow should be identical. They don’t. It’s not true. P&L is a metric of financial performance. In contrast, the bank account is a record of the time when money flows in and out.
Understanding the difference can alter the way that a proprietor considers restaurant financials.
Imagine what might happen during an average week. The customers pay for food. The payment of employees is essential. Invoices for food and drinks are sent. Rent is on the verge of being due. Deposits to credit cards are timed. Sales tax is an obligation.
The purchase for next week has already started.
Looking just at revenue or the final profit figure does not take into account a lot of the activity.
The key may lie in the cost of prime.
When the profitability of restaurants starts to change in the wrong direction, then food, drinks as well as labor costs require consideration.
Cost of selling goods with labor is the main cost. Bookkeeping Chef’s supplied guidance places prime cost at roughly 60% to 65% of revenue for many restaurants, focusing on weekly monitoring rather than waiting until the close of each month.
Effective prime cost management involves less focus on a single percent and more being aware of earlier movement.
Suppose that normally the restaurant is performing at a high level, but this week, there’s an increase in percentage. Perhaps overtime was increased. The cost of drinks could be the same as food costs rose. Operators may examine menus or waste, portion sizes, vendor invoices, and purchasing if the food portion is greater.
The percentage is the key. The answer is found in the activity of the restaurant.
Weekly reports allow this conversation to be held even though everyone is aware of what’s transpired.
The details will be more difficult to recall the next day or two.
The Vendor’s bills arrive
Restaurants may purchase ingredients one week and pay for them next week. This is a way to explain the reasons why profit alone isn’t enough to answer all cash related questions.
Invoices from vendors need to be accounted for, tracked and paid. The manual process of completing this task in an office with many suppliers could become an enormous administrative burden.
Automating the accounts payable process can help organize this by reducing the time-consuming handling of payments and bills. The owner can get more precise information about the payments that haven’t been deposited into their bank account through integrated bookkeeping systems.
It’s useful because, considered as a whole the restaurant’s financial position may appear to be healthier than its actual financial situation.
It could be that there are $80,000 in your account right now. This number could mean something different in the event that payroll, rent and vendors commitments will consume a substantial part of it in the next several days.
This is the natural progression to the process of forecasting cash flows.
The most important question to ask is “What happens to our money after we receive the money and have fulfilled the obligations we have made?”
The difference can be crucial when deciding whether this is the right time to repair equipment, make an additional purchase, or preserve liquidity.
And Some of the Cash Was Never Really Yours
The example of sales tax is a good one.
Restaurants get money from customers, which they have to be able to manage according to the tax requirements. If these dollars are mentally coupled with the normal operating cash, then the balance in a bank can offer a false impression of how much cash is available.
A consistent record helps restaurants stay in compliance with sales taxes and provide management a complete picture of their financials.
This is the reason restaurant accounting can be more effective when financial obligations aren’t viewed as distinct islands.
Prime cost affects margin. Vendor purchases affect COGS as well as future payments. Payroll impacts both labor percentage as well as cash. The availability of cash is influenced by sales tax. P&Ls are used for recording the financial performance. Forecasting can also be useful for management.
The pieces are interconnected.
Bookkeeping Chef assists in bringing the pieces together by providing restaurant-specific reports as well as system integrations. 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.
This last aspect is crucial.
The aim isn’t to get owners of restaurants to stop looking at their accounts because they are handled by someone else. Owners should receive information that helps them understand what’s happening.
Don’t be fooled into thinking that the P&L is incorrect if the accounts appear to be in a good state, yet the P&L confirms that the restaurant earned money.
What happened between the two?
That question can teach you far more about your restaurant than either number can be on its own.