The month is now over. The month is over.

Then you check the bank account of the restaurant.

This number isn’t exactly what you’d hoped for.

This gap can be a source of frustration for owners of restaurants because they feel that profits and cash flow should tell the same tale. They are not. It’s not true. P&L is a metric of financial performance, while the bank account is an indication of when money moves into and out.

Understanding the difference can help owners change their views on the restaurant’s finances.

Imagine what might happen during an average week. Customers pay for food. Employers must be paid. You will receive invoices with food and beverage deliveries. Rent is nearing. The time frame for the credit card deposit differs. Sales tax has been collected, but the money comes with an obligation.

On the other hand, the next week’s shopping has already started.

When you concentrate on revenue or the number of dollars earned at the end, it is easy to miss a an abundance of activity.

The Key to the Mystery Could Be Hidden in Prime Cost

If the profitability of restaurants begins to decline, the cost of food, beverages and labour costs must be taken in the equation.

Cost of sales combined with labor is a major cost. Bookkeeping Chef’s guidelines place prime costs at approximately 60% to 65 percent for most restaurants, and emphasizes weekly monitoring instead of staying until the end of the month.

Effective primary cost management is not about focusing on one particular percentage, and more about recognizing changes early.

If the restaurant is performing at or near its goal, but this week’s percentage increases. Perhaps the overtime rate was increased. Perhaps beverage costs were steady while food costs grew. The manager can review menus and portions, waste or vendor invoices, as well as purchasing if the food portion is greater.

The percentage is the most important. The answer lies in the restaurant’s activity.

Weekly reports allow this conversation to be held as everyone is conscious of what has happened.

The details are harder to recall just a few days later.

The Vendor Bills are then delivered.

The restaurant will be able to pay in the future for the ingredients it buys. This timing helps to explain how profit alone will not be enough to answer all cash-related questions.

Vendor invoices have to be recorded, received as well as tracked until they are paid. This can take an enormous task for an organization with numerous suppliers.

Automating accounts payable can streamline this process, reducing routine tasks like handling bills and payment details. Bookkeeping systems that are integrated allow owners to have a better view of their obligations, even if they haven’t yet been paid.

This is important since a bank’s balance when seen as a whole can appear healthier than a restaurant’s current position.

There is currently $80,000 on the account. The figure of $80,000 means small if the cost of rent, vendors or payroll take up a large portion over the next few days.

That leads naturally to cash flow forecasting.

Instead of asking “How many dollars of cash are we carrying?” the better question is “What is going to occur to our cash after the money we expect to receive and the obligations we already know about?”

It is vital to recognize the difference between them when deciding whether this week is a good time to replace equipment or purchase more products or save the cash flow.

The cash you received may Not Be Yours

Sales tax illustrates this especially well.

The money restaurant owners receive from customers will eventually need to be managed in accordance with its tax obligations. If these funds are placed in the same category as operating cash, it can make a false impression about the amount of money that is available for spending.

Regularly maintained records allow restaurants to comply with sales tax regulations while also providing management an accurate view of their financials.

This is a reason why restaurant accounting can be more effective when financial responsibilities aren’t treated as separate entities.

Prime cost affects margin. COGS and future payments are affected by purchases made by vendors. Payroll impacts both labor percentage and cash. Sales tax influences cash availability. The P&L tracks financial performance, while forecasting helps management look ahead.

The pieces are joined.

Bookkeeping Chef assists in bringing these pieces together using restaurant-specific reports as well as system integrations. For business owners who don’t want to stay up all night reconciling financial information, outsourced bookkeeping services will handle the bulk of accounting tasks without having to remove the owner from the financial conversation.

It’s the final part that matters.

Restaurant owners shouldn’t stop going through the manuals simply because they’re handled by another. It’s for owners to receive data in a way that helps them understand the situation.

If the P&L indicates that the restaurant is earning money but the bank balance seems too tight, don’t think the P&L must be incorrect.

Find out what transpired between you and your partner.

This question will reveal more about your business than any number.