Revenue Can Grow While Restaurant Margins Get Smaller

The month is over. Sales were excellent, and the P&L is in profit and nothing appears to be terribly off.

Verify the restaurant’s bank account.

The number you received isn’t the one you were expecting.

This can be very frustrating for restaurant owners because they believe that profit and cash flow should tell the same tale. They don’t add up. It’s not true. P&L is a measurement of financial performance. In contrast, the bank account is a record of when money moves into and out.

Understanding the differences could help restaurant owners shift their perspective on restaurant finances.

Take a look at what happens during an normal week. Customers pay for meals. Employees are required to be paid. You will receive invoices for food and beverage deliveries. Rent is approaching. Credit card payments are subject to their own timetable. Sales tax is collected however it’s an obligation.

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

If you are only looking at the revenue or the final profit, then you will miss a lot of this action.

Prime Cost could be the key to the answer

If restaurant profits begin to decrease, food, beverage and labor expenses should be taken into the equation.

Prime cost consists of both the cost of goods and labor. Bookkeeping Chef’s guidelines place prime costs at approximately 60%-65 percent for most restaurants and emphasizes monitoring on a weekly basis instead of staying until the end of the month.

Effective management of prime costs is not about focusing on the exact percentages and more about noticing movement earlier.

Imagine that the restaurant’s results are typically within a certain range however this week, it went up. Perhaps the overtime rate was increased. Maybe beverage costs were stable however food prices soared. The higher proportion of food could lead the business owner to examine purchasing, waste management, menu mix and portions, or even vendor invoices.

The percentage is crucial. The answer lies in the activity of the restaurant.

This is possible due to the fact that everyone can still remember what transpired.

After two or three weeks, it gets more difficult to reconstruct details.

Once the vendor invoices are received

Restaurants can purchase ingredients one week and pay for them the following week. This timing helps to explain the reasons why profit alone isn’t enough to answer all cash-related questions.

Invoices from vendors must be tracked, accepted and paid. In a business that has many suppliers, doing this by hand can be an administrative burden.

Automating accounts payable can help organize the process by cutting down on the need to handle bills in a repetitive manner and payment information. Bookkeeping systems that are connected can give the user a better view of any obligations that haven’t yet reached the bank account.

This is useful, because the bank’s balance could seem healthier than a restaurant’s actual financial situation.

There could be a possibility that there are $80,000 in your account right now. The figure of $80,000 is small if the cost of rent, vendors or payroll make 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 becomes “What will happen to our cash after the money we’re expecting to receive and the obligations we already know about?”

This distinction is essential when deciding on whether this is the right week to make an additional purchase replacement of equipment, or preserve the liquidity.

And Some of the Cash Was Never Yours

The example of sales tax is an excellent one.

Restaurants collect money from customers which needs to be handled in accordance with tax regulations. If the money is mentally grouped with ordinary operating cash, the balance of the bank could create a false impression of what is available to spend.

Consistent records support sales tax compliance as well as giving management a more realistic picture of the financials of the restaurant.

It is for this reason that restaurant accounting is more efficient when financial obligations aren’t separated from other responsibilities.

Prime cost affects margin. Vendor purchases affect COGS and future payments. Both labor and cash percentages are affected by the payroll. Sales tax impacts the availability of cash. P&Ls track financial performance, while forecasting lets management take a look ahead.

The pieces are joined.

Bookkeeping Chef combines restaurant-specific reports and system integrations. For those who don’t wish to stay up all night reconciling financial data, specialized outsourced bookkeeping services will handle large portions of the accounting burden while removing the business owner from the financial discussion.

That last part matters.

It’s not the intention of restaurant owners to stop checking their books because someone does. It’s important that the owners get information so they understand what’s happening.

If the P&L shows that the restaurant is earning money however the balance of the bank seems insufficient, don’t believe the P&L could be wrong.

Ask them about what transpired between them.

Answering this question can tell you more about the restaurant, more than just a number.