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.
Know Your Figures: Key Terms in Restaurant Accounting
- 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.
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.
- 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.