The month is now over. The month is finished.
Then you check the bank account of the restaurant.
The number doesn’t match the one you’d expected.
This gap can be a source of frustration for restaurant owners since they think that profit and cash available should tell the same tale. They don’t add in. A P&L examines how well the company’s financials have performed over a certain time while the bank account represents the exact timing of funds moving in and out of the company.
Knowing the difference can change the way that a restaurant’s owner thinks about their finances.
Look at what goes on in a typical week. Food is paid for by customers. Employees must be paid. Deliveries of food and beverages arrive with invoices. Rent is getting closer. Credit card payments have their own timing. Taxes on sales have been collected, however that money is a legal obligation.
The purchase for next week has already started.
If you focus only on the amount of revenue or the final income, then you’ll miss a lot of this action.
Prime Cost could be the key to the answer
The cost of food, drinks and labour costs merit a closer review when the profitability of a restaurant begins to go downhill.
The prime cost is comprised of the price of items and labour. Bookkeeping Chef’s guidelines place the primary cost at around 60%-65 percent of revenues for a variety of restaurants, while emphasizing weekly monitoring rather than waiting until the end of each month.
Effective prime cost management involves not focusing on one percentage and more attention to the early changes.
Suppose that normally the restaurant is performing at a high level, however this week it’s at a higher percent. Perhaps the overtime rate went up. The beverage cost may have remained the same, whereas food costs rose. A higher proportion of food may make the supervisor think about reviewing purchasing, waste, menu mix portions and vendor invoices.
The percentage raises questions. The activities that underlie the restaurant provide the answer.
The reason this conversation can be relived is because everyone will be able to remember the details of what transpired.
After two or three weeks, it becomes much more difficult to reconstruct the particulars.
Once the vendor invoices are received
Restaurants may buy ingredients in one week, and then pay for them the following week. It’s because of this timing that understanding profits alone does not answer all cash issues.
Vendor invoices should be recorded, received as well as tracked until they are paid. In a busy business with multiple suppliers, managing that by hand can be the company’s own administrative task.
Automating accounts payable speeds up this process, reducing the time spent on tasks that are repetitive, such as managing bills and payment details. Connected bookkeeping systems can also provide the owner with a clearer picture of debts that haven’t yet been paid into the bank account.
That’s useful because an account balance seen in isolation may appear to be healthier than the restaurant’s actual short-term position.
It could be that there is $80,000 in the bank account at present. That number means something very different when you consider that rent, payroll and vendors obligations will consume a large portion over the next few days.
That leads naturally to cash flow forecasting.
What will happen with our cash after we’ve gotten the amount we’ve hoped for and have met our obligations?
This distinction is crucial in determining the appropriateness of the right week to purchase an additional item to replace equipment or preserve the liquidity.
A portion of the Cash Was Never Really Yours
The example of sales tax is a great one.
The money that a restaurant gets from its customers will eventually need to be handled in line of its tax obligations. If these dollars are mentally added to cash flow, the balance in a bank can give an inaccurate impression of how much money is available.
The consistent records help ensure sales tax compliance, while giving the manager a better view of the restaurant’s finances.
Accounting for restaurants is more efficient when the financial obligations of each restaurant are not handled separately.
Prime cost affects margin. Vendor purchases affect COGS as well as future payments. Payroll can affect both cash and labor percentage. Cash availability is impacted by the sales tax. P&Ls are used for recording the financial performance. Forecasting can be helpful for management.
The pieces are interconnected.
Bookkeeping Chef helps bring these pieces together with restaurant-focused reports as well as system integrations. For business owners who don’t want to spend their nights manually reconciling financial information, outsourcing of bookkeeping can take on much of the accounting workload without removing the owner of the financial discussions.
The last sentence is vital.
It’s not the goal for restaurant owners to stop checking their books because somebody else does. It is important that owners receive information so they understand what’s happening.
If the P&L indicates that the restaurant is profitable but the bank balance feels too tight, don’t think that the P&L may be inaccurate.
Find out what transpired between you and your spouse.
The answer to this question will provide more information about the restaurant’s location than the number.