To have a successful restaurant, you need to do more than just serve delicious meals. You also need to implement the proper accounting practices to ensure financial stability and growth.
So, how can you effectively handle your restaurant’s finances to ensure its success and profitability?
Well, everything you need to know about restaurant accounting is right here in this guide.
Let's dive in!
Restaurant accounting is a specific form of accounting that caters to the restaurant industry. It involves recording, tracking, and analyzing financial transactions specific to restaurants. Accounting usually takes place quarterly or annually.
With the data provided by restaurant accounting, owners can ensure the establishment’s efficient operation, compliance, and profitability.
While both restaurant accounting and bookkeeping are crucial for financial health, they play distinct roles. Here’s a breakdown to ensure your restaurant’s finances are in top shape:
Think of restaurant bookkeeping as the meticulous record-keeping that lays the groundwork for informed financial decisions. Bookkeepers meticulously track the daily transactions that keep your restaurant running:
To sum up, restaurant bookkeeping focuses on daily and short-term financial activities, providing real-time data for decision-making.
Restaurant accounting builds upon the foundation laid by bookkeeping, transforming raw data into actionable insights. Accountants are the financial detectives who analyze, interpret, and translate the numbers into a story that helps you steer your restaurant towards success:
Restaurant accounting goes beyond the basic principles of bookkeeping and requires a unique approach due to several key factors:
Unlike most businesses, restaurants grapple with tip management. Whether you choose tip pooling, server splits, or cash vs. paycheck tips, ensuring employee satisfaction while maintaining accurate financial records and payroll taxes is a delicate balancing act.
The ever-evolving tipping landscape adds another layer of complexity. Some restaurants are opting to raise wages and eliminate tipping tipping altogether, requiring adjustments to accounting practices.
Similar to other businesses, restaurants manage raw material inventory that gets transformed into finished products (delicious meals!) However, restaurant inventory management is often on overdrive.
Frequent inventory counts (daily, weekly, or monthly) are crucial compared to quarterly or annual counts in other industries. This meticulous tracking ensures accurate cost of goods sold by reflecting the beginning and ending inventory values for specific periods.
Regularly generating profit and loss (P&L) statements is a recipe for success in the restaurant industry. Knowing your restaurant's performance not only on a monthly basis but also weekly, provides valuable insights.
This week-to-week view offers a clear picture of your sales and cost trends, empowering you to make informed decisions about menu pricing, staffing, and overall cash flow management.
While many businesses operate with monthly accounting periods, restaurants benefit from a weekly schedule. This offers several advantages:
The recommended method utilizes the 52-week 4-4-5 or 4-5-4 calendar.
This divides your year into four quarters, each consisting of thirteen weeks. Two quarters (4-4-5) use two four-week periods and one five-week period, ensuring a balanced annual representation.
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Weekly accounting periods require special considerations for monthly or annual expenses like rent, utilities, or restaurant software subscriptions.
To avoid reflecting the entire cost in a single week, utilize prepaid accounts. For instance, a yearly software subscription can be divided into twelve equal portions, with each week reflecting a portion of the expense.
Let’s understand this with an example:
Imagine your restaurant pays an annual subscription of $1,440 for a restaurant management software. With weekly accounting periods, reflecting the entire cost ($1,440) in a single week would distort your financial picture.
Here's how prepaid accounts help spread the cost evenly:
This weekly adjustment gradually reduces the balance in the "Prepaid Restaurant Software" account. By the end of the year (52 weeks), the entire $1,440 will have been expensed through weekly adjustments, accurately reflecting the software cost throughout the year.
Restaurant deliveries might not always be perfect. Spoiled items or discrepancies with invoices necessitate vendor credits.
These credits require adjustments to your invoice totals. You can either “short pay” the vendor (pay the adjusted amount) or pay the full amount and account for the credit later. Regardless of the method, proper documentation is vital to ensure accurate reconciliation of monthly vendor statements.
The age-old question: Should you handle your accounting in-house by hiring an accountant or outsourcing it to a professional accounting firm? Here’s a breakdown of both approaches to help you make an informed decision:
Advantages:
Disadvantages:
Advantages:
Disadvantages:
The best option for your restaurant depends on various factors, including:
It's not a one-size-fits-all decision. Weigh the pros and cons carefully to determine if in-house accounting or outsourcing best aligns with your restaurant's needs and growth goals.
Restaurant accounting helps ensure a restaurant's long-term success. Here are some of the key benefits of using good restaurant accounting practices:
Restaurant accounting gives clear visibility into the restaurant's financial performance, helping owners and management make more educated choices to maximize profitability.
Effective restaurant accounting helps ensure the proper tracking and management of costs related to food, labor, utilities, rent, and other operating expenses. That ensures effective budgeting, forecasting, and variance analysis to identify cost-saving opportunities, reduce waste, and improve overall cost-efficiency.
Accounting in a restaurant ensures the creation of detailed financial reports. Consequently, it helps facilitate adherence to tax legislation and regulations and helps a restaurant identify tax liabilities, eligible deductions, and credits.
Restaurant accounting offers the tools, insights, and data required to monitor expenditures, income, budgeting, inventory, and debt, among other areas. Addressing these areas may improve cash flow.
Now let's talk about the two common accounting methods used in restaurants:
Cash accounting ensures the documentation of revenue at the moment the restaurant receives the money.
This method is simple and suitable for small eateries or companies with simpler financial processes.
It doesn’t matter if the actual exchange of money hasn’t occurred yet. In accrual accounting, you record the transaction as soon as it happens.
The cash method is available to most businesses, with a few exceptions. Here's a breakdown:
To use the cash method, corporations and partnerships (excluding tax shelters) must have average annual gross receipts of $26 million or less (adjusted for inflation) over the past three tax years.
Calculating Average Annual Gross Receipts:
You can typically use the cash method if your average falls below the threshold.
Businesses that exceed the gross receipts test ($26 million or less, adjusted for inflation) lose eligibility for the cash method in any given year. They must switch to accrual accounting starting in the year they fail the test.
To make this change, Form 3115 needs to be filed with the IRS. For further details, refer to the Instructions for Form 3115.
For more information on Accounting Periods and Methods, please refer to IRS Publication 538.
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Running a restaurant is no small feat. Between managing staff, maintaining quality control, and keeping customers happy, finances can easily become an overwhelming aspect.
That's where a qualified accountant comes in–a financial partner who understands the unique challenges of the restaurant industry and helps you navigate the complexities of bookkeeping and financial management.
Here's a breakdown of how to find the right accountant for your restaurant:
For a more detailed breakdown of How You Can Hire the Right Accountant for Your Business, read our detailed guide by CFO Andrew Lokenauth.
Keeping your financial books balanced can feel more complicated than cleaning up your kitchen after an entire day’s service. This is why finding the right accounting firm becomes crucial–they’ll ensure your finances are in order, helping you to maximize profits, stay compliant, and make smarter decisions.
The good news? Fyle makes finding the perfect fit easier! We've partnered with several accounting firms specialising in restaurants. These partnerships streamline the process, allowing you to:
Let Fyle connect you with the right accounting partner so you can focus on your business's delicious side. Check out our accounting directory now!
To manage restaurant finances, use these accounting reports:
Profit and Loss Statements (P&Ls) or Income Statements summarize the restaurant's income, expenditures, and net profit or loss for a certain period (monthly, quarterly, yearly, etc.).
Restaurant owners and managers may use it to assess profitability, spot patterns, and make smart financial choices.
P&L covers food, beverage, and other service revenues and all operational expenditures, such as food, labor, rent, utilities, marketing, etc.
The cash flow statement provides a comprehensive overview of the cash inflows and outflows resulting from various activities, including operations, investments, and financing, during a given time frame.
The cash flow statement encompasses various sources and uses of cash, such as sales, payments to suppliers and vendors, payments to employees, cash from loans or investments, and other cash transactions.
Restaurant owners and managers can use it to track cash flow, identify patterns, and keep enough cash for immediate and future financial obligations.
The balance sheet offers a comprehensive overview of the restaurant's financial standing at a particular moment, displaying its assets, liabilities, and equity. Here is a list of what it includes:
The balance sheet provides restaurant owners and managers with valuable insights into the restaurant's financial health, allowing them to evaluate its liquidity, solvency, and overall financial stability.
Revenue reports require the calculation and analysis of different financial ratios, including gross profit margin, net profit margin, return on investment (ROI), and inventory turnover.
This report allows restaurant owners and managers to assess the establishment's financial performance, efficiency, liquidity, and profitability. It also helps them compare the restaurant's performance to industry benchmarks and pinpoint areas that need improvement.
Here are some key performance indicators every restauranteur should track:
COGS is the direct cost of the ingredients you use to prepare the dishes you sell. Think food, beverages, and any other supplies used to create menu items.
A healthy COGS indicates you're pricing your menu effectively and controlling your food and beverage costs. A rising COGS could signal areas for improvement, like negotiating with suppliers or adjusting portion sizes.
Use the formula: COGS = Beginning Inventory + Purchases – Ending Inventory.
For example, if you start March with $12,000 in inventory, purchase $5,000 in supplies, and have $7,000 remaining at the end of the month:
COGS = $12,000 + $5000 - $7,000 = $10,000
The COGS ratio reveals the percentage of your sales that goes towards COGS. Divide your COGS by your total sales for the period. Monitoring this ratio helps identify any significant cost increases.
Prime Cost builds on COGS by adding your labor costs (wages, salaries, benefits) to the COGS amount.
Prime cost represents your two biggest restaurant expenses—food and labor. Monitoring it allows you to manage these costs effectively and ensure profitability.
Ideally, your prime cost ratio (prime cost divided by sales) should fall between 55% and 60%.
EBITDA provides a clearer picture of your restaurant's operational performance. It reflects your earnings from core business activities before considering financing decisions (interest, taxes), non-cash accounting adjustments (depreciation, amortization), and capital expenditures.
EBITDA helps assess your restaurant's profitability on a more fundamental level. This is crucial for making informed decisions like buying, selling, or investing in a restaurant.
Revenue per Head, also known as sales per head or average ticket, tracks your average customer spending.
Monitoring revenue per head allows you to:
Net Profit Margin reflects your profitability as a percentage of your total sales. It essentially reveals how much profit you earn for every dollar of revenue.
A higher net profit margin indicates effective menu pricing, controlled food and labor costs, and a healthy bottom line.
Your restaurant's profit margin is its earnings after costs. Thus, it shows how well your restaurant converts revenues into profit.
Profit margins in the restaurant industry may vary significantly due to factors such as the restaurant's type (e.g., fast-food, casual dining, fine dining), location, size, level of competition, and overall business model. Typically, restaurants see a Gross Margin of 32.43% and a Net Margin of 10.66%.
(Source: New York University)
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Let's go over some steps that form part of a good restaurant accounting workflow:
Appropriate restaurant accounting software can facilitate financial management and tax compliance.
Thus, do your research on trustworthy and easy-to-use restaurant accounting solutions. Ideally, you want a system that can handle your financial management needs, from creating invoices to generating reports.
Before making a final selection, use free trials, demonstrations, or pilot programs provided by software vendors to evaluate the software's functionality and compatibility with your restaurant's requirements.
For a more detailed review of restaurant accounting software, refer to our guide on Accounting Automation.
You’ll need to set up a chart of accounts. A chart of accounts allows you to break down all your restaurant’s financial activities during a period into specific categories.
Here is a basic example of restaurant accounting:
In general, your restaurant's chart of accounts will have at least seven categories. They include assets, liabilities, equity, income, cost of goods sold, costs, and others.
To help you organise and report, each account and subaccount within the chart of accounts may need to be assigned a unique account number or code. You can use generative AI to automatically generate these account numbers based on specific criteria such as account type, department, or location.
Your multiple point-of-sale systems can provide more financial data to analyse for accounting purposes. After all, this is where your customers consummate their purchases.
So, make sure you integrate your accounting software with POS devices like your restaurant card readers and barcode scanners.
Integrate the software with your eCommerce payment solutions as well. You want to be able to capture important financial data when customers are using your online ordering services. Don’t forget to use the fastest website hosting to deliver a smooth customer experience to customers online. That’s the only way they’ll push through with the digital payment process in the first place.
With your accounting software’s integration with relevant systems, you won’t have to manually input financial data into the accounting solution for analysis. You can ensure the automatic transmission of sales, inventory, and financial data to the software.
Don’t just rely on your POS systems to collect restaurant sales data. You’ll need to track your daily sales manually, too. With this check and balance strategy, you further ensure the accuracy of your financial data for accounting purposes.
Apart from ensuring accurate financial data collection, daily sales reporting helps your business by:
That said, establish a separate daily sales reporting process. You can use a template you or your manager can just fill out at the end of every business day. Then, reconcile the data you manually gather with the data in your POS system. Make the necessary data updates in your POS system (or your manual sheet) if necessary.
Restaurant inventory levels are the amount and value of food, drinks, supplies, and other products in stock. They help ensure your restaurant can meet customer demand while effectively managing costs.
You or your manager can use digital spreadsheets or inventory management software to track inventory levels. You can also forecast inventory requirements using past sales, seasonal patterns, and forthcoming promotions and events.
Finally, confirm inventory levels with regular physical inventory counts. These counts should be done during off-peak hours to avoid restaurant disturbances.
Complying with tax requirements, like VAT and HMRC compliance, protects your restaurants from fines, audits, and legal concerns.
So, keep up with changes in tax laws, rates, and filing requirements to guarantee correct and timely compliance. Also, maintain comprehensive and structured financial records, including income, spending, sales receipts, invoices, payroll records, and tax returns.
Restaurants often operate on tight margins, so streamlining any process that involves money can have a significant impact. Tracking all your expenses ensures financial transparency, cost management, and profitability.
While you can construct a restaurant-specific chart of accounts to classify spending, selecting tools like Fyle that automate expense management and integrate with your accounting tool can help you in the following ways: