You’ve heard the stats – restaurants can have high failure rates. And while offering great food and service is one essential aspect of staying afloat, a great financial strategy is as important (if not more important) in helping your restaurant become successful and maintain that success. Here is our expert guide on the essential accounting principles and tips every restaurant owner should know.
Do you want to see your restaurant thrive in the long term? Contact us at Financial Optics for expert accounting solutions!
Principles of Accounting for Restaurants
Accounting is accounting, right? Actually, accounting for restaurants is quite different from accounting for other industries. That’s one reason it pays to work with an accounting firm that has experience with and a deep understanding of restaurant accounting.
What are accounting principles? They are simply the rules companies must comply with in their financial reports. You can read our blog to learn about general Small Business Finance Basics. Here are some of the basic accounting principles you should know and how they relate to restaurants.
Accrual Accounting for Restaurants
Although other industries use either cash or accrual methods, these types of accounting can play out a little differently for restaurants. You might get by with the cash basis method, which keeps track of the money that changes hands. Many restaurant owners do just that. For some restaurants, it makes sense. After all, most of your customers pay you on the day they visit your restaurant. Some restaurants never have to deal with accounts receivable, although there are exceptions, such as catering contracts.
At the same time, dealing with employees on the cash method can be tricky and often ends up generating sloppy or incomplete accounting. Cash-basis accounting gives you less information to go on when making decisions for your restaurant. In reality, the cash method is best suited to one-person operations without employees. And if you plan on building your reputation and clientele, that’s not really going to be your situation for long, if ever.
The accrual method is required after a certain level of revenue. However, even if you don’t bring in that much (yet), you may want to consider the accrual method for your restaurant. In fact, we at Financial Optics only work on the accrual method of accounting for our restaurant customers.
The accrual method is usually more accurate and detailed. Because of this accuracy, you can easily pinpoint your gross profit margins, expenses and income, how each is generated, and how they compare. The accrual method streamlines analysis so that you know exactly where the money is coming from and going. Still, the accrual method is more complex and sometimes difficult to use without the help of local or remote outsourced accounting services.
Before you decide between using the cash or accrual method going forward, it’s a good idea to get an expert opinion. At Financial Optics, you can get financial advice for small business owners or even hire a virtual CFO to help you make the right choices. You can also learn more about the Accrual vs. Cash Basis of Accounting in our blog.
Managing Inventory in Restaurants
Restaurants are businesses that have inventory. Yet, a good deal of your inventory is used up each day you are open. Unlike many other companies, you cannot get by with checking inventory once a month or quarter. You need weekly inventory management. Our Financial Optics accounting services can help you understand how to track your inventory. We understand and use the right technology to help with real time profitability analysis. Remember, you will also track food that is spoiled, which can often help you make better purchasing decisions as you continue.
Accounting for Your Employees’ Tips
In nearly all restaurants, servers and sometimes others receive tips. That is the employee’s money. However, you do have to track it. Why? It’s because your employees will need to report tips to you so that you can pay your required share of the taxes on them. There are also some tax credits available to restaurants based on your expense for the employer side or payroll taxes. It all requires the correct understanding to keep you in compliance and out of hot water with the IRS.
4 Accounting Tips for Restaurant Owners and Managers
Here are some tips you can put into practice with the help of outsourced accounting services. Because accounting for restaurants needs to be managed differently from many other types of business, the more you know about your industry and accounting for restaurants, the better able you will be to guide your team to higher profits.
1. Choose your accounting periods wisely.
As a restaurateur, you have some options on how to set up your accounting periods. For most restaurants, the ideal choice is a four-week period rather than a monthly or quarterly accounting period. Why? Unlike many other types of companies, restaurants tend to do more business on a certain day of the week, usually Friday or Saturday.
By choosing the four-week option, you have the same number of Fridays or Saturdays in each accounting period. Therefore, you can compare year to year to see your progress more clearly. You can also set up weekly or biweekly accounting periods if it makes more sense for your restaurant.
2. Customize your chart of accounts.
Your chart of accounts is a tool that allows you to look at all the accounts in your business and helps you understand specifically where all the transactions are happening throughout your business. It might sound like a boring, generic document to some.
However, when it is customized to your restaurant, it can give you the information you need to make pricing changes, manage payroll expenses, cut overhead expenses, and build profits. With an accounting service to help you, you can have a chart of accounts that shows what’s going on in your unique business in ways that are easy for you to see and respond to in a timely fashion. When you can clearly see where you are now, you will likely get more excited about your accomplishments and goals. That’s when growth happens.
3. Keep an eye on your prime costs.
Always know what your prime costs are. The prime cost equals the cost of the food plus the cost of labor to make and serve the food. In other words, prime cost includes all the money spent to serve your customers – both direct costs of food and other ingredients and the indirect costs of labor.
When you know what your prime costs are, you can work towards finding lower-cost ways to produce the same high-quality dining experience. In addition, you can compare the prime costs to the revenue from those items so that you know which are more profitable.
4. Know your restaurant ratios.
Ratios are used in business accounting to understand your costs and revenue. Two of the ratios you need to be very familiar with in the restaurant industry are the following:
- Food and beverage expenses-to-sales ratios tell you what your profits are from each dish you serve.
- Revenue per seat tells you whether it would be advantageous to expand, renovate, or downsize your restaurant space.
Financial Optics can show you how these ratios work in your unique restaurant and advise you on changes you might want to make.
Financial Optics and Accounting for Restaurants
Restaurants that want to thrive, grow, and get the best profits from what they do can benefit from professional guidance. An outsourced accounting services firm like Financial Optics can help you achieve a greater level of success. We are here for you, whether you choose our outsourced bookkeepers, a virtual CFO, or need help with financial advice for small business owners. Our team has the expertise to help you manage your restaurant in ways that bring both financial and personal satisfaction!
Could your business exceed your greatest expectations? Contact us to find out how Financial Optics can help you make it happen!