It has been a challenging year (2020) for the restaurant industry. Congratulations if you are one of the many restaurant entrepreneurs who has made it through 2020 and more than halfway through 2021. Now you can focus on putting your culinary talents to use by preparing delicious meals for your customers who are eager to return. The last thing you want to worry about is dealing with the accounting practices of your business. But it is important to understand the many peculiarities that each sector of business must address and understand.
Accounting Methods
Cash method versus Accrual Method—what is the difference?
The difference between cash and accrual accounting lies in the timing of when sales and purchases are recorded in your accounts. Cash accounting recognizes revenue and expenses only when money changes hands, but accrual accounting recognizes revenue when it’s earned, and expenses when they’re billed (but not paid).
For a small restaurant, the cash method is generally the method of choice because it is simple to maintain. A customer dines in your restaurant, cash is received, it is deposited in the bank, and leaves the bank when bills are paid. There is no need to track accounts receivables or payables. You know exactly how much money is in the bank at any given time. Also, since transactions aren’t recorded until the cash is received or paid, the business’s income isn’t taxed until it is in the bank.
On the other hand, the accrual method records revenue and expenses when a transaction occurs rather than when payment is received or made. It allows for a different analysis of activity, shows a more accurate perspective of how expenses are incurred and income is generated, and how income compares to expenses. This method recognizes revenues and expenses in the same period.
Tips
Most restaurant employees work for tips, but a restaurant owner needs to understand how to factor tips into the accounting process. Tips are considered employee income, not restaurant income, and are not subject to withholding. However, your restaurant employees are required to report tips to you, the employer, and both of you are required to pay taxes on them—you just don’t need to report them as part of your restaurant revenue.
Types of restaurant expenses
As we have seen in recent days due to the pandemic, the cost of food for restaurants has been rising rapidly and the shortage of/competition for wait staff has forced the increase of hourly wages, to just be open for business. It is important to have a good handle on your expenses.
There are fixed and variable expenses. Fixed expenses include rent, mortgage payment, salaries for non-hourly employees, loan payments, license fees, routine maintenance on equipment, contracted ongoing marketing, and insurance premiums. These costs are easier to budget because they stay about the same each month.
Variable expenses include food, hourly wages, processing fees, and utilities. They are more difficult to budget because they change frequently. When budgeting use percentages instead of only a fixed dollar amount. Keep labor and food costs at 30% of sales each to remain profitable.
Inventory Management
Restaurants are a unique business because their inventory is perishable therefore it requires weekly monitoring.
An excellent way to increase profits is to lower the cost of goods sold. This can be done through proper management. Start by categorizing your food items such as meats, dairy, and fruits. Set a percentage for each food group, which makes it easier to manage. Minimize waste by measuring ingredients carefully and train staff accordingly. Using a little more than you need can add costs to the recipe ingredients. Just-in-time inventory also keeps down the holding costs and losses from outdated items. This takes pre-planning and a good understanding of how much inventory gets consumed.
Cash Flow and Profit and Loss Statements
Just as with inventory, weekly profit and loss statements and cash flow reports are a good idea for restaurants to help manage inventory.
Important Ratios
To be successful in the restaurant industry, restaurant entrepreneurs need to understand the relationship between the cost of goods sold and its menu price. This ratio will determine the profit of the menu item. As I mentioned above, a rule of thumb is that the food cost should be 30% or less. For example, if the ingredients for an 8 oz hamburger on a bun with lettuce and tomato cost $5, it needs to price at least $16.67 on the menu. Labor costs vary depending on if it is a fast food or a full-service restaurant. This runs from 25% to 40%.
Another important ratio is the revenue per seat. This is calculated by dividing the revenue from a given day by the number of seats. It is helpful when considering renovation or downsizing. If revenue per seat is lower on certain days or periods, consider closing an area to decrease the available seating in these periods. This would cut costs by decreasing staff requirements. Should your restaurant be filled, you would experience higher revenue per seat and would need to add seats and increase staff.
Should you need assistance in determining the best accounting method to use, the cost of goods sold, or key financial ratios for restaurants please call Felsing LLC at 407-412-9299. We are here to help.
Source: Business.com, Restaurant Accounting: How it’s Different, editorial staff, April 8, 2020; Bench, Cash Basis Accounting vs Accrual Accounting by Cameron McCool, July 10, 2021; Investopedia, Accrual Accounting vs. Cash Basis Accounting: What’s the Difference by Chizoba Morah, August 19, 2021.