The month is now over. The sales were good and the P&L showed a profit and there was no sign of anything to be seriously incorrect.
Make sure to check the restaurant’s account.
The number isn’t the one you’d expected.
For restaurant owners, that gap can be frustrating as profit and available cash seem to be the same. They don’t. A P&L examines financial performance over a time in time, whereas the bank account represents the actual timing of money going into and out the company.
Understanding the differences could help restaurant owners shift their perspective on restaurant finances.
Have a look at what goes on in a typical week. Customers pay for meals. Employees have to be paid. Deliveries of food and beverages arrive with invoices. Rent is due. Deposits to credit cards are timed. Sales tax is collected however it’s the responsibility.
In the meantime, next week’s purchase has already 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
If restaurant profits begin to move in the wrong direction, food, beverage and labor expenses require attention.
Cost of goods sold combined with labor is the primary cost. Bookkeeping Chef’s guidelines place the prime cost at between 60% to 65% of revenue for many establishments, and emphasizes daily monitoring, rather than waiting until the final day of each month.
Effective management of prime costs requires less focusing on a single percent, and more paying attention to early movement.
Let’s say that a restaurant typically performs close to its target, but this week’s percentage rises. Perhaps overtime was is up. Maybe beverage costs were stable However, food expenses increased. The chef may look over menus, waste, portion sizes or vendor invoices, as well as purchasing if the food portion is higher.
The percentage raises the question. The answer is found in the activity of the restaurant.
The reason this conversation can be relived is because everyone is able to recall the details of what transpired.
After a period of two to three weeks, it is much harder to reconstruct the details.
The Vendor’s Bills Arrive
A restaurant could purchase the ingredients in the week ahead, but pay for the ingredients later. This can help explain why profit alone is not enough to answer all cash-related questions.
Vendor invoices should be recorded, received as well as tracked until they are paid. In the course of manual processing, an organization with a lot of suppliers could become an enormous administrative burden.
Automating accounts payable can help organize this process by reducing the need to handle bills in a repetitive manner and payment details. Owners can have a clearer view of the payments that haven’t been deposited into their bank account by using integrated bookkeeping systems.
It’s useful because, taken as a whole the restaurant’s financial position may appear to be healthier than its actual financial position.
It could be that you have $80,000 on your account as of right now. The figure of $80,000 means small if the cost of rent, vendors or payroll are to take an enormous amount over the next few days.
That leads naturally to cash flow forecasting.
The better question to ask yourself is “What will happen to our money after we receive the money and have fulfilled the obligations we’ve made?”
The difference can be crucial in deciding if this is the right time to repair equipment, make an extra purchase, or keep liquidity.
The Cash You Received May Not be Yours
The sales tax example is an excellent one.
Restaurants get money from clients, which they then handle in accordance with their tax obligations. If the funds are combined with normal cash flow, the balance of the bank account could offer a false impression of the amount of money available.
The consistency of the records helps restaurants comply with sales taxes and provide the managers a clear picture of their financials.
It is for this reason that restaurant accounting is more efficient when financial responsibility isn’t treated as separate islands.
Prime cost affects margin. COGS (cost of goods sold) and future payments are affected through purchases from vendors. Payroll and cash availability are affected by payroll. Taxes on sales affect the availability of cash. The P&L records financial performance, forecasting can help management look ahead.
The pieces join.
Bookkeeping Chef utilizes restaurant-specific reporting and system integrations to integrate these pieces. If you don’t want to stay up all night reconciling financial information, outsourced bookkeeping services can handle most of the accounting work while removing the business owner from financial conversations.
This last aspect is crucial.
Restaurant owners should not stop reading their books just because they are handled by someone else. Owners must be provided with information which will allow them to comprehend what’s happening.
When the P&L reports that the restaurant earned cash, yet the bank account is feeling a little tight, don’t presume that some of the figures must be incorrect.
Find out what happened between you and your partner.
The answer to that question will reveal something more about the food you serve than any number be on its own.