The month has ended. The month is over.
After that, you can check the restaurant’s bank account.
The number doesn’t match the one you’d expected.
Restaurant owners may be dissatisfied with this since they believe cash flow and profits should be the same. However, they aren’t. A P&L is a measure of financial performance over a time while the bank account represents the timing of money actually moving in and out of the company.
Understanding the difference can alter the way a restaurant owner views their finances.
Take a look at the typical week. Customers pay for meals. Employers must be paid. Invoices for food and beverages are delivered. Rent is getting closer. The time frame for credit card deposits differs. The sales tax collected has an obligation.
The shopping for the week ahead has already begun.
Looking just at revenue or the ending profit number misses much of that activity.
The clue may be hidden in the prime cost
When the profitability of restaurants starts to change in the negative direction, food, beverage and labor costs need the attention of restaurant owners.
The prime cost is comprised of both materials and labor. The Bookkeeping Chefs’ advice places the cost of goods sold between 60% and 65 percent of revenue for many restaurants. They also stress regular monitoring of the week instead of waiting until the end of the month.
Effective primary cost management is less about obsessing over the exact percentages and more about spotting changes quickly.
Suppose the restaurant normally performs close to its target however this week’s performance is higher. Perhaps overtime was has increased. Perhaps the cost of beverages was stable while food costs grew. A higher proportion of food may lead the operator to review buying, waste, menu mix portions or invoices from vendors.
The percentage is crucial. The activities that underlie the restaurant provide the answer.
Weekly reports allow for this discussion to occur while everyone is still aware of what’s transpired.
The details are much more difficult to remember the next day or two.
Then, the Vendor Bills arrive.
A restaurant could purchase the ingredients this week, but then pay for these items in the future. This is a way to explain how profit alone will not be enough to answer all cash-related questions.
Vendor invoices should be recorded, received then tracked and finally paid. This is an enormous task for the case of a business with several suppliers.
Accounts payable automation helps organize this process by reducing repetitive handling of bills and payment information. Owners can have a clearer view of the payments that haven’t been deposited into their bank accounts through connected bookkeeping systems.
This is helpful, since the balance of your bank account may seem healthier than a restaurant’s real near-term situation.
Today, there may be $80,000 on the account. It could be interpreted differently if it is impacted by other factors such as rent, payroll, vendors and other obligations that will be due in the next few days.
This is the reason for cash flow forecasting.
The best question to ask is “What happens to our cash once we receive it and have met our obligations we’ve made?”
The distinction is important when deciding if it is an appropriate time to repair equipment, make an additional purchase, or to preserve the liquidity.
The Money You Received Could Not Be Yours
The sales tax example is a good one.
Restaurants receive money from customers which has to be managed in accordance with tax regulations. If these funds are associated with operating cash, the balance of the bank can give a false idea of what’s available for spending.
The consistent records help ensure sales tax compliance while also providing management with a more accurate understanding of the restaurant’s financials.
Restaurant accounting is more effective when the financial obligations of each restaurant are not treated separately.
Prime cost affects margin. Vendor purchases impact COGS and future payments. The percentage of labor and cash are affected by the payroll. The availability of cash is influenced by the sales tax. The P&L tracks financial performance, and forecasting assists management to look ahead.
The pieces are interconnected.
Bookkeeping Chef combines restaurant-specific reports and system integrations. Outsourced bookkeeping can help owners who do not wish to be tasked with reconciling their financial data.
The last section is very important.
It’s not our goal for restaurant owners to stop examining their books because somebody else does. Owners need to be informed that can help them know what’s going on.
Don’t assume that the P&L is wrong if the bank account seems tight but the P&L indicates that the restaurant has made money.
What was the difference between them?
This question can tell you more about your company than any other number.