Restaurant accounting
Restaurant Accounting

Restaurant Accounting Basics: Your Bottom Line for a Thriving Business

Managing a restaurant is a fast-paced and high-pressure endeavor. In addition to making great food, you have to keep a close eye on your restaurant accounting. Knowing how much those meals cost to produce, how often you replenish inventory, and your staff costs make the difference between profitability and insolvency. Here’s a step-by-step guide to the basics of restaurant accounting and how it’s different from other industries.

Restaurant accounting

Know Your Figures: Key Terms in Restaurant Accounting

Every business owner knows you have to charge enough to cover costs and make a profit. But restaurants work a bit differently than other businesses, because of the product that they sell. Their revenue is dependent on service and a high-turnover, perishable product. To gain insight into how your restaurant is performing, it’s key to gain an understanding of these key terms:
  • 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.

For most restaurants, it’s easier to cut back on prime costs before occupancy and operating expenses. Having these figures clearly defined can help you to assess whether you are on the right track or have to make changes.

That’s one reason why you should review your prime costs on a weekly basis. You have an opportunity to cut back, especially with reference to how busy you are. If you aren’t filling tables, you may want to order less food or reduce the number of staff shifts. Conversely, if your revenue is high and you still have tables available, you may want to increase your capacity through more ordering and more people working.

Restaurant accounting

Know Your Accounting Method

There are two accounting options for all small businesses: cash and accrual. The main difference is that in a cash-based method, you record revenue when money actually changes hands. In the accrual method, you record revenue when you invoice for payment. Most restaurants use a cash-based method, although the IRS may require you to use the accrual method once your revenue becomes large.

Here’s an example of the difference. Perhaps you have a contract to cater an event off-site. The event takes place on February 26, but you give the client seven days to pay. Under the accrual method, the revenue occurs in February because that’s when you agreed to the job and the contract for payment is in place. Under the cash method, the revenue would occur in March — or whenever you receive payment — because that is when the money actually changed hands.

Restaurant accounting

Key Statements

In addition to understanding important accounting terms, you should also know what you are looking at when your accountant gives you certain statements. Here are a few important documents you should be familiar with:
  • Cash flow: This measures the amount of cash (or cash equivalent) going through the business. You can think of it as a way of gauging how well you are managing the money that’s coming in and out of your doors.
  • Profit and loss: This is the overall picture of your restaurant finances. The P&L statement is a snapshot of how much you’re spending and how much you’re bringing in. The bottom line of this statement is, as the name suggests, either a profit or a loss.
  • Chart of accounts: This is the master sheet of all the financials to do with your business. Its main categories include your assets (like the equipment you own), liabilities (like business loans), revenue, expenses, and equity. These categories will get broken down into more detail, so you can analyze your full financial picture.
Working with your accountant, you can discern what areas of your financial well-being need attention. That insight allows you to keep going in the short term, and plan for a healthy business over the long term.
Restaurant accounting

Managing Inventory

Because inventory is the heart of your business — you serve freshly prepared food to patrons daily, after all — it’s essential to keep a close eye on your rate of turnover. You don’t want to order more ingredients than you use, but you also don’t want to disappoint customers by making menu items unavailable. Do your inventory on a weekly basis in order to calculate an accurate cost of goods sold and to ensure appropriate planning.

Partner With the Experts

Part of being a savvy business owner is knowing when it’s time to call in partners with more expertise. Honest Buck knows the ins and outs of restaurant and cafe accounting. To learn how we can help you gain visibility into your bottom line, contact us today.