What makes a restaurant’s accounting unique

Many think accounting for restaurants is just a matter of retail accounting. But the structure of restaurants requires specialized consideration.

• Inventory management is crucial. Retail stores need to take inventory quarterly or once a year. Restaurants need to take inventory weekly because much of their food is perishable and won’t last a month.
• Cost of Goods Sold (COGS). COGS is the cost a business requires to create the materials it’s selling. In the case of restaurants, they need to track every single ingredient they need to prepare their menu items, and that number includes any amount of waste it incurs. Approximate 40% of food bought by restaurants is wasted before it’s used.
• Prime cost. This is the cost of ingredients, food made and the labor it took to make it. Restaurants have to understand where every piece of food is used, whether it’s in-house or at a catered event, and how much it costs to prepare.
• Earnings before interest, taxes, depreciation and amortization (EBITDA). Restaurants looking for investors, financiers or restaurateurs use EBITDA to demonstrate value. Anyone reading it can see how operations contribute to earnings and if the organization is worth the selling, buying or investment price. The idea of EBITDA varies, but restaurants that set themselves up to generate earnings at every turn are desirable.
• Breakeven point. This is how much the restaurant needs to make to cover expenses. It’s essential to set sales goals.
• Total sales per head. Also known as the sales per seat or average ticket prices, this number helps you understand your trends over time. It can also set upsell and marketing traffic targets to help you get the most out of every mealtime opening.
• Net profit margin. This is the true profit. After labor, rent, utilities, and all other factors are subtracted, this is how much investors and owners take home. It dictates whether expanding, selling or growth is worth it.
• Turnover ratio. Turnover is all about quantifying the speed at which inventory enters and leaves your business. This is an efficiency marker that dictates whether a particular dish is worth keeping on the menu.
• Server benchmarks. While ingredients and menu items are important, server performance tells the manager about how many guests the wait staff had and if there were any challenges.

Seven key financial reports

There will be several reports that restaurant accountants will use to paint a complete financial picture. These seven are a good start:

• Cash Flow Statement. This is one of the crucial reports. The cash flow statement provides a view of your business over a given period. It helps you keep your doors open, pay bills and handle whatever costs necessary to keep tables filled with patrons. The stronger your cash flow, the less outside money you need to sustain you.
• Flash Report. It’s a snapshot of your restaurant’s finances, including revenues and expenses, at a certain point in time. The Flash report is a composite of various labor metrics, which is vital to understanding your business’s profit margins.
• P/L Statement. The P/L statement gives a full understanding of your restaurant’s financial health. Apart from net profit and loss, you can see food cost percentages.
• Daily Sales Report. Daily sales figures break down into drinks, foods, and taxes. This helps you see what’s selling and makes bank reconciliation a little smoother.
• Monthly Performance Report. A month-to-month look at your restaurant’s financial performance. This provides insight into your customers’ behavior, such as their responses to menu items and which menu items may be worth upselling.
• Cash Flow Forecast. When it comes to restaurants, managing liquidity is the priority. The cash flow forecast gives you an idea of how much money you have to meet obligations. Running this report regularly prevents funding issues from sneaking up on you.
• Chart of Accounts. The chart of accounts is a summary of all internal business financials. It can be tailored to the restaurant’s specifications. As a result, managers get an idea of how each financial account is doing. Because it’s customizable, it’s important to develop a template and use it from period to period to ensure accuracy.

Importance of setting your accounting cycle

One of the ways to chart progress or even highlight challenges is to make even comparisons. That’s why it’s crucial to establish and know your accounting cycles. For example, most restaurants opt for a 13-cycle year with 12 cycles of four weeks and one cycle with five weeks. This way, it’s a true apples-to-apples comparison when you’re ascertaining year-over-year progress.

The challenge is that standard accounting doesn’t acknowledge this count. Restaurants need to integrate software that can work within this standard. It can accurately chart monthly expenses daily, giving you better reporting.

Technology integration for better restaurant accounting

If you’re dealing with multiple eateries with their own legal entities, restaurant accounting can become disjointed. This can include having POS systems that are outside of the general ledger. They need extra time to reconcile with your existing management system, adding more labor resources. Working with legacy systems requiring separate logins or having the same information in varied formats is a recipe for headaches. To create more uniform restaurant accounting, use a platform that has POS integration.

Why POS integration is crucial

POS is the primary method of processing payments and monitoring revenue performance, but the data it holds can tell you so much more. By integrating POS with your restaurant management system, you can tailor guests’ experiences and offer meaningful, personalized marketing, which increases your revenue.

POS tells you:

• Guest booking frequency
• Average number of guests on a ticket
• Average spend per table
• Menu item preferences
• Designated server data, including any errors and issues

With all of your restaurant data automatically integrated, business runs smoother, your accounting software can accurately record all transactions, and bank reconciliations become less problematic.

5 common mistakes to avoid

Accounting for restaurants is as essential as preparing its menu items. That’s why it’s important to maintain pristine accounting practices that keep your business open. Avoid:

1. Bookkeeping errors. There’s no room to allow the pennies to pile up.
2. Irregular KPI monitoring. Restaurant data analytics have a direct impact on revenue. Whether it’s POS data or inventory control, analyzing the necessary key performance indicators, KPIs impacts all aspects of your restaurant business, including guest experience and menu decisions. You can generate specific reports within many software tools and set alerts to let you know they are ready.
3. Using incorrect accounting cycles. Because consistency in the restaurant sector breeds quality and profits, the same can be said for using the correct accounting cycle if you want to understand how your business is doing during the same period. So whether going with a 4-4-5, 5-4-4 or 4-5-4, choose the best 13-month period and stick with it.
4. Relying solely on cash-based accounting. There is a belief that restaurants that generate less than $1 million revenue can use the cash-based accounting method. This is not necessarily true. The cash method is important because that payment is accepted right away, so there’s no need to have an accounts receivable balance. The accrual method records payments whether or not payment is received. Restaurants that only use cash-based accounting don’t accurately show how their expenses were incurred or how it compares to the income generated. For a good overall view, accrual is a better choice.
5. Not carrying out a complete reconciliation. One major reason why this is critical is that credit card companies clear at different times. Failure to keep an eye on this means inviting costly complications, some of which include:
   • Paying necessary bills and expenses
   • The ability to summarize weekly income and expenses, which roll up into year-on-year evaluations
   • Cash flow forecasting

Should restaurants consider outsourcing their accounting function?

The answer to this depends on the state of the industry and the business. While having an in-house accountant is valuable, there are times when that fixed overhead cost can hurt the business. When a business may be experiencing a downturn, turning that fixed cost into a variable cost through outsourcing may benefit.

Outsourcing your accounting allows you to work with different kinds of accounting specialists when needed. In addition, the perspective of an outsider provides insight into potential growth and challenges. They have a broader view of your business and may be able to see paths you may not have considered.

One concern with outsourcing is cost. The good thing about outsourcing is that you pay to work with the contractor as much or as little as needed. Another concern is how to ensure a smooth flow of data between two separate companies. This can be a sticky point, especially if your restaurant system is highly customized.

It’s up to you to decide if outsourcing is right for you and the level of services you will need. However, for those who have an in-house accountant, hiring an outside professional for a limited time can be a source of extra finance support during tough times.

Accounting for restaurants FAQs

How do you find an accountant?

Restaurants have a specific business structure that makes them unique. To find an accounting professional with experience dealing with restaurants, check with your local chamber of commerce or check with other restaurant owners to know who they use. In addition, you’ll want to ask for references from some other clients to understand if the individual or firm is right for you.

Does the restaurant need a bookkeeper or a CPA?

It depends on what you want to accomplish. For example, you need a bookkeeper if you need someone to manage your books, such as payroll or posting journal entries. On the other hand, if you are looking for business analysis because you are planning for growth or have a complex tax issue that needs to be handled, you need a CPA.