Restaurant ownership is easy until financial management is involved. Is there a more common culprit behind small business failure? A tiny percentage of businesses keep track of their cash flow changes. There are those that don’t necessarily use them in decision-making. This means that the bulk of the for-profit world is run on surface analysis and optimism as opposed to actual data-backed performance.
If you want to cut back on loss-making and get the most out of your managerial effort, you have to learn to monitor your finances. This article discusses the three most important financial statements – the balance sheet, the cash flow statement, and the income statement – and how to read and infer from them to enhance your restaurant’s performance.
The balance sheet shows the assets, liabilities, debt, capital, etc., that your business has at a point in time. It gives you a snapshot of your restaurant’s financial position at a specific date, helping you calculate your equity and determine your net worth.
It is safe to say that the balance sheet duly takes a spot among the three most important financial statements. Here is how to interpret the various components on your balance sheet:
Assets: This refers to everything your business owns that has monetary value, including cash, equipment, inventory, prepaid expenses, money owed, and marketable securities or investments.
Liabilities: The liabilities component lists all your obligations to other entities, including accounts payable, loans, accrued expenses, bonds, deferred revenues, mortgages, and warranties.
Equity: You get equity when you subtract total liabilities from total assets. It’s what you’d remain with if you liquidated your restaurant and paid off what you owe. Note that while profit is not included in calculating equity, what you retain and inject into the business must be subtracted as a liability as it represents what the business owes you.
Also known as the profit and loss statement, the income statement summarizes your restaurant’s expenses and revenue. It displays your business’s Cost of Goods Sold (COGS), revenue, gross profit, general and administrative expenses, EBITDA, net income, income taxes, etc., helping you determine if you are making profits or losses.
Comparing income statements from different periods is one of the easiest ways to tell if your restaurant is making headway and the degree to which it’s doing so. More in-depth analysis will take the wraps off vital market dynamics like niche-specific economic cycles and help you plan ahead informed.
To determine your net profit or loss over a given period, find the sum of the Cost of Goods Sold, prime costs, and operating costs and subtract it from the total sales.
Here’s why you need to monitor your income statements:
- Income statements provide a breakdown of the business’s day-to-day expenses.
- They help you determine whether the business is profitable.
- They simplify period comparison.
- They help you point out pain points and get back on track through precise, quick fixes rather than potentially self-counterbalancing overhauls.
Cash Flow Statement
In the most elementary description, the cash flow statement is the link between the balance sheet and the income statement. It shows the movement of money in and out of business by monitoring operations, financing, and investment.
Keeping track of your restaurant’s cash flow statement will give you a detailed picture of where you’re getting your money from and what you are spending it on. Assuming everything is meant to contribute to the growth of the business, you’ll be able to pick out and discard needless expenses.
Segments of a cash flow statement
The cash flow statement is divided into three parts:
Operating activities: All revenue-generating activities, including asset sales and net income
Investing activities: These include activities that increase or decrease your company’s assets, e.g., investments in securities, sale of securities, and sale and purchase of physical assets.
Financing activities: These are all the activities that directly define how your restaurant raises capital and pays it back to investors via capital markets. They include selling and issuing stock, taking and changing loans, and paying cash dividends.
Reading and understanding these three financial statements can help you track your restaurant’s performance, make necessary operational tweaks, and predict the future with ease and accuracy. For more comprehensive results, pay attention to what’s happening in your restaurant daily. Monitor new visits, repeat visits, average guest spends, and high- and low-business days, and use your observations to build an optimal activity balance.
Consider using technologies such as table management systems to automate repetitive processes and focus on what requires human attention.