The month is finished. The sales were excellent, the P&L showed a profit and there was no sign of anything to be terribly in error.

Check the restaurant’s bank account.

The number you received isn’t what you’d expect.

For owners of restaurants, this is a problem because the cash flow and profit seem like they should tell the same story. But they don’t. A P&L measures the financial performance of a company over time, while the bank account is a reflection of the timing of money actually going into and out the business.

Knowing the difference could change the way that a proprietor looks at restaurant finances.

Have a look at what happens in a normal week. The customers pay for food. Employees have to be paid. Invoices for food and drinks are sent. Rent is coming. Credit card payments are timed. Taxes on sales are collected but it is the responsibility.

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

If you only focus on revenue and the final profit figure it’s easy to overlook a great deal of activity.

The Clue May Be Hiding in Prime Cost

If restaurant profitability begins to decline, the cost of food, drinks and labor costs must be taken into the equation.

Together, cost of goods sold and the labor cost are the main costs. Bookkeeping Chef’s provided guidance places the cost of goods sold at 60% to 65 percent for most restaurants, and emphasizes weekly monitoring rather than staying until the end of of the month.

Effective primary cost management is less about obsessing over the exact percentages and more about noticing movement quickly.

Suppose the restaurant normally performs close to its target however this week’s performance rises. Perhaps the overtime rate was increased. Perhaps, the costs for beverages remained constant as food costs rose. The higher proportion of food could prompt the manager to consider examining buying, waste management menu mix and portions, or even vendor invoices.

The percent raises the issue. The answer lies in the activity of the restaurant.

Weekly reports make the conversation possible, while everyone remembers the events.

After a period of two to three weeks, it is much harder to reconstruct the details.

Then, the Vendor Bills arrive.

Restaurants may buy ingredients the week before and pay for them next week. That timing helps explain why understanding profit alone doesn’t answer every cash issue.

Vendor invoices should be recieved and tracked. In a busy operation with many suppliers, completing that manually can turn into an administrative burden.

Automating the process for accounts payable can streamline this process through reducing the repetition of bills and payments. The account owner will have better insight into the obligations that haven t hit their bank account through connected bookkeeping systems.

It’s advantageous because, taken as a whole the restaurant’s financial position might appear to be better than its actual financial situation.

There could be $80,000 in the account as of today. It could mean something different when you consider that rent, payroll vendors, or other commitments will consume a substantial part of it in the next few days.

This is the reason for cash flow forecasting.

Instead of asking “How much cash do we have?” the better question is “What could occur to our cash after the money we expect to receive and the obligations we know about?”

It is important to know the difference when deciding if this week is a good time to replace equipment or purchase additional items, or conserve liquid funds.

The cash you received may Not be Yours

The example of sales tax is a good one.

The money that restaurants receive from their customers is eventually going to need to be handled in accordance to its tax obligations. If these funds are combined with normal cash flow, the balance of the bank account could give an inaccurate impression of the amount of cash available.

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

Restaurant accounting is more efficient when the financial responsibilities of each restaurant are not considered separately.

Prime cost affects margin. Vendor purchases impact COGS as well as future payments. Payroll affects both labor percentage and cash. Cash availability is affected by sales tax. The P&L shows financial performance, forecasting can help management look ahead.

The pieces join.

Bookkeeping Chef can help bring these pieces together with restaurant-focused reports and system integrations. For operators who don’t want to stay up all night reconciling financial records, outsourced bookkeeping services will handle large portions of the accounting burden while removing the business owner of the financial discussions.

The last sentence is vital.

The goal isn’t for restaurant owners to not look at the books because somebody else handles them. It’s to provide owners with details in a manner that helps them understand what’s happening.

So when the P&L states that the restaurant has made money but the bank account feels surprisingly tight, don’t assume some of the figures must be off.

Ask about the events that occurred between them.

Answering this question can tell you more about the restaurant’s location than an identifying number.