The month is over. The sales were great and the P&L showed a profit and there was nothing to be seriously wrong.
Then you check the bank account of the restaurant.
The number isn’t what you’d expect.
Restaurant owners might find this disconnect frustrating since they believe cash flow and profits ought to be identical. They don’t add in. A P&L evaluates the financial performance of a firm over a specified period of time, while accounts in banks show the exact timing of money going into and out of he business.
Knowing the difference can change how a restaurant’s owner thinks about their finances.
Take a look at what happens during an normal week. Customers pay for meals. Employees have to be paid. Food and beverages are delivered with invoices. Rent is getting closer. Deposits made with credit cards come with their own schedules. Taxes on sales are collected but it’s a responsibility.
The buying for next week has already begun.
If you just look at revenues or the final income, then you’ll be missing a lot of this process.
The clue may be hidden in the prime cost
If the restaurant’s profitability begins to shift in the negative direction, then food, drinks, and labor costs deserve consideration.
Cost of selling goods with labor is the main cost. The bookkeeping chef’s guideline places the primary cost at around 60% to 65% of revenue for many restaurants, while emphasizing daily monitoring, rather than waiting until the closing of the month.
Effective primary cost management requires less obsessing on a single percentage and more attention to the early changes.
Let’s say that typically, the restaurant does well, however this week it’s more of a percentage. Perhaps overtime was also increased. Maybe the costs for beverages were stable while food costs grew. A higher proportion of food could prompt the manager to review purchasing, waste management, portions and menu mix or vendor charges.
The percentage is the most important. The answer is found in the activity of the restaurant.
Weekly reports make the conversation possible, while everyone remembers the events.
Two or three weeks later The details are much harder to understand.
After the vendor bills are paid
Restaurants may purchase ingredients one week and pay for them next week. This is a way to explain the reason why profit alone isn’t enough to answer all cash related questions.
Vendor invoices need to be recorded, received, tracked, and ultimately paid. The manual process of completing this task in an office with many suppliers could become an enormous administrative burden.
Automating accounts payable can streamline this process, which reduces the time spent on tasks that are repetitive, such as managing the payment and bill details. Connected bookkeeping systems can also give the user a better view of any obligations that haven’t yet reached the account of the bank.
This is because a bank balance viewed in isolation may appear to be healthier than the restaurant’s actual short-term position.
There could be $80,000 in the account today. The figure of $80,000 is little if vendors, rent, or payroll will take the majority of the coming days.
This is what leads to cash flow forecasting.
What happens to our cash once we’ve received the money that we expect and have met our obligations?
The distinction could be important when deciding if it is an appropriate time to replace equipment, an addition purchase, or maintain the liquidity.
The Cash Wasn’t Yours at All
The sales tax example is a great one.
The money restaurant owners receive from patrons will eventually have to be handled in accordance of its tax obligations. If those dollars are mentally divided into operating cash, the balance in the bank can give a false idea of what is in the bank to spend.
Consistent records support sales tax compliance while also giving management a more realistic view of the restaurant’s finances.
This is one reason why restaurant accounting can be more effective in situations where financial responsibility isn’t seen as separate entities.
Prime cost affects margin. Vendor purchases impact COGS as well as future payments. Payroll is a factor that affects the percentage of labor and cash. Sales tax affects cash availability. P&Ls track financial performance, while forecasting lets management take a look ahead.
The pieces are joined.
Bookkeeping Chef combines restaurant-specific reports with system integrations. For operators who don’t want to be slavishly reconciling financial data, outsourced bookkeeping services will handle most of the accounting work without removing the proprietor from financial conversations.
The last part is important.
Restaurant owners should not stop reading the books, just because they are handled by someone else. The goal is for owners to get details in a manner that will help them understand what’s happening.
So if the P&L says the restaurant made profits, but the account is feeling a little tight, don’t presume that one of the numbers must be wrong.
Ask about the events that occurred between them.
This one question could teach you something more about the food you serve than any number on its own.