The month has ended. The sales were good, the P&L had a profit, and there was nothing that appeared to be terribly wrong.

It is recommended to check the bank account of the restaurant.

The number you received isn’t what you would have expected.

Restaurant owners may be frustrated by this because they believe that cash flow and profits ought to be exactly the same. They don’t add in. A P&L evaluates the financial performance of a company over a specified time period, whereas an account in a bank shows the exact time of money entering and leaving the business.

Understanding the difference will change the way a restaurant’s manager is able to view their financials.

Check out what goes on in a typical week. The customers pay for food. Employees are required to be paid. You will receive invoices along with the delivery of food and drinks. Rent is getting closer. The time frame for credit card deposits differs. Sales tax is an obligation.

Already the next week’s purchases have begun.

If you just look at the amount of revenue or the final profits, you’ll overlook a significant portion of the activity.

The key may lie in the prime cost

Food, drink and labour costs merit a closer at when profitability in restaurants begins to fall.

Cost of selling goods with labor is the prime cost. The Bookkeeping Chefs’ instructions place the main cost between 60-65 percent of the revenues for a variety of restaurants. They also stress regular monitoring of the week instead of waiting until the end of the month.

Effective primary cost management requires less focus on a single percent, and more paying attention to earlier movement.

Suppose that normally the restaurant achieves its goals, however this week it’s at a higher percent. Perhaps overtime was is up. Perhaps beverage costs were steady however food costs increased. A higher proportion of food could cause the owner to examine purchases, waste management, portions and menu mix, or vendor costs.

The percentage raises questions. The answer lies in the restaurant’s activity.

Weekly reports make this conversation possible and everyone will be able to recall what occurred.

Three or four weeks later, the details become much more difficult to decipher.

The Vendor’s bills arrive

Restaurants may buy ingredients this week but have to pay for these items in the future. This explains why knowing the profit isn’t enough to answer every cash question.

Invoices from vendors need to be received, tracked and paid. In a busy operation with many suppliers, completing that manually can turn into the company’s own administrative task.

Accounts payable automation helps organize this process by reducing repetitive handling of bills and payment details. Bookkeeping systems that are connected will give the owners a clear image of their obligations even if they have not yet been paid.

It’s advantageous because, looked at as a whole the balance of a restaurant’s bank account could appear to be more healthy than its actual financial situation.

There is currently an amount of $80,000 in the account. This amount could mean something different when you consider that rent, payroll, vendors, and other obligations will consume a large part of it in the next several days.

That leads naturally to cash flow forecasting.

The best question to ask yourself is “What will happen to our cash once we receive it and have met the obligations that we know?”

The distinction can matter in determining if this is a comfortable week to replace equipment, make an additional purchase, or preserve cash.

The Money You Received Could Not be Yours

The example of sales tax is a great one.

Restaurants receive cash from its customers, which eventually has to be managed in accordance with its tax obligations. If these funds are placed in the same category as operating cash, it may make a false impression about the money available to spend.

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

Accounting for restaurant operations is more effective when the financial responsibilities of each restaurant are separated.

Prime cost affects margin. Vendor purchases impact COGS and future payments. Payroll is a factor that affects the amount of cash available and also the labor percentage. Cash flow is impacted by sales tax. P&Ls keep track of financial performance and forecasting allows management to see the future.

Connect the pieces.

Bookkeeping Chef incorporates restaurant-specific reporting along with system integrations. Outsourced bookkeeping services that are specifically tailored to your needs can be a good option for operators who don’t have the time to reconcile their financial information. They can handle a large portion of the accounting tasks but without taking the owner away from the financial discussion.

The last point is important.

The aim isn’t to get restaurant owners to stop looking at the books because someone else handles them. It’s essential that owners are informed so that they know what’s going on.

Don’t assume that the P&L is incorrect if the accounts appear to be in a good state, yet the P&L confirms that the restaurant earned money.

What transpired between the two?

The answer to this question will reveal more about the restaurant’s reputation than the number.