When visualizing a successful restaurant, most owners think about good service and even better food. However, proper accounting is key to running a successful, profitable restaurant. While many aspects of accounting are similar to other businesses, there are essential elements that are different. The cost-to-sales ratio, prime costs, inventory management, and accounting periods are imperative to have control and knowledge of to ensure that the restaurant profits are being maximized. Having an accountant that understands all of the elements that are necessary for a restaurant’s accounting is vital to a successful business.
Restaurant Financial Statements
A business’s financial statement needs a vast amount of information to be fully utilized, and restaurant financial statements contain even more data. Typically, the statement will include:
- Chart of Accounts
The chart of accounts provides financial organization for the company. This will include the restaurant’s assets, liabilities, equity, revenue, and expenses. It will then further be broken down into sub-categories, such as supplies. The chart of accounts will allow users of the financial statement to see where the money comes and goes for the restaurant.
- Cost of Goods Sold
The cost of goods sold (COGS) is important in guaranteeing that your restaurant will make a profit for each plate of food sold. It allows owners and managers to set a price with an acceptable profit margin. COGS directly affects how much money is made and consists of only the ingredients that go into making an item (not utilities or labor). This can be easily calculated when taking the weekly inventory: beginning inventory – ending inventory = COGS.
- Labor Cost & Occupancy and Operating Expenses
Labor Expenses for a restaurant are made up of your employee payroll, payroll taxes, and any employee benefits. It accounts for every employee of the restaurant. Labor expenses are one of the largest expenditures for a restaurant.
Occupancy Expenses are fixed costs that include rent, property insurance, utilities, taxes, and any other cost that is associated with occupying the building. Restaurants are the only type of small business to include this on their financial statements.
Operating Expenses are everything else that isn’t included in the previous two expense categories. It entails everything needed to run the restaurant daily, such as napkins, plates, advertising, and so on. It is not uncommon to confuse operating expenses as synonymous with occupancy expenses.
- Prime Cost
Prime cost is one of the most important numbers to focus on when thinking about your restaurant. While other costs aren’t as simple to adjust, the prime cost consists of COGS + labor cost. It is one of the biggest expenses that the restaurant has to account for and is the easiest way for the restaurant to increase profits by cutting costs.
- Cost-To-Sales Ratio
The cost-to-sales ratio enables users of the financial statements to compare restaurant to restaurant regardless of size; unlike the prime cost, which isn’t ideal for comparison. With this ratio, your accountant is able to view the restaurant’s expenses as a percentage of its sales. It’s equated by dividing the food costs by food sales and multiplying that number by 100%. The ideal number is anywhere between 26% and 36%.
Additional Daily and Weekly Activities
Along with extra elements to the restaurant’s financial statements, there are other challenges that are taken on by the restaurant’s management and accountant. While unique to other businesses, it’s not impossible to master these details:
- Tip Handling
Handling tips are one of the most challenging aspects for an accountant. For each restaurant, tip handling practices are different. This can make it even more difficult to preserve a valid financial statement and taxes. Please refer to the article on How to Handle Tips for Restaurants included on this website.
- Inventory Management
Inventory management is a practice familiar to most businesses. However, what is unique about restaurant inventory management is that the inventory is perishable. So, while most businesses may take a quarterly inventory count, a restaurant performs it more frequently – sometimes daily to ensure the freshest foods.</li
- Cash Flow Statements
The profit and loss (P&L) or cash flow statement allows the restaurant to know what the weekly sales, costs, and trends are. This allows management to accommodate and adapt to meet their target budget.
- Accounting Periods
Due to the frequency of reviewing inventory and financials, the accounting period is typically shorter than what other businesses have. Most restaurants run on a weekly accounting period. This allows for greater accuracy and control for the weekly, recurring disposition of the business. Setting the accounting period allows the business to set the “end of the week” at the beginning. Then, inventory doesn’t have to be done on Saturday or Sunday, when a restaurant is typically the busiest. The best practice is to maintain a 4-4-5 or the 4-5-4 calendar convention. With either method, a year is divided into four quarters of 13 weeks each (13 x 4 = 52 weeks). Under the 4-5-4 method, a quarter consists of a 4-week plus a 5-week plus a 4-week month (13 weeks total). This enables a week-to-week comparison for the same period for either a previous year or a different quarter/month. Given the importance of a busy weekend or a seasonal/event driven sales, a proper analysis of the sales comparison can be meaningful only if the financials are grouped for appropriate periods. Such routine weekly inventorying and grouping of sales/accounting periods are unique to a restaurant business and can be understood by a specialist only.
- Prepaid Accounts
Prepaid accounts help a restaurant business spread bills that aren’t addressed within a weekly accounting period. These long-term expenses include larger bills that are distributed through multiple account periods to balance out the expenses. Rent, software, utilities, insurance, and other large expenses will be included in a prepaid expense account and allocated appropriately. This helps balance financial statements.
- Vendor Credits and Short Pays
Accounting for the restaurant’s vendors prevent payment on goods and services that either were not received or were received in bad condition. On occasion, products did not go out for delivery or they don’t meet the standards of the business. Typically, the restaurant will short-pay the vendor. Short paying the vendor allows the restaurant to only pay for what is accepted and received (deducting the amount for the product that is in bad condition or not delivered). However, if payment is processed for the total bill, then a credit is due to the restaurant. Accounting for the vendors and maintaining appropriate records prevent any disagreements regarding the monthly statement and manage working capital.
- Deciding Prices of Food Items
Deciding the prices on the menu items can be daunting if the appropriate steps to do so are not taken. Without a befitting price, profits may be lost. Typically, a process called menu engineering is performed to decide the ideal cost of an item. This allows the company to maximize profits without price gouging.
- Managing Payroll
Managing employees and their salaries requires a balance to ensure that the right employees are maintained to further maintain quality for the business. A high turnover rate, while not completely unavoidable, should be evaded, and without the right salary, employees won’t be tempted to stay.
- Reducing Costs and Expenses
Within a restaurant, finding where to reduce costs can be a challenge, yet essential. While there are many areas to cut costs, it’s a juggling act. There is give and take to each segment. Reducing salaries will increase the turnover rate. Purchasing produce at a decreased cost will decrease the quality of the food. Picking and choosing how to handle the restaurant’s expenses is imperative to being profitable and maximizing products.
- Reviewing and Balancing Accounts
Owning a restaurant will keep owners and management busy, and sometimes financial aspects are forgotten. This can be detrimental to keeping a restaurant profitable. This is why certain standards are set to ensure that everything is accounted for. Using the standard 4-4-5 (or 4-5-4) accounting calendar helps restaurants in reviewing, reconciling, and comparing accounts. Reviews need to be performed frequently to ensure that nothing is neglected and that financial statements are as accurate as possible. Reviewing prevents losses, aids in tracking expenses and revenue, and enables management to stay up to date on exactly where money is being utilized.
Accounting for a restaurant can be difficult to grasp with the differences in their financial statements and their extra daily/weekly activities. However, Kislay Shah CPA is prepared to tackle these challenges for restaurateurs. If you have further questions, feel free to contact Kislay Shah CPA at kislay@shahcpaus.com or call at 646-328-1326.