Restaurant accounting has its own language and even the most seasoned restaurateurs still find it complex. As a restaurant owner, you need experts to help you with your profit and loss statements, prime costs and the most suitable restaurant accounting software for your business. Restaurant accounting involves a complex practice of moving items measured against industry benchmarks. It is time consuming, accuracy dependent and very important to any business. Restaurant accounting can be daunting but not insurmountable if you know what you need to know and when you do, you benefit from business decisions that are finance driven.
When do you need to seek an accounting expert and how to find an accountant that fits for your restaurant? What are the basics of accounting such as KPIs, processes and reports? What are the common mistakes and how can you avoid them? What is the best restaurant accounting software for your business and how does your POS complement your accounting? How can restaurant accountants and bookkeepers help you focus on growing your business?
In business, you should know your strengths and let the experts handle your weaknesses. If you’re a business owner, bookkeeping isn’t likely your core competency. Managing your books without being a trained accountant is like managing your kitchen without culinary training. A trained restaurant accountant eases you from the challenges of complex financial analysis and daily tasks that you otherwise won’t have to grow your business and manage your restaurant’s daily operations.
Restaurants accountants are experts because they know what good financials look like in the restaurant industry and which KPIs you should focus on. Restaurant accountants know how to meaningfully and accurately compile data and analyse your financials to identify cost leaks, operational issues and trends that may need short or long term action.
Your restaurant accountant can manage your general bookkeeping, financial analysis, financing options, prime cost analysis, business modeling, cash flow, payroll, budgets and forecasts, overhead analysis, taxes, sales records, audits, reconciliation, accounts payable, financial reports and tip reports.
You can outsource your accounting to a large or boutique accounting firm or hire an independent part time or full time accountant. When searching for a restaurant accountant, remember that most accountants charge by the hour and their rates are based on seniority. Some firms like Sky Accountants charge fixed fees.
Make sure you choose an accountant that specialises in the restaurant industry because the business structure of restaurants is different from other industries and require specific accounting benchmarks and methods that would not apply to other businesses.
Don’t forget that CPAs and bookkeepers do not have the same roles. An accountant provides in-depth tax consulting and operational analysis while bookkeepers manage payroll, accounts payable and journal entries which are more task based.
Restaurant Accounting: What You Need to Know and Why
Like it or not, you still need to work with your accountant so it’s best to understand restaurant accounting basics and monitor financial KPIs that will help you make sound business decisions. Your restaurant needs daily, weekly, monthly and annual reports that should be monitored for the financial health of the business.
The Daily Sales Report is the end-of-day report which measures sales, costs and future sales. Revenue, including sales, tips, credit card fees and tax are reconciled against settlement such as accounts receivable, discounts & coupons, cash & credit card deposits, redeemed gift certificates. Ideally, the result should be at zero but it can sometimes be cash over or short. The Daily Sales Report will show you how much you’ve made that day and how much you’ve comped. It will allow you to compare with other days of the week, month or year.
Meanwhile, the Chart of Accounts in restaurant accounting categorises the money your business spends and receives. It records high-level transactions such as revenue, assets, expenses, cost of goods sold, liabilities and equity. These are further categorised into meat costs, staff wages, beverage costs, utilities, marketing, etc. The chart of accounts shows an overview of your business’ financial reports such as your profit and loss statement, balance sheet and cash flow report. It also allows you to compare numbers to industry averages and keep track of your expenses. You can use this to show your financial standing to shareholders and investors.
In restaurant accounting, the Profit & Loss (P&L) Statement is also known as income statement, statement of operations or statement of earnings. It shows your sales and costs and reconciles them with your food costs, sales volume, labour costs, profits and operating costs. You can review your P&L statement with your restaurant accountant to know your total revenue and expenses over a specific period of time. It will allow you to make financial-driven business decisions, identify ways to increase revenue, cut costs or change business strategies.
The Cash Flow Report, on the other hand, tracks the cash that comes in and goes out in your restaurant accounting. It lists down the state of your investments, operations, financing and debt. This report shows how much money you currently have and your operating cash flow, which tells you whether or not you can generate enough positive cash flow to grow the business or if you would need to seek external financing to do so.
A Balance Sheet lists down your assets, liabilities and equity. You get your equity when assets are subtracted from liabilities. If you get a negative number, it means you owe more money than you have. The goal is to make this positive by finding ways to make more income or reducing operating costs to cover debts. It’s important to pay attention to your balance sheet because it shows the current value of your assets and overall business and if there are warning signs that the business is in trouble.
Revenue Reports show your total expected revenue for a specific period and how it is divided between for example, food and beverages. In restaurant accounting, these can be used as a financial projection tool to anticipate the revenue your business can generate in the future. It shows your total revenue, average revenue per customer per table and average number of tables and receipts. The long-term trend analysis and daily and weekly reports will help you evaluate operations and set realistic sales targets. You can also use this to set sales targets for staff and attract investors.
The Controllable Costs Report tracks the restaurant expenses that can be controlled such as food and beverage inventory or labour. This allows you to determine your operating margin and calculate prime cost.
The Financial Forecast Report shows a rough estimate of how much revenue the business will generate in the future by using the total revenue, gross profit and operating profit percentage to show the controllable and non-controllable expenses and profit leftover. It shows your current and future fiscal conditions.
Lastly, the Start Up Costs Report helps keep track of your spending when you’re starting a business. This will allow you to stay on budget so you don’t exceed it before you even open your doors.
Restaurant Bookkeeping Processes
Restaurant accounting also involves restaurant bookkeeping processes to keep the business running.
One of these restaurant bookkeeping processes is Account Reconciliation, which proves that all transactions are accounted for and that the cash in your account is correct. You can reconcile accounts by looking at all recorded financial transactions and comparing your records against bank statements, credit cards and other transactions to make sure they all match. It will show if your sales actually made it to the bank and keeps you aware should there be any incorrect deposits, cash variances, errors or lost checks. Your restaurant accountant or bookkeeper will reconcile all bank accounts, credit accounts, loans, payroll liabilities, financing sources and lines of credit.
Another restaurant bookkeeping process is Accounts Payable, which handles paying invoices from suppliers, vendors and food inventory. If your accounts payable process is locked down, your bills will be paid on time without error so your supplies remain on schedule. Accounts payable should be reconciled before being entered into the accounting software. You can do this by checking that everything is correct with each purchase order, receiving order and vendor invoice. Once done, you can then pay the invoice and maintain good relationships with vendors.
You should also pay attention to your payroll which calculates and distributes your staff’s paychecks. It keeps a financial record of staff bonuses, vacation, sick and over time and deductions. Each employee also has a record of their pay. Some employees are paid by salary, others an hourly rate so you need to track hours, tips and taxes. All pay records are included in annual reports and financial statements, making payroll time consuming and complicated. To avoid violations and remain compliant, it’s best to hire an expert to do your payroll. Remember that payroll mistakes can even cost you your best performing employees.
You can measure the success of your restaurant through key performance indicators. Here’s a list of the important KPIs you need to monitor to see the financial outlook of your restaurant.
One of the most important KPIs for your restaurant accounting is prime costs, which account for all the costs needed to produce and distribute your goods and services. It is the amount that goes to your staff and menu items. To calculate your prime costs, add the cost of goods sold and total labour cost. Note that the ideal prime cost ratio is between 55% to 60%. If you calculate your prime costs, you can increase efficiencies, cut costs and increase profits.
Another important KPI to watch out for is your cost of goods sold ratio because it indicates how well you control your inventory and how well your pricing is. It represents the cost of the items used to produce the sales. If you monitor this ratio, you can reduce costs, contain inventory costs and ensure your dishes are profitable. To calculate the cost of goods sold for a specific period, add the beginning inventory of food & beverages and purchases then deduct the ending inventory from it. Remember that the ideal ratio depends on the venue type.
You should also calculate your breakeven point, which represents how much revenue your restaurant needs to cover the expenses. The formula is: Total Fixed Costs / ((Total Sales – Total Variable Costs)/ Total Sales) = Breakeven Point
You’re aiming for a surplus, of course. Calculate your breakeven point to know your sales goals.
EBITDA, on the other hand, represents earnings from your operations, outside of financing, accounting and capital spending on your restaurant’s earnings. “Earnings Before Interest, Taxes, Depreciation and Amortization” is used by restaurateurs and investors when they want to sell, buy or invest in a restaurant. It values a restaurant and gauges its earning potential. Too find out your EBITDA, add your operating profit, amortization expense and depreciation expense.
It’s also helpful to know your restaurant’s total sales per head or sales per seat, average spend per head or ticket. This metric will help you track trends and set targets for upselling and marketing. Simply divide your total sales by the number of customers to calculate for your total sales per head.
Lastly, an important KPI to monitor is your net profit margin, which is what’s left over after you’ve accounted for your COGS, rent, labour, utilities, equipment and other operating expenses. This is your true profit. To find out your net profit margin, deduct your operating expenses from your gross revenue and divide it by your gross sales. The average net profit is 6% but profit margins differ depending on concept. Keeping up with your net profit margin will help you make decisions about expansion, investors and even selling the business.
Restaurant Accounting Mistakes
You can choose to do restaurant accounting the right or wrong way. Here are some of the most common mistakes to avoid in restaurant accounting.
The most common restaurant accounting mistake is not using a restaurant accountant. Restaurants have unique reports, KPIs, tax and business structures and other industries don’t need to deal with weekly reports, complicated labor and inventory metrics and even tips. This is why you should hire an expert to do all these.
Another common restaurant accounting mistake is mis-logging numbers when entering hundreds of rows of data. Bookkeeping errors skew financial reports and KPIs so avoid failing to recognise meal discounts or entering the incorrect information into your books by automating your bookkeeping processes.
Some months have 30 days, some have 31. Some months have four weeks with 28 days with four Fridays and Saturdays. Not all months are equal and you may be using the wrong accounting period. Make sure you accurately compare revenue based on periods that are equally busy by using four-week accounting periods, instead of monthly. This is a common mistake by restaurateurs.
You should also review your KPIs regularly, including inventory, labour, cogs and prime costs. Not doing so is another common mistake. These KPIs can be controlled but if not monitored, they can get way out of hand. Monitor these numbers weekly through your POS’ daily reports so you can solve any cost leaks early on and not incur too many damages.
You can use either of the two kinds of restaurant accounting methods, accrual and cash-based accounting. Cash-based accounting might seem to be best for restaurants because it records income as it enters the bank and records expenses when payments are made. However, the truth is, accrual accounting is better for restaurants because if you use cash-based and record your income ahead of your expenses, the business may seem more profitable than it actually is. Accrual accounting reports income as it is earned and expenses as they appear – not when transactions happen. It records COGS as inventory is used, not when the suppliers are paid.
Restaurant Accounting Software
You and your accountant will stay on the same page if you have the right restaurant accounting software. It’s critical to choose the best accounting software for your business because if you connect it seamlessly with your POS, it can make your life easier by automating the collection and organisation of your financial data and transactions.
Your restaurant accounting software can monitor your financial performance in real time and eliminate the effort, time and errors that come with manual accounting processes. It will manage and track your income and expenses, log payroll, send invoice payments, capture tax information and many more. Your POS will complement your accounting system and you can use it to get your restaurant’s financial performance and sales-to-labour ratio at any given moment.
Using your restaurant accounting software, you will be able to identify historical trends and analyse the data in various datasets. Doing this will allow you to cross-reference sales by menu category and find out the best time to run a promotion on desserts, for example, among others. You can use your POS to analyse costs and sales and menu performance and find out which ones are the best and worst sellers, your inventory status and sales trends.
Lastly, you will be able to optimise labour by looking at shift reports and insights into sales by section, voids and staff activities. You can cut costs and assess staff performance as necessary.
It is important to be on top of your restaurant bookkeeping not only to avoid tax season problems but also to lay a foundation for business decisions based on the financial performance of your restaurant. With diligent practices, right expertise, accurate reporting systems, you will have transparent KPIs to monitor your restaurant’s health.
Need a bit of assistance with your hospitality and restaurant business? Contact a Sky Accountants representative today and learn more about our fixed fees. You won’t regret it.
Some of our clients include Buckley’s Entertainment Center, Ballarat Leagues Club, Daylesford Hotel, Bacchus Marsh Golf Club, Campbell Point House, Midlands Ballarat, The Urban Newtown, Maryborough Midland Society, Brink Drinks, Dontek, UV Wraps and many more.
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