Restaurant Accounting Basics

 Restaurant Accounting Basics

 

There are a few basic concepts in accounting which any manager or business owner should know.

Financial statements.

Its important to produce timely financial statements on a monthly basis. Your profitability is dependent upon you making good decisions. Good decisions require information based on your financial results. If you are losing money, you should know why. If you are making money, you should know why. You cannot rely on luck. If you do not have financial statements, you are flying in the dark and will most likely fly into the side of a mountain sooner or later.

I don't think a manager should be doing the accounting, but in a single location type business, they should be overseeing a bookkeeper or accountant to ensure that bills and employees are being paid, income and sales tax returns are being filed in a timely manner, financial statements are being prepared, money from credit customers are being collected, cash (bank) accounts are being properly reconciled, and so forth.

Income statements should be prepared in a manner which is meaningful to the business owner. Generally, larger expenditures will deserve their own line item on an income , such as payroll, overtime, employee benefits, rent, utilities, repairs and maintenance, along with your sales and cost of sales. They should be trending by month, so you can easily see if costs are getting better or worse (or out of control!). If you see expenses on any line item escalating without a logical explanation behind it, you should be digging through the details or ask the bookkeeper to provide and explanation as to the cost increases.

Sometimes, there will be a logical explanation. If you see you payroll double in cost, likely, you're hired twice the staff which would be supported by twice the sales. Same with credit card fees and other costs that will go up in tandem with sales.

Inventory control.

The key word here is control. How well are you controlling your inventory?

·         Are you buying too much and throwing away your profit at the end of the week?

·         Are you buying too little, telling customers "Oh, I'm sorry, we're out of that dish tonight." How do you know their disappointment won't translate into, "I'm never coming back here again. These guys are amateurs and haven't a clue how to run a restaurant."

·         How do you know your bartender is not giving away free drinks when you're not there or comping food to pretty girls?

·         How do you know your cashiers not ringing up your sales and pocketing the money for themselves?

All of these issues translate to potentially lost profits and can be answered by looking and analyzing the numbers. They can be addressed through the strengthening of procedures and internal controls, which are accounting related.

Liquidity.

You need cash to keep your business going. If you have the 'false' sense that you just made a ton of money and can simply take $100K out of your business to buy a nice car that you just can't live without, you may have some unpleasant surprises up ahead.

Cash is the lifeblood of your business. Without it, your business comes to a grinding halt. You cannot purchase inventory, pay your employees, pay your taxes, pay your rent and you'll soon be insolvent and out of business. It is important to forecast your cash requirements to make sure you have enough to run your business in a way that makes sense -- not in a way that you can afford. If it looks like you may run out, you'll need to find alternative ways generating those cash requirements.

Pricing.

Do you know what your food costs are for every item on your menu? You should. If you don't, how do you know you are selling it at a price that will cover your food cost, overhead and allow for a profit at the end of the day. If you're simply breaking even, why do you even offer it?

Each dish should be costed out, so that you can determine what an appropriate selling price is.

Wastage:

If you just opened your shop yesterday, it may be tough to decide how much to buy. But as your business becomes established, eventually you will see trends in your sales. You should costing out everything you're throwing away. Essentially, you are throwing away money.

Establish a separate line item on your income statement called Food Waste, so you can monitor if this number is exceeding expected parameters. When your eyes start popping out of their sockets, it will make you focus more on what and how much you buy and/or aligning yourself with alternative food vendors that might be more affordable. Don't "bury" your wastage in Cost of Sales. This only conceals the problem. Know exactly how much you throw away each month.

 

Basics of Restaurant Accounting for Managers

Even if you don't prepare your own financial books or outsource most accounting functions, as a restaurant manager you still should have a basic understanding of your restaurant's financial performance.

Terms and Concepts to Assess Performance

Some of the key financial metrics to be aware of as a restaurant manager are listed below (and excerpted from this resource on restaurant accounting basics):

·         Cost of Goods Sold: This is how much it costs to make your menu items. It does not take into account overhead expenses like rent or staff. Instead, it is a simple calculation of the ingredient costs for each dish.

·         Labor Costs: Your labor costs are the people power that gets the job done in your restaurant. This includes everyone from the front of house to back of house. Include salaries, benefits, and payroll taxes in your labor costs.

·         Prime Costs: The majority of your business expenses are included in prime costs. Your prime costs are your cost of goods sold and your labor costs. Experts often recommend keeping your prime costs at 65 percent or lower of your overall budget.

·         Occupancy Expenses: This is what it costs for you to maintain your space. That’s your rent or lease costs, insurance, repairs, and utilities.

·         Operating Expenses: These are everything else that you have to pay for in order to run a successful restaurant. This is your website costs, marketing, napkins, and printed menus.

·         Cost-to-Sales Ratio: This is a measure of your prime costs (cost of goods sold plus labor costs) to your revenue. If you bring in $20,000 revenue on a weekly basis and your prime costs are $12,000, then your cost-to-sales is 60 percent.

Basic Financial Statements

Financial statements help managers identify areas of weakness in operations. They are useful to monitor to make sure the restaurant generates enough income to cover expenses.

·         Income Statement: This shows how the restaurant performs over a period of time. It indicates whether the business is profitable, and it allows managers to compare their restaurant's performance against industry benchmarks. The basic formula for an Income Statement, also known as a Profit and Loss Statement, is:

Sales - Cost of Goods Sold - Expenses = Profit or Loss

·         Cash Flow Statement: This measures the amount of cash or cash-equivalents flowing through your business.

 

Compliance With Tipping Laws

Following the correct tipping laws is crucial for accurately accounting for payroll and for maintaining compliance with wage regulations. Tipped employees must report the tips they receive, and restaurants must report these tips to the Internal Revenue Service. As a manager you should be aware of what does and does not count as a tip (for example, required service charges are not tips), and whether tip pooling is allowed. To complicate the already challenging task of payroll, different rules might apply depending on your state and even your city. Rules to be mindful of include minimum wage standards and tip credits.

Running a restaurant is not easy. You need to look at expense, stock management, customer service and specially accounts. Handling accounts is not easy job, single mistake can mess up the budget and expesnse

So these are the most important thing a restaurant manager need to know about accounting.

1.    Track your expenses
Once you have a clear picture of what you’re expenses are, it will be easier to get an idea of how much you need to earn in order to make a profit.

2.    Accuracy matters
This seems obvious, but many restaurant owners and small business owners don’t really practice this. It’s of the utmost importance to record all your transactions accurately, to the penny. Precision counts here - don’t round off those numbers. Even those few dollars and cents will multiply over time, and will affect your bottom line.

3.    Track your income
This is no less important than keeping records of your expenses. But not all restaurant owners keep accurate records of revenue, especially those who do a lot of cash business. .

4.    Take advantage of modern restaurant accounting software
Software like restaurant pos software helps a lot in handling accounts and even whole restaurant. It will save your time and gives you stress free life.

 

Accounting may not be a core task for restaurant business but the importance of accounting should not be ignored as only accurate accounting enables you to make better decisions.

So, it has become a necessity for an accounting manager to not only pay attention to staff, food, and customer service but also to his/her books in order to earn better profits.

Following are some important things that a manager needs to know about restaurant accounting:-

• Accuracy- To record all the transactions accurately is one of the most important aspects. It’s the precision that counts.

• Expenses- Just knowing about your expenses isn’t enough, you also need to record and organize the expenses properly to get a better insight into how much you are spending.

• Income- The restaurants into cash business mostly do not keep accurate records of revenue. It is important to record all the sources of income and organize them properly to get a better idea of what is generating more income.

• Inventory- One of the most important items for restaurants is its inventory. It includes food, supplies and other goods/products that are consumed on a regular basis. To keep an accurate record of inventory (of how much is consumed and what all needs to be cut off) is a vital task, which can result in better cost management.

 

Having a great restaurant isn’t just about the food.

There are 5 important things you need to know about the business side of your restaurant, namely, record keeping and accounting:

1. Track your expenses (food inventory, wages, rent, software, etc.) and organize them properly by category. Knowing the total of your expenses, you will get an accurate idea of how much you’ll need to earn in order to make a profit.

2. Track your income, especially if you do a lot of cash business. Don’t overestimate or underestimate your revenue.

3. Record all your transactions accurately. Precision is important, believe me. Never round up numbers. Every cent counts.

4. Buy an accounting software and use the technology! You can find software products that will manage your inventory, interact with your POS systems and help you with a lot of other financial tasks. These are very easy to use.

If it sounds like a lot of work, then hire a professional. They’ll help you organize your bookkeeping, your bottom line and your financial processes.