The month has ended. Sales were excellent, and the P&L shows a profit and nothing is suspiciously to be wrong.

Then you check the bank account of the restaurant.

The number is not exactly what you’d hoped for.

Restaurant owners, this gap can be frustrating as profits and cash available seem to provide the same information. They don’t. A P&L is a measure of financial performance over a time, while the bank account reflects the time frame of money going into and out the company.

Understanding the difference will change the way a restaurant’s manager thinks about their finances.

Imagine what happens on a typical workday. Customers pay for meals. Paying employees is necessary. Food and beverages are handed out. Rent is on the way. The time of credit card deposits differs. Sales tax is an obligation.

The buying for next week has already begun.

If you are only looking at the amount of revenue or the final profits, then you’ll be missing a lot of this activity.

Prime Cost Could Hold the Key to the Solution

When the profitability of restaurants starts to change in the negative direction, then food, drinks as well as labor costs require the attention of restaurant owners.

Prime cost is composed from both goods and labor. The bookkeeping chef’s guideline places prime cost at roughly 60% to 65% of revenue for many establishments, and emphasizes daily monitoring, rather than waiting until the end of each month.

It is much more crucial to be able to detect changes earlier than worrying about a specific percentage.

Imagine that the restaurant’s efficiency is usually close to its goal, but this past week, it grew. Perhaps the overtime rate is up. The cost of beverages could remain the same, while food prices increased. A higher percentage of food could lead the business owner to look at purchases, waste management, portions and menus, or even vendor invoices.

The percentage raises a question. The restaurant’s activity is the answer.

Weekly reports allow the discussion to continue while everyone is still aware of the events that have occurred.

The details will be more difficult for you to recall the next day or two.

When the vendor invoices arrive

Restaurants may purchase ingredients during a week and pay for them the following week. This explains how profit alone will not be enough to answer all cash questions.

Invoices from vendors have to be received, tracked and paid. In a busy business with many suppliers, completing that manually can turn into an administrative burden.

Accounts payable automation helps organize this process by reducing the need to handle bills in a repetitive manner and payment details. Bookkeeping systems that are connected will give the owners a clear image of their obligations even though they haven’t yet been paid.

It’s beneficial because, when looked at as a whole the bank balance of a restaurant may appear to be more stable than its actual short-term financial position.

In the present, there could be $80,000 on the account. The amount could be interpreted differently depending on other factors such as rent or payroll, vendors, and other obligations for the next few days.

Forecasting cash flow is a natural outcome.

Instead of asking “How much cash do we have?” the better question becomes “What will transpire with our cash after the money we expect to receive and the obligations we already know about?”

The distinction is important in determining if this is a comfortable week to repair equipment, make an additional purchase, or to preserve liquid funds.

It is possible that you weren’t eligible for all the money you thought.

The sales tax illustrates this very well.

Restaurants take money from their clients, which they follow in accordance with their tax obligations. If these funds are added to cash flow, the bank balance may give an inaccurate impression of how much cash is available.

Consistent records support sales tax compliance while also giving management a more realistic view of the restaurant’s finances.

It’s for this reason that restaurant accounting functions better in situations where financial responsibilities aren’t treated as separate islands.

Prime cost affects margin. COGS (cost of products sold) and future payments are impacted due to purchases from vendors. Payroll affects both labor percentage and cash. Cash flow is affected by the sales tax. P&Ls report financial performance, and forecasting lets management examine the future.

The pieces are interconnected.

Bookkeeping Chef employs restaurant-specific reporting as well as system integrations to integrate these pieces. Outsourced bookkeeping services that are specifically tailored to your needs are a great alternative for those who aren’t able to manually reconcile financial data. They are able to handle the bulk of the accounting duties but without taking the owner away from discussions about finances.

It’s the final part that is important.

Restaurant owners shouldn’t be able to stop reading their books regardless of whether they’re being handled by another. Owners should receive information that will help them to comprehend what’s happening.

If the P&L shows that the establishment is earning money but the bank balance feels tight, do not assume the P&L is not accurate.

Find out what happened between you and your partner.

Answering this question can tell you more about the restaurant’s reputation than the name.