Smart Restaurant Accounting Tips for Effective Management
As a restaurant manager, you have to keep a lot of balls in the air. You have to deal with suppliers, manage a staff, serve clients, and keep an eye on your finances. Managers also have to address employee turnover and training issues, a process which can feel overwhelming. How can you effectively manage your restaurant’s accounting process?
The key is to have a plan and to know which accounting reports are most useful for your business. Use these restaurant accounting tips set up a system, establish useful reports, price your product and prevent employee theft.
Understanding the Accounting Cycle
For starters, you need to understand how the accounting cycle works, so that you can set up systems to generate your financial statements. Now, restaurant accounting does require a time investment, and it’s essential to post transactions quickly and not fall behind. Consider using technology to work more productively, and hire an accountant to review your monthly activity and your financial statements.
Your accounting process is a cycle because it repeats every month and year. At the beginning of the next month, you gather a new set of source documents, and the process starts over.
Here are the four steps in your restaurant’s accounting cycle:
Your first task is to gather and file vendor invoices, receipts, and other paperwork that documents your business transactions. These source documents support the accounting activity that you’ll post each month. Assume for example, that your restaurant receives a $500 invoice from your meat vendor.
Next, you’ll use the source documents to post accounting transactions using a journal entry, which includes the date, dollar amount, accounts, and a description of the transaction. When you write a $500 check to pay the meat vendor, you’ll increase the inventory- meat account, and reduce the cash account for $500. The entry will include the date and a brief description, such as “paid invoice for the purchase of meat.”
As you post accounting entries, you’ll want to periodically check and see how the transactions are impacting your business. A trial balance is a list of each account, with the account number and the current balance. Business owners generate and scan the trial balance, to get an overview of their financial condition. If you pay several invoices for meat purchases, for example, the trial balance will report a significant increase in the inventory-meat account.
Creating Financial Statements
At the end of each month, you’ll produce a trial balance, make some adjustments to ensure that the report is correct, and use the adjusted trial balance to create the financial statements.
How Three Important Reports are Connected
Accounting software allows you to produce dozens of different reports, and proactive restaurant managers know which are the most useful for their businesses.
There are three reports, however, that every business owner should review, and you need to understand how these reports are connected. You can use them to make improvements to your business over time. Use them to monitor spending, manage inventory, increase sales, and generate higher profits.
The balance sheet reports your restaurant’s assets, liabilities, and equity as of a specific date. Assets are resources that you use to generate revenue, such as furniture, ovens, and refrigerators. Liabilities include your accounts payable balances, and possibly a bank loan balance. The difference between assets and liabilities equals equity, which is the real value of your business.
The income statement (or profit and loss statement), lists your revenue (sales), expenses, and net income for a specific period, such as a month or year. Net income (profit) in the income statement increase the equity balance in the balance sheet. Many restaurant managers consider this report to be the most important.
Cash Flow Rollforward
No business can operate without sufficient cash inflows, and managers need to forecast these inflows and outflows every month. You can monitor them by maintaining a cash flow rollforward, which lists the beginning balance in cash, expected cash inflows (customer sales), cash outflows (inventory purchases, payroll) and the ending cash balance by month. The ending balance in the January balance sheet is your beginning cash balance in your February cash rollforward.
Smart Pricing Decisions
Pricing your menu items can be challenging because you must compete with other restaurants, and address changing customer preferences. However, you have to price your food and drink offerings to cover all of your costs and expenses to generate a reasonable profit. Use the break-even formula to make informed pricing decisions.
Here’s the break-even formula:
[(Sales price per unit) x (Units sold)] – [(Variable cost per unit) x (Units sold)] – (Fixed costs in total dollars) = $0 Profit
You can use the formula to analyze your entire restaurant, a particular menu category (appetizers, soups, etc.), or a specific item on your menu. You can change any of the variables to perform “what if” analysis and change the profit to a particular dollar amount goal.
Assume, for example, that you want to generate $50,000 in profit from your entrée menu items, and that the average entrée sale price is $15. You estimate variable food costs of $9 per entrée, and the fixed costs that you must cover (payroll, insurance, building lease, etc.) total $100,000.
Here are the number of entrees you must sell to generate $50,000 in profit, assuming that X represents entrees sold:
$15 sale price (X) – $9 variable cost per unit (X) – $100,000 fixed costs = $50,000 profit
$6X = $150,000
X= 25,000 entrees
If your restaurant is open 300 days a year, you must sell over 83 entrees a day to reach your $50,000 profit goal.
Why Restaurant Budgeting is Important
When you create a restaurant budget at the beginning of each year, it forces you to make assumptions about your sales prices, total sales, costs, and other factors. At the end of each month, you should compare your actual results to your budge. From there, you can investigate any differences between budgeted and actual results.
Assume, for example, that you budget meat and fish costs to be 15% of your monthly sales. You review your results at the end of January and note that meat and fish costs were 22% of your total sales.
The higher cost may be due to your vendor charging more per pound, or because your staff is using more meat and fish than you budgeted. You can use this information to negotiate lower prices from your vendor or to train your staff to use the proper amount of meat and fish.
Creating a budget requires effort, but comparing your budgeted and actual results can help you make smart business decisions to increase profits. And this can be done by keeping a close eye on your restaurant accounting.
Preventing Restaurant Theft
Perhaps no business has a more significant risk of employee theft than a restaurant, and you can take steps to reduce the risk.
Your restaurant may have dozens of employees who serve hundreds of customers each month, and your business must process a large number of relatively small transactions, including many cash sales. This volume gives employees a chance (or at least, the temptation) to steal cash or to fraudulently process a payment on a customer credit card or debit card.
Put these systems in place to reduce the risk of theft. Note that you must explain these processes to your staff, and you must sufficiently train your servers to comply with these requirements.
Reconcile your bank account immediately after your bank statement is available online. Knowing your reconciled bank balance is the starting point for monitoring cash activity.
Credit Card and Debit Card Receipts
Compare each day’s credit card and debit card receipts to your online bank activity. This step helps to ensure that each customer payment has posted to your bank account.
Point-of-Sale (POS) Systems
Review the activity for each POS system in your restaurant every day. The cash, credit card, and debit card sales posted to the POS system must match up to the ending cash balance and card receipts.
Use Systems to Improve your Business
Creating systems for your restaurant accounting can help you manage your business, generate higher profits, and reduce the risk of employee theft.
You can leverage technology by using accounting software, and effective POS systems. Payroll can be a time-consuming task for any business, so consider getting outside help to process your payroll. Work with an accountant who can review your accounting transactions and prepare your tax returns, including your sales tax calculations.
Use these restaurant accounting tips to manage and grow your business effectively.
Planning your restaurant finances is a big job, but it shouldn’t be overwhelming. Read our piece on how to on the five leading restaurant expenses and how to proactively manage them.
Ken Boyd is a 4-time Dummies book author, including the book Accounting All-In-One for Dummies. He is a contributing writer to the QuickBooks Resource Center, and several other publications. Ken’s video work can be found on LinkedIn Learning, creativeLIVE, O’Reilly Media and Dummies.com.