Operating a restaurant is a dream for many, but there’s a lot more to it than meets the eye. There are far more restaurants and food-related businesses that fail than succeed, and that’s frequently because entrepreneurs spend more time focusing on front of house operations and food preparation than on the business and accounting side. Though it is not the flashy side of the business, accounting and bookkeeping is just as important as your menu, décor, and presentation, especially with the typical narrow profit margins seen in the restaurant business.

To make your success more likely, take the information provided below to heart. Even better, get professional assistance from our office.

See Relax Tax’s Debt Guide at relaxtax.com/debt

Establishing a Smart Restaurant Bookkeeping Process

• Get help

The most important thing to do is hire a bookkeeper if you don’t know what you’re doing when it comes to restaurant bookkeeping – and preferably one who has specific experience in food and beverage accounting. The more your bookkeeper knows about the specifics of cost of goods sold, front-and-back-of house operations and inventory management, the better.

• Arm your bookkeeper with the tools that they need

This usually means purchasing a special software package that has been written with restaurants in mind. The more particular the package is, the easier it will make everybody’s life. Look for a program that allows you to make customized invoices, generate profit and loss statements, track your revenue, and review cash flow. It is also important that you can generate customized reports to track trends and that the program is cloud-based so that you can access the information on demand.

• Categorize your cash flow with a chart of accounts

An experienced bookkeeper’s first step is likely to be setting up a chart of accounts that will track assets, expenses, liabilities, revenue, and equity, then break those categories down further into the various specific areas that are most important for you to keep track of.

• Select a Point-of-Sale system that works for your environment

Retail operations have been transformed by state-of-the-art point-of-sale systems that tie every aspect of the business together. A robust program will do far more than generate receipts or place orders with the kitchen: it will also help with inventory management and tie into your sales reporting. System selection should be based on more than bells, whistles and capabilities. You also want to make sure that your entire team finds it intuitive and easy to work with.

See this related post from Dennis Harabin: As the Pandemic Continues, Managing Restaurant Cash Flow Becomes Critical

Cash flow has always been a challenge for restaurants, and before COVID-19 changed everything there were thousands of articles written about the importance of forecasting, streamlining overhead, and controlling inventory. But more than a year-and-a-half into the pandemic, more than 110,000 restaurants have closed their doors permanently. Those restaurants that survived (and even thrived) in the face of closures, reduced seating, and staffing shortages went beyond traditional cash flow strategies, finding ways to reduce costs, expand sales, and pivot their entire menu. With reports of variants squashing hopes of a true return to normal, here are some of the cash flow management strategies that have helped other restaurants expand their clientele, pay their bills, and keep their doors open.

Keeping Your Eyes on The Right Information

Food businesses have many different metrics that need to be tracked so you can have a clear picture of what is happening, where things are working well and what needs to be improved. The most important aspects of your business that you need to track include:

• Inventory – Having an inventory management system will help you understand what is selling and what isn’t, as well as calculate the right pricing for items that are selling well. By tracking ingredients and supplies, you can take advantage of discounts, order using economies of scale, and avoid waste.

• Sales – Revenue is one of the most important aspects of running any business, and when it comes to restaurants it is essential that you know how much you are bringing in from different areas of your business, whether that is liquor and beverage sales as compared to food, dinner as compared to lunch and breakfast, or from catering as compared to in-house dining.

• Cash Management – Tracking cash coming in as compared to going out is the key to keeping your business afloat. It needs to be done every day, then repeated on a weekly and monthly basis so that you understand how your sales are trending and how to schedule your bill payments.

• Accounts Payable – Though paying vendors may be a struggle, especially at the beginning, making sure that you are doing so on a timely basis will ensure that you will continue getting the high-quality supplies that you need, when you need them. The best way to keep track of your liabilities is in your accounting software, which will help you schedule payments in a way that meets your obligations while also maximizing your cash flow.

• Payroll – One of the most important aspects of any restaurant’s success is the quality of their employees, both in the front of the house and in the back, but keeping track of payroll can be a challenge. Different staff members get paid on different wage structures, and there are complicated tax processes that are involved as well. With an estimated ten percent of the American workforce made up of restaurant employees, there are plenty of tools that have been developed to ensure that those 14.7 million working in the industry are getting paid the way that they should and that you are tracking them, whether they are part-time, full time, hourly, or salaried. 

• Reconciliation – Reconciliation is the process of making sure that you have everything in your business operations and financial management properly accounted for, including your credit card bills, loans, bank accounts, and payroll.

Reporting and Analysis

If you are new to the restaurant business, there are specific calculations that you will need to make based upon the various reports and financial statements generated by your bookkeeper or accountant. Careful analysis of these calculations will provide you with invaluable information from which you can make decisions. They include:

• Cost of Goods Sold – This metric tells you what it is costing you to make the food that you are selling. You can calculate it by adding your initial inventory to your purchased inventory and then subtracting your existing inventory. As you can see, in the restaurant business costs are entirely based on the supplies and ingredients that are needed for the items that you are selling to your customers. This means that taking inventory is one of the most important tasks you will perform. It must be done regularly, and it must be accurate.
  
  
• Prime Costs — This metric accounts for both your cost of goods sold and what you are paying to operate your restaurant in terms of labor, including wait staff, bar staff, administrative staff and kitchen staff. The figure you use for labor costs should reflect wages, payroll taxes, and benefits, as well as any other employee-related expenses. Though each business is different, the rule of thumb for restaurants is that total labor costs should represent less than one third of your total revenue. If it is more, you may want to evaluate how much you are spending in each of the labor areas and assess the real value. 

• Food Costs — This is different from cost of goods sold, as it is reflected as a ratio that divides that number by what you are able to sell the prepared menu item for. To determine your total food costs, divide your cost of goods sold by your total revenue and then multiply by 100.
• Overhead – These are the rent, electricity, and other expenses that are fixed costs of running your business. You can add them up and break them down as narrowly or as broadly as you’d like, as some costs are billed monthly and others are daily. Knowing what you are on the line to pay regardless of how business is doing is essential.

• Gross Profit – When you have calculated all of your expenses and all of your sales, you can determine what your gross profit is by subtracting expenses from total sales. 

See this related post from Dennis Harabin: How The Ordering App ‘Toast’ Helped Restaurants Survive and Thrive

Restaurants and other hospitality businesses were among the hardest hit during the pandemic, and even as infection and hospitalization rates wane, many consumers are hesitant about returning to their pre-pandemic activities. Despite these challenges, businesses have managed to survive and thrive with the help of innovative technologies like Toast, a restaurant-only software solution that addresses point of sale, restaurant operations, kitchen dashboards, online ordering and delivery, and marketing. Though created years before COVID-19 as a means for improving operations, the product has helped restaurants large and small to adapt, minimize contact, improve overall service, and boost profitability.

There is no doubt that tracking the nitty gritty of expenses and income is not the most fun part of owning a restaurant, but without doing so you are asking for financial trouble in the future. If you prefer to have somebody else take care of this aspect of your business, it will allow you to focus on the part of the industry that you love: the food, the service and the customers. For information on how our firm can help you with this, contact us today at 551-249-1040.

 Do you have some questions? Dennis Harabin at Relax Tax can answer them!

Recommended Readings: 

•  Tax Considerations for New Businesses
• The Importance of Estimating Start-Up Costs Before Launching A New Business
• When Is Your Business No Longer a “Startup”?
• Top Marketing tips for getting your business noticed
• What You Need to Know Before Starting Your Own Business