Running a restaurant is not an easy task, and one crucial aspect that can make or break your business is how well you handle your finances.
Accounting for restaurants is a big part of managing your business finances. It’s more than just keeping track of money coming in and going out – it involves recording all financial transactions, preparing financial statements, and monitoring key performance indicators to help you understand the financial state of your business.
By doing so, you can make informed decisions that will contribute to your restaurant’s success. In this blog, we will be sharing everything you need to know about accounting for restaurants and how to effectively manage them.
Restaurant chart of accounts
A chart of accounts is basically a big, organized list that keeps track of all the financial transactions in your business. Think of it as your business’s financial address book – it’s divided into different categories such as assets (what you own), liabilities (what you owe), equity (your net worth), revenue (your income), and expenses (what you spend).
Each category has its own set of unique reference numbers to make it easier to find and record transactions.
So, every time money comes in or goes out, it’s recorded in this list. In simpler terms, it’s like a financial roadmap that helps you keep track of where your money is coming from and where it’s going.
The CoA plays a crucial role in creating financial statements, helping you understand where your business currently stands. So, maintaining an accurate and efficient CoA is vital for managing your business’s financial health.
Cost of goods sold (COGS)
When it comes to accounting for restaurants, COGS (Cost of Goods Sold) is very important. COGS is the direct cost associated with producing the food and beverages that you sell in your restaurant.
For example, if you run a pizza restaurant, the cost of ingredients like flour, cheese, and tomato sauce would be considered COGS.
To calculate it, you need to add up the cost of all your food and beverage inventory. This number directly impacts how much profit you make on each dish sold.
Here’s why it’s so important:
By understanding COGS, you can price your dishes right, decide on portion sizes, choose your menu wisely, and even bargain better with suppliers.
So, if you’re a restaurant owner, getting restaurant accounting services that understand COGS can be helpful.
Labor, occupancy, and operating expenses
When it comes to managing the accounts of a restaurant there are a few common expenses that need to be taken into account:
1. Labor
This category covers all the expenses related to your team, including salaries, benefits, and payroll taxes. Remember, these costs aren’t part of your Cost of Goods Sold (COGS). They’re separate because they’re not directly tied to producing your product or service.
2. Occupancy
This is the cost of having a roof over your business’s head. It includes rent or mortgage payments, property taxes, and utility bills like water and electricity. It’s essentially what you pay to keep your business’s doors open and lights on.
3. Operating expenses
These are the day-to-day costs of running your business. Think office supplies, marketing costs, travel expenses, and any fees or licenses your business needs to operate.
By breaking down these expenses, you get a clearer picture of where your money’s going, helping you make smarter financial decisions for your business.
Prime cost and cost-to-sales ratio
Two of the most important metrics in restaurant accounting are prime cost and cost-to-sales ratio.
1. Prime cost
Prime Cost is a simple concept in accounting for restaurants – it’s the sum of your Cost of Goods Sold (COGS) and labor costs. In other words, it’s the total cost of your raw materials and the wages you pay your team to turn those materials into products.
Now, why is this important – keeping an eye on your Prime Cost can help you identify opportunities to cut costs and maximize profits. If your Prime Cost is high, you might need to find cheaper suppliers or streamline your labor processes.
2. Cost-to-sales
On the other hand, the Cost-to-Sales Ratio gives you a bird’s-eye view of your business’s financial health. It’s calculated by dividing your total costs (including COGS, labor, and other expenses) by your total sales.
The lower the ratio, the better, as it means you’re spending less to make each sale. By understanding this ratio, you can see if your spending is in line with your sales and make adjustments if needed.
Inventory management and tip handling
Keeping track of inventory and managing tips are two crucial aspects of restaurant bookkeeping services – here’s why they’re so important:
1. Preventing waste
Regular inventory checks can help you spot items that are nearing their expiry dates, so you can use them up before they go to waste.
2. Reducing theft
Regular inventory management can deter staff from stealing, as they know you’re keeping a close eye on stock levels.
3. Optimizing ordering
By tracking what you use and when you can make smarter ordering decisions to avoid overstocking or running out of items.
4. Fair tip distribution
Proper tip handling ensures all eligible staff receive their fair share, boosting morale and reducing disputes.
5. Accurate reporting
Both inventory management and tip handling impact your financial reports. Accurate tracking makes sure you report your income and expenses correctly, keeping your business in good standing with the tax authorities. Restaurant bookkeeping services can help you in this process.
Profit and loss (P&L) Statements and cash flow management
Creating and analyzing profit and loss (P&L) statements is a key part of accounting for restaurants. These financial reports show your income, expenses, and net profit over a period.
They highlight financial strengths and weaknesses and can be used to make informed decisions about your business’s future.
Meanwhile, cash flow management is about timing. It ensures you have enough cash on hand to cover daily operations. It’s like choreographing a dance, making sure money comes in and goes out at the right time.
Both P&L analysis and cash flow management are vital services provided by accountants for restaurants or through restaurant consulting services. They help keep your financial health in check and your business running smoothly.
Accounting methods (cash-basis vs. accrual accounting)
1. Cash-basis
2. Accrual accounting
Accrual accounting, on the other hand, records income and expenses when they’re incurred, not when cash changes hands. This method is more suitable for restaurants because it accounts for all those boxes of ingredients in your storeroom.
Comparing cash-basis and accrual accounting
Cash-basis accounting records transactions when cash changes hands, while accrual accounting records income and expenses as they occur.
Accrual accounting works better for restaurants, especially those with a lot of inventory. It only counts the cost of ingredients when they’re used, not when they’re purchased.
This provides a more accurate depiction of a restaurant’s financial situation, ensuring costs and profits are accurately captured within a specific period.
Key financial reports
Let’s take a look at the key financial reports that are super important for running your business smoothly. You know, the ones that help you keep track of your transactions, forecast sales, budget effectively, and assess your overall financial situation.
Balance sheet
Balance sheets give a snapshot of your restaurant’s financial health at a specific point in time. It shows what you own (assets), what you owe (liabilities), and your net worth (equity). It’s a great way to see where you stand financially.
Income statement
Next, we have the income statement, also known as the profit and loss statement. This report shows your revenue, costs, and expenses over time. It’s your go-to report to check if you’re making a profit or running at a loss.
Cash flow statement
The cash flow statement, as the name suggests, tracks the flow of cash in and out of your business. It helps you see how well you’re managing your cash – crucial for paying bills and keeping your restaurant running!
The chart of accounts
The chart of accounts is like the backbone of your accounting system. It’s a list of all accounts – assets, liabilities, equity, income, and expenses – used in your business. It keeps your transactions organized and makes financial reporting easier.
Revenue reports
Lastly, revenue reports are very important for accounting for restaurants. They show your sales over a specific period, broken down by different categories like food type, day of the week, or even by waiter. They’re super helpful in identifying trends, forecasting future sales, and making informed decisions.
Key performance indicators (KPIs)
Key Performance Indicators are a big part of accounting for restaurants as they help measure the success and progress of your business – here are some common and important KPIs:
1. COGS ratio
The Cost of Goods Sold ratio – is a common indicator. It’s calculated by dividing your COGS by your total sales. It shows how much you’re spending on ingredients for every dollar you make in sales – a lower ratio usually means better efficiency.
2. Prime cost
Prime cost is another important one – it combines your COGS with your labor costs, which includes things like restaurant payroll services. To calculate it, just add up your COGS and labor costs – This KPI is crucial because these are the two largest cost areas for most restaurants.
3. EBITDA
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It provides a snapshot of your restaurant’s operational profitability by ignoring non-operating costs. It’s calculated by adding back interest, taxes, depreciation, and amortization to your net income.
4. Revenue per head
Revenue per head tells you how much revenue each customer brings in. Just divide your total sales by the number of customers. It’s a great indicator of how well you’re maximizing your revenue from each guest.
5. Net profit margin
Lastly, net profit margin shows what percentage of your sales is pure profit. You calculate it by dividing your net profit by your total sales and then multiplying by 100 to get a percentage.
Outsourced vs. in-house accounting
Outsourced accounting
Outsourcing accounting for restaurants means hiring external firms like restaurant payroll services to handle your financial tasks.
Pros:
- Saves time and lets you focus on running your business
- Provides expertise in the field of accounting and tax laws
- Cost-effective, as you don’t have to hire a full-time employee
- Access to advanced technology and software
Cons:
- Less control over the process and sensitive data
- Potential communication issues with an external firm
- Added cost for outsourcing services.
In-House accounting
Having an in-house accountant or accounting team means hiring someone to handle your financial tasks on-site.
Pros
- More control over the process and sensitive data
- Easy access to financial information and reports
- Quick communication and collaboration with other team members
Cons
- Cost of hiring a full-time employee or team
- Limited expertise in accounting and tax laws, unless you hire a specialist
- Potential for errors if the accountant is overworked or lacks experience
Which one to choose?
Deciding between outsourced and in-house accounting depends on your specific needs and resources. If you’re a smaller restaurant or just starting, outsourcing might be more cost-effective and less stressful.
As you grow, you might want to consider building an in-house team for more control and personalized service. Always make sure to do your research and evaluate your financials and needs before making a decision.
Common mistakes and software recommendations
Here are some common accounting mistakes restaurants make:
- Not tracking inventory properly: Restaurants deal with a lot of perishable items – not tracking inventory can lead to waste, theft, or spoilage.
- Ignoring labor costs: Many restaurant owners focus on food costs and forget about labor – but it’s just as important in your prime cost!
- Failing to reconcile bank statements: This is essential for catching errors or discrepancies early.
- Not utilizing POS systems fully: Many POS systems offer comprehensive sales reports – not using these is a missed opportunity for insights.
- Lack of financial forecasting: Many restaurant owners only look at past data – however, predicting future trends can help you plan and budget better.
Here is a list of the top 5 accounting software for restaurants
Each of these software offers features specifically tailored to the needs of restaurants, such as inventory tracking, menu costing, and sales forecasting. It’s important to research and choose the one that best fits your restaurant’s needs and budget.
For an in-depth look at some useful inventory management software, check out our guide to the best restaurant inventory management software.
In conclusion, proper accounting is crucial for the success of any restaurant. It not only keeps your finances organized but also provides valuable insights into the performance and growth of your business.
By hiring professional services and outsourcing or investing in reliable software, you can ensure accurate and efficient accounting for your restaurant.
At KPI Accounting, we offer specialized restaurant accounting services to help you make informed decisions and achieve financial success. Contact us and let us help you take your restaurant to the next level!
FAQs
How does accounting for restaurants differ from other types of business accounting?
Restaurant accounting involves specific practices like inventory management, daily sales reporting, and food cost analysis which may not apply to other businesses.
