The month is finished. The month has ended.
Make sure to check the restaurant’s account.
The number is not what you expected.
This gap can be a source of frustration for restaurant owners since they think that profit and cash on hand should tell the same tale. These two things don’t match up. The P&L is a measurement of financial performance, whereas the bank account is a representation of the time when money flows in and out.
Understanding the difference will alter how a restaurant’s owner views their finances.
Imagine what goes on during a typical workday. The customers pay for food. Employers must be paid. The invoices for food and drinks are sent. Rent is getting closer. The time of credit card deposits is different. Taxes on sales have been collected, but the money comes with an obligation.
The purchase for next week has already begun.
If you are only looking at the revenue or the final profits, you’ll miss a lot of the activity.
The Clue May Be Hiding in Prime Cost
If restaurant profitability begins to decrease, food, beverage and labor costs must be taken in the equation.
Prime cost is made up of the price of materials and labor. The Bookkeeping Chef’s guidance puts the cost of goods sold at 60% to 65% for many restaurant and emphasizes monitoring on a weekly basis rather than staying until the end of the month.
It is more important to be able detect the changes before they occur rather than obsessing over a specific percentage.
Imagine that the restaurant normally does well, however this week it’s an increase in percent. Perhaps overtime was has increased. Perhaps beverage costs remained stable but food costs increased. The operator may review menus as well as waste, portions sizes, vendor invoices, and buying if the percentage of food is greater.
The percentage raised the question. The answer is found in the activity of the restaurant.
This conversation is possible because everyone will be able to remember what transpired.
After a period of two to three weeks, it becomes harder to reconstruct the specifics.
The Vendor’s Bills Are Received
Restaurants can purchase ingredients in one week, and then pay for them next week. This is a way to explain the reason why profit alone isn’t enough to answer all cash questions.
Vendor invoices should be recieved and logged. This can be a lot of work in the case of a business with several suppliers.
Automating accounts payable helps to streamline the process by cutting down on the need to handle bills in a repetitive manner and payment details. Connected bookkeeping systems can also give the user a better image of the obligations which haven’t yet deposited into the account of the bank.
This is helpful, since the bank balance can appear more healthy than the restaurant’s current situation.
It is possible that you’ve got $80,000 in your account as of right now. It could mean something different when you consider that rent, payroll and vendors obligations consume a significant portion over the next few days.
This leads naturally to the process of forecasting cash flows.
What will happen with our cash once we’ve received the money that we expect and have met our obligations?
This distinction is essential in determining whether or not this is the appropriate time to make an extra purchase or replace equipment, or to maintain liquidity.
And Some of the Cash Was Never Really Yours
The sales tax illustrates this particularly well.
The money a restaurant gets from its customers will eventually have to be managed in accordance to its tax obligations. If these cash-flows are placed in the same category as operating cash, it could give a false impression of the cash available for spending.
Regularly maintained records help restaurants comply with sales tax laws and also providing a realistic view of their financial position.
This is the reason restaurant accounting can be more effective in situations where financial responsibility isn’t seen as separate entities.
Prime cost affects margin. Vendor purchases affect COGS and future payments. The percentage of labor and cash are affected by payroll. Cash availability is affected by the sales tax. P&Ls record financial performance while forecasting lets management take a look ahead.
The pieces are connected.
Bookkeeping Chef assists in bringing these pieces together with restaurant-focused reports and system integrations. 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 point is vital.
The idea isn’t for owners of restaurants to stop looking at their books simply because someone else is handling them. It’s for owners to receive the information they need in a format that will help them understand what is happening.
Don’t believe that the P&L is correct if your balance of the bank seems to be tight, however the P&L shows the restaurant has generated money.
What happened between the two?
Answering this question can tell you more about the restaurant’s reputation than the number.