The restaurant industry is ever-growing. Each year we see numerous restaurants opening up and then some fizzling out. A lot of websites claim that the restaurant closure rates are as high as 90% but this myth was busted by popular research that showed only 17% of restaurant startups failed in their first year.
But what ensures the success of the other 83%? It can’t be credited to blind luck that a restaurant manages to not just break even but also make decent profits. One of the major contributors to a restaurant’s success is its efficient financial record keeping that helps in reducing expenses and increasing profits.
No business can survive for long without keeping an eye on every expense and transaction being made. But for a restaurant, this becomes vital because even a single percentage of increase in expenditure can heavily impact the net profit. Considering the profit margins are razor-thin it only makes sense to track all the money that comes in and flows out of the restaurant.
This is where the Chart of Accounts comes to your rescue. If you’ve never heard of it, a Chart of Accounts for restaurants is a list that presents an overview of every area of your business. It tracks your restaurant’s financial performance by categorizing all financial transactions.
It takes into account the assets, liabilities, revenue, COGS, and expenditures incurred during a specific period. Think of it as a way of bookkeeping for restaurants that helps in keeping all the business accounts organized.
Imagine you have to prepare for an exam. The chances of you scoring high in that exam majorly depend on two things, how well you understand the topics and how well you convey it through your words in the exam. But if somehow you have very little clarity about what exactly is the syllabus for the exam, the chances of you passing it become dubious.
This is exactly what your restaurant is without a Chart of Accounts. You will have absolutely no idea about how to take your restaurant business to greater heights. With a Chart of Accounts, you get a crystal clear picture of your debits and credits. This not only makes it easy to identify problems but also serves as a foundation for accurate accounting for restaurants.
Elements included in Restaurant Chart of Accounts:
Now that we are clear about what a Chart of Accounts is, let’s study its main elements in more detail. A restaurant’s Chart of Accounts focuses on its revenue and the cost of goods sold to derive the gross profit. Once you have that information, you can list out all the expenses and deduct them to get your net profit. This familiarizes you with how well your restaurant is performing.
Let’s look at an example. We have provided only a few line items under operational expenses, add as per your actual spend.
|Gross profit (A)||6,36,000||63.60%|
|Salaries and Wages||2,10,000||21.00%|
|Repairs & Maintenance||11,000||1.10%|
|Total OpEx (B)||4,76,000||47.60%|
Within this Chart of Accounts for a particular month, we see the revenue at the top which serves as a starting point to obtain the monthly profit before taxes. The restaurant makes a sales of INR 10,00,000 from which we straight away knock off the COGS (cost of goods sold) to achieve the gross profits and then remove all the expenditures to achieve the net income for the month.
For the sake of simplicity, we have arrived at EBIT, or Earnings Before Interest, taxes. Your accountant can add in Depreciation and Amortization to arrive at EBITDA. So the Chart of Accounts becomes a comprehensive list of all the business accounts. Clearly, it is a great way to keep finances in check and find loopholes that are preventing your restaurant from making profits.
To start on the right foot, it is crucial to have exact figures of revenue and COGS. For this, you can use our restaurant management software that streamlines the process of inventory management and obtaining key financial metrics. It also provides valuable insights about lowering food costs which increases your profit margins.
Here is a sample Chart of Accounts you can use for your restaurant:
|Restaurant Chart Of Accounts : EagleOwl Sample|
|Account Number||Account Type||Account||Amount|
|1500||Asset||Cash in hand||$0|
|1700||Asset||Taxes & Licences||$0|
|2900||Liability||Outstanding Gift cards||$0|
|4700||Revenue||Net service charge||$0|
|6000||OpEx||Payroll : FOH||$0|
|6100||OpEx||Payroll : BOH||$0|
|6400||OpEx||Advertising & marketing||$0|
|6600||OpEx||Repairs & maintenance||$0|
|6700||OpEx||Travel & transport||$0|
Click here to download EagleOwl’s free sample of chart of accounts in Google Sheet format.
Let’s break down each element of the Chart of Accounts for better clarity:
Everything that a restaurant owns – be it kitchen equipment, vehicles, or inventory is considered an asset. Every asset, whether fixed or current, needs to be listed in the Chart of Accounts. Cash, petty cash, Accounts Receivable (A/R), food & bar inventory, property & equipment, vehicles, etc are all included under the Assets account.
In its simplest form, liabilities are something that your restaurant owes others. For instance, a loan can be termed as a liability as it decreases your restaurant’s financial health. Other common examples of liability for a restaurant are Accounts Payable (A/P), the company credit card, employee payroll & leaves, property rent & related taxes, and more.
Assets increase the restaurant’s value while liabilities reduce it. When you deduct the liabilities from the assets, you obtain the equity accounts. The capital contribution of all members is an example of equity. The owner’s equity includes common stock and preferred stock along with retained earnings.
The total income generated by the restaurant by the food and beverage sales is termed as its revenue. It sits at the top of the Chart of Accounts and refers to the restaurant’s total earnings for a specified frame of time. A restaurant could have multiple revenue streams and we take the sum of all the revenue streams.
COGS, or Cost Of Goods Sold, refers to the direct expense of creating everything that a restaurant sells. Essentially, it is the cost of ingredients that goes into creating and selling the menu items. It does not include packaging and distribution costs. A chart of accounts for restaurants on Quickbooks(QBO) makes it easy to get COGS at any time. Note that this line item is directly proportional to sales, i.e. not a fixed expense.
- Operational Expenses:
Your business spends a certain amount on a day-to-day basis to keep operations running smoothly. These are termed as an expense or Operating Expense or Opex. Examples of expenses include rent, electricity, staff salary, stationery, utilities, marketing, etc. Keeping tabs on expenses is the key to gaining a healthy profit. Note that some of these are fixed expenses.
Why Chart of Accounts are important
A big part of running a restaurant is keeping an eye on every aspect that spends or brings money. With multiple accounts and revenue streams, it can become overwhelming to understand how the money is getting spent. A Chart of Accounts helps you organize accounts and stay on top of things by monitoring every account associated with the restaurant.
Ajay Nagarajan, CEO of Total Environment Hospitality (Windmills, Oota) says, “I track my P/L every day. My salary expenses are higher than average. If I don’t control our COGS, I won’t make money.”
The best part is, most restaurant management softwares seamlessly integrate with accounting software like Xero, QBO, Tally, MYOB, etc for further processing of transactions. With their in-built Chart of Accounts, you can quickly get an idea about the restaurant’s accounts and financial health.
For instance, consider QBO which automatically creates a Chart of Accounts when you select the type of industry and company. You can then start entering the details of each account. For higher efficiency, make sure you classify all accounts. This makes a QBO Chart of Accounts a wise decision for restaurants.
A lot of restaurant owners focus heavily on the quality of food being served and the customer experience and assume this is enough to generate profits. While these are invaluable to ensure a successful presence, poor accounting practices can make you lose money quicker than you imagine.
There are 2 things that make restaurant success scalable. One is dedication. The other is EagleOwl all-in-one restaurant management software.