The month ended. The month is done.
You then check the bank account of the restaurant.
This number isn’t exactly what you expected.
For owners of restaurants, this gap can be frustrating as the cash flow and profit seem to have the same meaning. They are not. A P&L measures financial performance over a time while your bank account shows the exact timing of funds flowing into and out of the company.
Understanding the difference could alter how a business owner looks at restaurant finances.
Have a look at what happens in a normal week. Customers pay for meals. Employees have to be paid. Invoices will be sent out with drinks and food deliveries. Rent is coming up. The time frame for credit card deposits is different. Sales tax is an obligation.
Already, the next week’s purchases have started.
When you look only at revenue and the final profit figure, it is easy to miss a the vast amount of activity.
The Secret Could Be Hidden in the Prime Cost
If restaurant profits begin to move in the wrong direction, then food, drinks and labor costs need the attention of restaurant owners.
Together, cost of items sold and labor comprise the primary cost. The Bookkeeping Chefs’ instructions place the main cost between 60% and 65% of revenues for many establishments. They also suggest the importance of weekly monitoring rather than 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 usually performs close to its target however this week’s performance is higher. Perhaps the overtime rate was increased. Perhaps beverage costs remained stable however food prices soared. A higher percentage of food could cause the owner to examine purchasing, waste management, portions and menu mix or even vendor invoices.
The percentage raises questions. The underlying restaurant activity provides the answer.
Weekly reports allow this discussion to occur in the midst of everyone being aware of the events that have occurred.
A few weeks later, the details become much harder to decipher.
The Vendor’s Bills Arrive
The restaurant is expected to pay an additional time for the items it purchases. It’s because of this timing that understanding profits alone can not resolve all cash-related issues.
Invoices from vendors have to be accounted for, tracked and paid. This could be quite a task in the case of a business with many suppliers.
Automating the process of paying bills can streamline this process through reducing the repetition of payments and bills. Bookkeeping systems that are integrated can give owners a better view of their obligations, even if they have not yet been paid.
It’s beneficial because, when viewed as a whole, the bank balance of a restaurant may appear to be healthier than its actual short-term financial situation.
It could be that there are $80,000 in your account at the moment. This amount could mean something different depending on other variables like rent or other expenses, such as payroll, vendors or other obligations for the coming days.
Forecasting cash flow is a common outcome.
What happens to the money we have received after we’ve received the amount we’ve hoped for and met all of our obligations?
It is vital to recognize the difference when deciding if this week is the best time to replace equipment or purchase more products or preserve liquid funds.
You might not have been rightfully entitled to all the money you believed.
The sales tax illustrates this very well.
A restaurant collects cash from its customers, which eventually needs to be handled in accordance with tax regulations. If the money is mentally divided into operating cash, the balance in the bank could create a false impression of the money in the bank to spend.
Consistent records support sales tax compliance while also giving the management a better picture of the financials of the restaurant.
This is a reason why restaurant accounting can be more effective when financial obligations aren’t viewed as distinct islands.
Prime cost affects margin. COGS and future payments are impacted by purchases from vendors. Cash and labor percentage are affected by payroll. Cash flow is impacted by the sales tax. P&Ls track financial performance, while forecasting lets management take a look ahead.
The pieces connect.
Bookkeeping Chef utilizes restaurant-specific reporting as well as system integrations to integrate these pieces. Bookkeeping outsourcing services with specialization are an excellent option for owners who don’t have the time to manually reconcile financial data. They are able to handle the bulk of the accounting work without taking the owner away from financial discussions.
The last part is important.
The idea isn’t for restaurant owners to not look at their books since someone else handles them. It is important that owners receive information so they can understand what’s going on.
Don’t assume that the P&L is wrong if the bank account appears to be in good shape, but the P&L shows the restaurant has generated money.
Ask what happened between them.
The answer to that question will reveal far more about your restaurant than any other number could be on its own.