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What Are Your Restaurant’s Financials Telling You?

What Are Your Restaurant’s Financials Telling You?

There are three financial statements that you should review regularly to help you determine your restaurant’s profitability.

The Balance Sheet

The balance sheet is a point-in-time snapshot of your assets and liabilities. Your assets are split into two categories: current and long-term. Current assets are items like cash, receivables, and inventory. Long-term assets are items like equipment and real property. Your liabilities are split into these same two categories. Current liabilities are items like accounts payable, accrued payroll, or income taxes. Long-term liabilities are items like car loans or mortgages.

The difference between your current assets and current liabilities will give you your “working capital.” Your working capital is a metric that reveals how healthy your restaurant is in the short term. A good working capital (i.e. more current assets than current liabilities) will show your investors that you can meet your daily operational expenditures.

The final part of the balance sheet is the equity section. If your restaurant is organized as a partnership, this would show up as “Partners’ Capital.” If your restaurant is an S corporation, it would be represented as “Shareholders’ Equity.” Whatever it is called, this equity shows how much value you have built into your business.

The Income Statement

The income statement is helpful in a different manner: it can show you the profitability of your restaurant. It also allows you to compare your sales to their associated costs to determine if you’re charging enough; it lets you see how much you’re charging in overhead, and it can reveal expense outliers that you wouldn’t have been able to determine from looking at the daily sales report from your POS.

The income statement will show your revenue and expenses over a specific period. All good accounting software will allow you to generate comparison reports, as well. For example, you can see whether you made more money this December compared to last December, or you can see if your second quarter was more profitable than your first quarter. Your income statement has a lot of helpful information in it if you learn how to utilize the reports to your advantage.

Cash Flow Statement

The statement of cash flows will show your restaurant’s cash position. It will show all the cash going in and all the cash going out of the business over a certain period. This information will be grouped into three large categories: operating activities (daily cash deposits, interest payments, vendor payments, etc.), investing activities (principal payments on loans, fixed asset purchases, etc.), and financing activities (cash paid to shareholders, dividends paid, etc.). It can be a tool to help you fully understand how you generate cash and how those funds are being used.

The cash flow statement is especially helpful to businesses that use the accrual basis of accounting because there is no other report that reveals anything about the company’s cash activities.

Using all three of these types of financial statements is key to knowing the true financial picture of your restaurant.

If you have questions about how to interpret your financial statements, we’re here to help. Contact us, for more information.

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