The month is done. The sales were great, the P&L was profitable and there was nothing that appeared to be seriously off.
You then check the bank account of the restaurant.
The number you received wasn’t what you were hoping for.
This disconnect can be frustrating for restaurant owners since they feel that profit and cash availability should tell the same tale. However, they aren’t. A P&L evaluates the financial performance of a business for a particular time period, whereas accounts in banks show the exact timing of funds flowing into and out of the company.
Knowing the difference could change the way an owner is looking at the restaurant’s financials.
Imagine what goes on during the typical week. Food is paid for by customers. Employees must be paid. Invoices will be sent out with the delivery of food and drinks. Rent is getting closer. Deposits made with credit cards have their own timing. The tax on sales is an obligation.
Already, the next week’s purchases have begun.
Looking only at revenue or the number of profits at the end misses much of that activity.
The Key to the Mystery Could Be Hidden in Prime Cost
If restaurant profitability begins to decline, the food, beverage and labor costs should be taken into consideration.
The prime cost is comprised of both the cost of goods and labor. The Bookkeeping Chefs’ provided guidance places the prime cost between 60-65 percent of the revenue for many establishments. They also suggest the importance of weekly monitoring rather than waiting until the month ends.
Effective management of prime costs requires less focusing on a single percentage and more attention to the early changes.
Let’s say that a restaurant typically performs close to its target however, this week’s rate rises. Perhaps the overtime rate went up. Perhaps beverage costs were steady However, food expenses increased. The chef may look over menus and portions, waste, vendor invoices, and purchasing if the food portion is higher.
The percentage raised the question. It is in the restaurant activity.
The reason this conversation can be relived is because everyone can still remember the details of what transpired.
The details will be more difficult to recall just a few days later.
The Vendor Bills are then delivered.
Restaurants may buy ingredients this week but have to pay for these items later. This timing helps to explain the reason why profit alone isn’t enough to answer every cash question.
Vendor invoices have to be received and tracked. Doing this manually in an organization with a lot of suppliers can become a huge administrative burden.
Automating the accounts payable process can assist in coordinating this process through reducing the repetition of bills and payments. The account owner will have a clearer view of the obligations that haven’t yet landed on their bank account by using integrated bookkeeping systems.
This is helpful, since the bank’s balance could appear to be healthier than the restaurant’s current situation.
It could be that there is $80,000 in the bank account at present. This amount could be different when it is affected by other factors like rent, payroll, vendors and other obligations that will be due in the coming days.
This leads to the cash flow forecasting.
The most appropriate question to ask is “What happens to our cash once we receive the money and have met the obligations we’ve made?”
The distinction could be important when deciding whether this is an appropriate time to repair equipment, make an addition purchase, or maintain liquidity.
The Cash You Received May Not be Yours
The sales tax illustrates this in particular.
A restaurant receives money from customers that eventually must be disposed of according to its tax obligations. When these money are thought of as grouped together with operating cash, it could provide a false perception of the cash available for spending.
The consistency of the records helps restaurants comply with sales taxes and provide management an accurate view of their financial situation.
It’s for this reason that restaurant accounting is more efficient in situations where financial responsibilities aren’t thought of as separate entities.
Prime cost affects margin. Vendor purchases affect COGS and future payments. Payroll is a factor that affects the percentage of labor and cash. Cash availability is impacted by sales tax. P&Ls are used to track the financial performance. Forecasting can also be useful to management.
The pieces are linked.
Bookkeeping Chef makes use of restaurant-specific reports and system integrations that help bring those 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 section is very important.
The idea isn’t for restaurant owners to not look at the books because somebody else handles them. It’s crucial that the owners receive information so they know the situation.
If the P&L indicates that the establishment is earning money but the bank balance feels tight, do not assume that the P&L may be inaccurate.
Find out what happened between you and your spouse.
Answering this question can provide more information about the restaurant, more than just a number.
