Restaurant accounting is a topic most restaurant owners dread. All restaurant owners want to do is operate the restaurant and find ways to earn profit. But what if we tell you that restaurant accounting is an integral part in restaurant operations?
Hiring an accountant for your restaurant accounting will help with the books. However, the restaurant owner must also be aware of the figures and what it means for his restaurant. Even only understanding the basic accounting principles will help you manage the finances of your restaurant better.
Restaurant Accounting Must-Have Entries
Restaurant accounting is a deep dive on a restaurant’s finances. It analyzes your profit & loss statement, cash flow, and sales channels. A good grasp on accounting principles is key to operating a restaurant without problems.
These restaurant accounting terminologies are your line items in the P&L. Familiarity with these terminologies will help you understand the accounting process for each line. Meanwhile, let’s break down all of these terms from the top.
The bread and butter of your restaurant. The total amount of your sales figures is always at the top of your P&L.
Sales can be broken down into subcategories. Namely, operating revenue & non-operating revenue. Furthermore, operating revenue can be broken down into food sales, beverage sales, and retail sales. While non-operating revenue examples are interest from banks and investments.
Cost of Goods Sold
The total cost of all menu items is your COGS. The formula for computing COGS is as follows:
Understanding your COGS is essential. Above all, it directly determines a restaurant’s profitability.
Automatically totaling your COGS are some common mistakes restaurant accountants make. A better way to understand your cost of goods sold is to split them up. For instance, line items for your COGS can be Food COGS, Dessert COGS, Merchandise COGS, Liquor COGS, Beer COGS. The idea is to separate them because all of them have different COGS. Having them individually can help the restaurant owner set budgets for each line item.
Cost of Labor
The total amount spent on your employees is called labor cost. Also included in your restaurant’s labor cost are the payroll taxes and benefits of the employees. In addition, labor cost computations also include overtime pay, rest day premiums, night differential pay, and holiday pays.
Similar to COGS, breaking down your cost of labor into several categories can give you a better understanding of what happens with your employees. For example, you can split up regular employees and contractual employees. Similarly, you can also split it up by employees in the front of house and back of house. The way you split up the categories will vary per restaurant. In short, the goal for categorizing is so you can read and understand your P&L.
This is the total amount of your COGS and Cost of Labor. As an industry standard, a good prime cost for a restaurant is around 60%.
Want to know more? Read our article on how to calculate restaurant prime costs.
Fixed expenses and variable expenses are the two types of restaurant operating expenses. First, we’ll be discussing what fixed expenses are. These are expenses that stay the same for every period. Fixed expenses remain the same no matter how much sales you rake in. Some examples include rent expense, cost of labor, marketing expense, and utilities expense.
On the other hand, variable expenses change from time to time depending on certain factors. For instance, employee commissions/bonuses and government taxes are variable expenses because they rely on the sales amount of the restaurant.
Food Cost Percentage
This is a term that restaurateurs will encounter most of the time in the business. In short, food cost percentage is your cost of goods sold on food divided by your total food sales.
For example, ABC Burgers’ cost of goods sold on food for September was $350 and total food sales was $1,000. Simply divide $350 over $1,000 then multiply by 100 to get your food cost percentage. In this example, the food cost percentage for ABC Burgers’ in September was 35%.
Chart of Accounts
If you haven’t heard of the Chart of Accounts for restaurants before, it is simply a list that presents an overview of every area of your business. It tracks your restaurant’s financial performance by categorizing all financial transactions.
Looking for a template? Avail of our free Chart of Accounts for restaurants sample.
Restaurant Accounting Mistakes to Avoid
Mistakes are going to be made in this very complicated world of restaurant accounting. Restaurant owners must be aware of these common mistakes in order to avoid making them. Let’s go through them one by one.
Financial Statement Delay
Whether you do this yourself or you hire a professional to do it, it is a huge problem if you’re receiving or doing your financial statements 15-30 days after the reported month. Looking at delayed financial statements will only make you work backward. Avoid this mistake by requiring your financial statements within 5 days after the reported month.
Delay in Monitoring and Sending Restaurant Data
It will be difficult for you to send or input complete data when you only monitor once a month. In other words, you must monitor all necessary data on a weekly basis.
Aside from completing data, updating your metrics on a weekly basis can help you see if problems are arising in your store. Monitor your metrics regularly for the numbers to not go astray.
Mistakes are bound to happen when there’s a multitude of numbers involved. For example, entering an extra zero to a line item will make your entire calculations wrong.
To avoid such errors, make sure you double check every line item that you’ve put data in. If possible, use Excel formulas to minimize human error. Moreover, it is also possible to integrate an accounting software to the POS your restaurant uses.
Not Hiring a Restaurant Accountant
The restaurant industry is very complex. Their reports, metrics, taxes are different from other industries and hiring a generic accountant may not be as helpful. Therefore, hiring an accountant who specializes in restaurant accounting is your best option.
Restaurant Accounting Softwares to Use
The main purpose of using restaurant accounting software is to automatically track your income and expenses. In addition, using restaurant accounting softwares can inform owners or managers of their current financial situation.
There’s a lot of restaurant accounting softwares in the market. We’ve narrowed it down to what we feel like are the best options for restaurateurs.
QBO offers a wide array of features and is considered one of the best accounting softwares around. The only drawback is QBO is not catered to the restaurant industry. Therefore, it might take longer to customize for your restaurant.
QBO has top tier features such as payroll services, maximum tax deductions, inventory tracking, to name a few. The best part about QBO is that it’s easy to use for restaurant owners or managers with no experience at all.
Xero is a cloud-based accounting software that’s widely considered as an alternative to QBO. Similar to QBO, Xero is also not restaurant specific but has a wide array of features. Xero has payroll services and processing, inventory management, and a mobile app.
Restaurant365 is a cloud based SaaS that caters specifically to restaurant owners. It offers features that meet the needs of any type of restaurant. It doesn’t matter if you’re a full-service restaurant, quick service restaurant, kiosk, or a tea shop, Restaurant365 will make life easier for the owner.
Unlike its counterparts, Restaurant 365 does not offer payroll services. However, Restaurant365 is able to combine accounting with restaurant management tools. Creating invoices, purchase ordering, and employee scheduling are some of restaurant specific features that it has.
EagleOwl is a back of the office solution that’s meant to increase a restaurant’s profitability. The goal of EagleOwl is to bring your costs down so you can add more profits.
While EagleOwl does not have built-in accounting software, it is possible to integrate accounting softwares to it.
Restaurant accounting was once a very difficult task to deal with. But with the adaptation of accounting softwares by restaurants, it is now a thing of the past. Make sure you invest in the right people and tools so you can manage your finances efficiently.