The month has ended. The month is done.

After that, you can check the bank account of the restaurant.

The number may not be what you expected.

For restaurant owners, that disconnect can be frustrating because the cash flow and profit appear to be the same. They aren’t. A P&L measures how well the company’s financials have performed over a certain time while your bank account shows the time frame of money going into and out the company.

Understanding the difference can alter how a business owner considers restaurant financials.

Imagine what might happen during the typical week. Food is paid for by customers. Employees must be paid. Food and beverages are delivered with invoices. Rent is on the way. The time frame for credit card deposits is different. Sales tax collected is an obligation.

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

If you are only looking at the amount of revenue or the final profit, then you will be missing a lot of the activity.

The key may lie in the prime cost

If restaurant profits begin to move in the wrong direction, the food, beverages and labor costs need attention.

Cost of goods sold combined with labor is the main cost. The Bookkeeping Chef’s guidance puts the prime cost at between 60%-65% of revenue for many restaurants, while emphasizing regular monitoring instead of waiting until the final day of each month.

Effective cost management for primes involves not focusing on one percent and more noticing earlier movement.

Imagine that the restaurant normally performs near its target but this week, it’s an increase in percentage. Perhaps overtime has is up. The price of drinks may have remained the same, whereas food costs rose. A higher percentage of food could cause the owner to review purchasing, waste management, portions and menu mix, or even vendor invoices.

The percentage is the most important. It is in the underlying food service activity.

This conversation is possible because everyone will be able to remember what happened.

The details are more difficult for you to recall two or three days later.

The Vendor’s Bills Arrive

A restaurant may purchase ingredients this week, but then pay for the items in the future. This is the reason that understanding profit alone isn’t the answer to every cash issue.

Invoices from vendors must be tracked, accepted and paid. The manual process of completing this task in an organization with a lot of suppliers can be a massive administrative burden.

Accounts payable automation helps organize this process by reducing repetitive handling of bills and payment information. Owners can have an accurate picture of obligations that haven’t yet landed on their bank accounts by utilizing automated bookkeeping systems that are connected.

This is important since a bank’s balance when seen in isolation can look healthier than the restaurant’s real-time position.

It could be that there is $80,000 in the account today. This amount could have a different meaning if it is impacted by other factors like rent as well as payroll, vendors and other obligations that will be due in the coming days.

This leads to the cash flow forecasting.

What will happen with our cash once we’ve received the money that we expect and met all of our obligations?

The difference can be crucial in determining if this is the right time to repair equipment, make an extra purchase, or keep liquidity.

And Some of the Cash Was Never Yours

Sales tax illustrates this especially well.

A restaurant receives money from customers that eventually needs to be handled in accordance with its tax obligations. If the money is mentally coupled with the normal operating cash, then the bank balance could provide an inaccurate picture of the amount of cash available.

Regularly maintained records allow restaurants to comply with sales taxes and provide management an accurate view of their financial situation.

Accounting for restaurant operations is more effective when the financial obligations of each restaurant are not considered separately.

Prime cost affects margin. Vendor purchases impact COGS and future payments. Payroll affects both labor percentage as well as cash. Sales tax affects the availability of cash. P&Ls are used to track the financial performance. Forecasting can be helpful to management.

The pieces are connected.

Bookkeeping Chef can help bring these pieces together using restaurant-specific reports as well as system integrations. For operators who don’t want to work all night reconciling financial data, specialized outsourcing of bookkeeping can take on the bulk of accounting tasks while removing the business owner from the financial discussion.

This last aspect is crucial.

Restaurant owners should never stop reading their books regardless of whether they’re being handled by someone else. The goal is for owners to get data in a way that will help them understand what is happening.

If the P&L indicates that the establishment is earning money but the bank balance seems insufficient, don’t believe that the P&L could be wrong.

Find out what transpired between you and your partner.

This question will tell you more about your business than any other number.