The month has ended. The sales were decent, the P&L was profitable and there was no sign of anything that appeared to be terribly incorrect.
Check the restaurant’s bank account.
You didn’t get the number you expected.
Restaurant owners, this gap can be frustrating as profits and cash flow seem to tell the same story. They don’t. A P&L evaluates the financial performance of a firm for a particular time period, whereas it is a bank account that shows the exact timing of funds flowing into and out of the company.
Knowing the difference could change the way an owner looks at restaurant finances.
Imagine what might happen during a typical week. Customers pay for meals. The payment of employees is essential. Invoices for food and beverages are handed out. Rent is nearing. Credit card payments are timed. Taxes on sales have been collected, however that money comes with an obligation.
Already the next week’s purchases have begun.
If you only focus on revenue and the end-profit number it’s easy to miss a the vast amount of activity.
The Key to the Mystery Could Be Hidden in the Prime Cost
If restaurant profitability begins to decline, the food, beverage and labor expenses should be taken into consideration.
Prime cost is composed of the price of materials and labor. The Bookkeeping Chefs’ provided guidance places the prime cost between 60 and 65 percent of revenue for many restaurants. They also stress weekly monitoring instead of waiting until the month ends.
Effective prime cost management is less about obsessing over a single percentage and more about noticing movement early.
Imagine that the restaurant’s efficiency is typically within a certain range However, this week, it was higher. Perhaps overtime was also increased. Perhaps beverage costs were steady while food costs grew. An increase in the percentage of food consumed might prompt the operator to review buying, waste management menu mix and portions, or vendor charges.
The percentage is the most important. The answer lies in the food service activity.
The reason this conversation can be relived is because everyone can still remember what happened.
The details are much more difficult to remember just a few days later.
Then the Vendor Bills Show Up
Restaurants may purchase ingredients during a week and pay for them next week. This is a way to explain why profit alone is not enough to answer every cash question.
Invoices from vendors must be received, tracked and paid. This can be lots of work for an organization that has many suppliers.
Automation of accounts payable streamlines the process by reducing routine tasks like handling the payment and bill details. The account owner will have more precise information about the obligations that haven’t yet landed on their bank account through automated bookkeeping systems that are connected.
This is important since the bank’s balance as a whole can appear healthier than the restaurant’s actual short-term position.
There may be $80,000 sitting in the account right now. That number means something very different in the event that payroll, rent vendors, or other commitments will consume a substantial portion over the next several days.
This leads to cash flow forecasting.
What will happen with our cash after we’ve gotten the cash we’ve been expecting and have met our obligations?
This is a crucial distinction when deciding whether or not this is the appropriate week to purchase an additional item replacement of equipment, or keep liquidity.
You might not have been legally entitled to the full amount you thought.
The sales tax illustrates this point in particular.
Restaurants collect cash from its customers, which eventually must be disposed of in accordance with its tax obligations. If these funds are associated with operating cash, the bank balance can create a misleading sense of the money available to spend.
A consistent record helps restaurants stay in compliance with sales taxes while giving management a complete picture of their financials.
Restaurant accounting is more efficient when the financial obligations of each restaurant are not separated.
Prime cost affects margin. Vendor purchases affect COGS and future payments. The percentage of labor and cash are affected by payroll. Taxes on sales affect cash availability. P&Ls are used for recording the financial performance. Forecasting can also be useful to management.
The pieces are interconnected.
Bookkeeping Chef incorporates restaurant-specific reporting along with system integrations. For operators who don’t want to spend their nights manually reconciling financial data, outsourced bookkeeping services can handle large portions of the accounting burden without having to remove the owner from the financial discussion.
The last section is very important.
The goal isn’t for restaurant owners to simply stop looking at their books since someone else is handling them. Owners need to be informed which will allow them to know what’s going on.
If the P&L shows that the establishment is earning money but the bank balance seems tight, do not assume that the P&L is not accurate.
Find out what happened between you and your partner.
The answer to this question will tell you more about the restaurant than just the number.