The month has ended. The month is over.
Check the bank account of the restaurant.
This number isn’t exactly what you’d expect.
This gap can be a source of frustration for restaurant owners as they think that profit and cash available should speak the same truth. They aren’t. The P&L is a measurement of financial performance, while the bank account is a reflection of how much money is moved in and out.
Understanding the difference will change the way a restaurant owner considers their financials.
Have a look at what happens in a normal week. Food is paid for by customers. The payment of employees is essential. Food and beverage deliveries arrive with invoices. Rent is close to being paid. Credit card payments have their own timing. Taxes on sales have been collected, but that money is subject to an obligation.
The shopping for the week ahead has already begun.
Concentrating on revenue or the ending profit number misses much of that activity.
The Clue May Be Hiding in Prime Cost
When the profitability of restaurants starts to change in the wrong direction, the food, beverages and labor costs need the attention of restaurant owners.
Cost of sales combined with labor is the main cost. Bookkeeping Chef’s guidelines place the cost of goods sold at 60% to 65 percent for a variety of restaurants and focuses on weekly monitoring rather than waiting until the end of the month.
It is much more crucial to be able to spot changes earlier than worrying about certain percentages.
Imagine that the restaurant normally is performing at a high level, but this week, it’s more of a percentage. Perhaps the overtime rate went up. Perhaps the cost of beverages remained steady however food prices soared. Operators may examine menus or waste, portion sizes or vendor invoices, as well as purchasing if the proportion of food is higher.
The percentage is what matters. The activities that underlie the restaurant provide the answer.
Weekly reports allow the discussion to continue even though everyone is aware of what’s happened.
After a period of two to three weeks, it gets more difficult to reconstruct the particulars.
Once the vendor invoices are received
Restaurants can purchase ingredients during a week and pay for them the next. This is a way to explain why profit alone is not enough to answer all cash-related questions.
Vendor invoices need to be accepted and logged. In a highly-competitive business with many suppliers, doing this by hand can be its own administrative workload.
Accounts payable automation helps organize this process by reducing repetitive handling of bills and payment information. The user can have more precise information about the debts that haven’t landed in their bank account by using integrated bookkeeping systems.
That’s useful 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 as of today. It could mean something different if payroll, rent, vendors, and other commitments consume a significant portion of it over the next few days.
This leads naturally to cash flow forecasting.
The most appropriate question to ask yourself is “What happens to our money after we have received the funds and have fulfilled our obligations we have made?”
This distinction is essential in determining which is the appropriate week to buy an additional purchase replacement of equipment, or preserve the liquidity.
And Some of the Cash Was Never Yours
The example of sales tax is a good one.
Restaurants take money from their customers, which they must follow according to their tax obligations. If these funds are combined with operating cash, they can give a false impression of the money available to spend.
Regularly maintained records help restaurants comply with sales tax laws, while providing a realistic picture of their financial situation.
This is one reason why restaurant accounting can be more effective when financial responsibilities aren’t treated as separate islands.
Prime cost affects margin. Vendor purchases impact COGS as well as future payments. Payroll can affect both the percentage of labor as well as cash. Cash flow is impacted by sales tax. The P&L tracks financial performance, and forecasting assists management to look ahead.
Connect the pieces.
Bookkeeping Chef uses restaurant-focused reporting and system integrations to bring those pieces together. Specialized outsourced bookkeeping services are an ideal option for operators who don’t have the time to reconcile their financial information. They will take care of a lot of the accounting task without taking the owner away from the financial conversation.
The last section is very important.
The idea isn’t for restaurant owners to not look at their books simply because they are handled by someone else. Owners should be given information which will allow them to understand what’s happening.
Don’t be fooled into thinking that the P&L is incorrect if the bank account seems tight but the P&L shows the restaurant has made money.
Find out what transpired between you and your partner.
This question will tell you more about your company than any other number.
