The month has ended. The sales were good, the P&L indicates a profit and nothing appears suspiciously to be wrong.
You then check the bank account of the restaurant.
You didn’t get the call you expected.
For owners of restaurants, this disconnect can be frustrating because profits and cash available seem like they should provide the same information. They don’t. It’s not true. P&L is a metric of financial performance, whereas the bank account is a record of when money moves in and out.
Knowing the difference can change the way a restaurant owner is able to view their financials.
Imagine what could happen on an average week. Customers pay for meals. Employees have to be paid. You will receive invoices with drinks and food deliveries. Rent is coming up. Deposits made with credit cards have their own specific timing. Sales tax is an obligation.
The purchase for next week has already started.
If you only focus on revenue and the end-profit number it’s easy to miss a lots of activities.
Prime Cost Could Hold the key to the answer
Food, beverage and labour costs are worth a closer review when the profitability of a restaurant begins to go downhill.
Cost of the goods sold with labor is the prime cost. The bookkeeping chef’s guideline places prime cost at roughly 60%-65 percent of revenues for a variety of restaurants, while emphasizing weekly monitoring rather than waiting until the closing of the month.
Effective prime cost management is less about obsessing over a single percentage and more about noticing movement early.
Imagine that the restaurant’s performance is typically within a certain range However, this week, it grew. Perhaps overtime was added. Perhaps, the costs for beverages remained constant but food costs increased. A higher proportion of food might prompt the operator to consider examining purchases, waste management, portions and menu mix, or vendor costs.
The percentage raises a question. The underlying restaurant activity provides the answer.
This conversation is possible because everybody can remember the details of what transpired.
The details will be more difficult to recall just a few days later.
Then the Vendor Bills Show Up
A restaurant may purchase ingredients in the week ahead, but pay for these items later. This is a way to explain why profit alone is not enough to answer all cash-related questions.
Invoices from vendors need to be tracked, accepted and paid. This can take an enormous task for an organization that has many suppliers.
Automating accounts payable helps to streamline this process by eliminating repetitive handling of bills and payment information. Bookkeeping systems that are integrated can give owners a better picture of obligations, even if they have not yet been paid.
It’s useful because, taken as a whole the bank balance of a restaurant could appear to be more healthy than its actual short-term financial position.
It could be that you have $80,000 on your account right now. The figure of $80,000 is little if rent, vendors or payroll take up a significant portion of the account in the next few days.
This naturally leads to the process of forecasting cash flows.
Instead of asking “How much cash do we have?” the better question is “What could happen to our cash after the money we’re expecting to receive and the obligations we know about?”
The distinction is important when deciding whether this is the right time to repair equipment, make an additional purchase, or to preserve cash.
The cash you received may Not Be Yours
Sales tax illustrates the point especially well.
Restaurants collect money from customers and has to be managed according to tax requirements. If those dollars are mentally associated with operating cash, the balance in the bank can create a misleading sense of the amount available to spend.
A consistent record-keeping system helps restaurants to comply with the sales tax laws while also providing an accurate overview of their financial standing.
Restaurant accounting is more efficient when the financial responsibilities of each restaurant are handled separately.
Prime cost affects margin. COGS (cost of products sold) and future payments are affected due to purchases from vendors. Payroll affects both labor percentage and cash. Sales tax impacts the availability of cash. The P&L tracks financial performance, while forecasting helps management look ahead.
The pieces link.
Bookkeeping Chef assists in bringing these pieces together with restaurant-focused reports as well as system integrations. Outsourced bookkeeping services that are specifically tailored to your needs are an ideal option for owners who do not have time to manually reconcile financial data. They can handle a large portion of the accounting duties but without taking the owner away from the financial conversation.
It’s the very last one that’s important.
Restaurant owners shouldn’t stop going through the manuals just because they are handled by another. It’s important that the owners get information so they know the situation.
If the P&L indicates that the restaurant made cash, yet the bank account is feeling a little tight, don’t assume one of the numbers must be wrong.
Find out what transpired between you and your spouse.
That question can teach you far more about your restaurant than any number by itself.
