Restaurant Accounting Basics

Restaurant Accounting Basics
7shifts Staff

By 7shifts Staff

Restaurant accounting isn’t easy. It involves tracking massive amounts of real data and industry benchmarks. It even has its own language, KPIs, EBITDAs, and CoGs.

Sounds complicated? That’s probably because you’re hearing most of these words for the first time. 

Learning basic accounting is like studying a different language, regardless of how many decades you have in the restaurant industry. The accounting process will seem less daunting once you understand what you need to do, know, and watch out for.

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3 steps to get started with basic restaurant accounting

Before jumping right to the know-how, it’s essential that you understand the basics of restaurant accounting first. Here are four steps to help you get started:

Step 1: Learn your restaurant accounting metrics

There are lots of transactions that happen in your restaurant daily. With the mountain of data and numbers in your restaurant business, it is essential that you know which ones to track so you can assess your business's performance and the effectiveness of your strategies. 

By tracking metrics like customer retention and employee turnover rate, contribution margin, and menu item profitability, restaurant managers can identify each area’s strengths and what areas need improvement. Use this data to establish clear and specific goals and adjust your strategies as needed. 

Step 2: Look for a trustworthy restaurant accountant

Even if you already know the restaurant bookkeeping and accounting process well, we suggest hiring a professional accountant to help ensure your business complies with local tax, payroll, federal, and state laws. 

When hiring restaurant accountants, your primary consideration should be those who understand the complexity of the food and beverage industry—both front-of-the-house and back-of-the-house operations and management. 

The reason is simple: you know the ins and outs of your business, and your restaurant accountant should, too. 

Remember that the laws are ever-changing, and it pays to work with a restaurant accounting professional who is always up-to-date with the latest promulgation. This will enable them to adjust your business practices or apply the necessary changes to your payroll or taxes if needed.

Note that the professional fees you will pay to the accounting professional you hire should be included in your restaurant costs

Step 3: Find a reliable restaurant accounting software

Restaurants should use reliable accounting software that can help streamline their data entry tasks, track revenue, create custom invoices, generate regular P&L statements, and review the inflow and outflow of money in their business.  

The ideal restaurant accounting software should also be user-friendly, especially for beginners. Look for tools that showcase features specifically tailored to the restaurant industry. This includes tolls with payroll management features, sales and expense tracking, budget forecasting, and report generation, to name a few.

Key accounting metrics restaurant owners need to track

Familiarizing yourself with the data that accountants and restaurant accounting software track will help you better understand your restaurant’s financial health. 

Below are some key restaurant metrics you should be tracking for your restaurant:

Cost of goods sold (COGS)

The cost of goods sold refers to the amount it costs to produce an item on your menu. This number is essential because it helps you determine the price of your food and beverages. As a rule, this should make up about 1/3 of your total expenses. 

In other words, the COGS directly impacts your net profit margin.

To calculate this, use the formula: Cost of Goods Sold (COGs) = Beginning Inventory + Purchased Inventory - Ending Inventory

Gross profit & gross profit margin

Your gross profit and gross profit margin help you track how much money you're making after deducting your Cost of Goods Sold. This can be either in the form of a whole number or a percentage.

To keep your restaurant in good financial standing, you should aim for at least 70%. This means that you get to keep $0.70 for every dollar you earn.

To calculate this, use the formula: Gross Profit = Total Revenue - CoGS

You may also use this formula to calculate the percentage: Gross Profit Margin = (Gross Profit / Total Revenue) x= 100

Customer retention rate

Customer retention rate is all about your restaurant's ability to keep your existing customers. 

The formula is: Customer Retention Rate = [ (# Customers at End of Period - # Customers Acquired During Period) ÷ # Customers at Start of Period) ] X 100

This metric measures how effective your strategy is in making your customers happy and ensuring that they come back. 

Customer acquisition cost (CAC)

CAC is used by restaurants to measure the effectiveness of their marketing efforts, whether they're advertising on social media or utilizing coupons, deals, and local print ads. 

To calculate CAC, use the formula: Customer Acquisition Cost = Marketing Expenses ÷ Total New Customers

It's important to track this metric to ensure that the marketing budget you have allotted is well spent. 

Table turnover rate

The table turnover rate refers to the number of times you have served new customers at the same table.

Here's how to compute this metric: Table Turnover Rate = Parties Served ÷ Number of Tables

Suppose you discover that your table turnover rate is low. In that case, you should devise strategies to increase your kitchen's efficiency, deal with "campers" who occupy your tables for too long, or even extend your operating hours.

Average cover or average revenue per guest

The restaurant's average cover is about the time a customer spends dining in your restaurant over a certain period.

To calculate this metric, use the formula: Check Average = Total Sales ÷ Number of Covers (guests in a given period, e.g., daily, weekly, hourly)

Experts at Toast stressed the importance of tracking this metric: "By tracking the number of customers throughout each day, you can staff accordingly – and hopefully, avoid over or understaffing." 

This is especially helpful so you know exactly how many employees to add during peak seasons like Christmas and how many employees you need during off-seasons to avoid overstaffing.

Average customer headcount

The average customer headcount is typically used to determine your restaurant's busiest times and days. This is one of the easiest metrics to track, as no computation is required.

You can view the number of customers who placed orders during specific times by checking your POS and filtering it by day, week, month, and year.

Knowing your average customer headcount could be especially useful in adjusting your strategies, like deciding whether to buy more ingredients for your recipes on a certain day. 

Revenue per available seat hour (or RevPASH)

RevPASH helps restaurant owners determine whether the seating space in their dining area is utilized well to generate maximum profit. This means that the higher the RevPASH is, the better the restaurant's standing.

“Time, not food, is the ultimate perishable inventory,” Sheryl E. Kimes, the Emeritus Professor of Operations Management at the Cornell University School of Hotel Administration and the inventor of this metric, once shared. “Food can be frozen and kept intact indefinitely, but once the time is gone, it’s gone.”

To calculate your restaurant's RevPASH, use the formula: Total Outlet Revenue / (Available Seats x # of Total Hours Your Restaurant Is Open)

Revenue per square foot (or Sales per Square Foot)

Knowing your sales per square foot can help you determine the efficiency of your operations by considering the size of the space you own. This can help you decide whether to pursue expansion or modify your strategy to earn as much money as your space can provide.

To calculate revenue per square foot use: Sales Per Square Foot = (Annual sales) ÷ (total square feet of restaurant)

A full-service restaurant should aim for $150 per square foot and limited-service restaurants should target at least $200 per square foot. Meanwhile, fast-casual restaurants should aim for about $500 per square foot because while they are smaller in size and overhead cost, they have much higher foot traffic.

Employee turnover rate

How often are your employees leaving their positions? Whether it's due to quitting, termination, or retirement, the employee turnover rate aims to answer this question.

To calculate this metric, use the formula: Employee Turnover Rate = (Employees Departed ÷ Number of Employees) x 100

Knowing this metric can help you address any underlying issues and work on a strategy to retain your current employees because the restaurant industry has a high turnover problem (and you don't want to be hiring and training new employees every week).

Labor cost percentage

Knowing the labor cost percentage estimates how much money your business spends paying its staff compared to the sales it generates over time. This metric helps you measure the amount spent on labor, particularly salaries, worker benefits, insurance, overtime, and payroll taxes. 

To calculate this, use the formula: Labor Cost Percentage = (Total Labor Cost ÷ Total Revenue) x 100

As a general rule, your labor cost percentage should be lower than 30%. TouchBistro stresses how the importance of this figure can help restaurant owners determine whether or not their food prices need to be adjusted.

Once you’re familiar with your labor cost percentage, you can decide whether you need to increase the price of your food to support your labor costs.

This means your labor cost percentage shouldn't be too high, as you might not be able to sustain it financially, or too low, as you might end up being short-staffed because you can't keep up with current demands.

Overhead rate

The overhead rate is a metric in restaurant accounting that includes various operational expenses such as utilities, rent, administrative costs, insurance, license, and depreciation. Calculating it can help you devise competitive strategies by ensuring that the operational costs are carefully factored into the pricing structure. 

Lisa Thompson, a Financial Consultant, says that this rate is essential for understanding the true costs of operating a restaurant business. "It not only guides cost control measures but also aids in formulating competitive pricing strategies, making it a cornerstone of financial success in the industry."

To compute the overhead rate: Overhead Rate = Total Indirect Costs (for a specific time period) / Allocation Measure (for the same period)

Prime cost

Prime costs include the two largest expenses you have direct control of: food and labor. If either of these costs is too high, your restaurant will lose money.

The great news is that these expenditures can also be controlled by optimal scheduling and inventory control measures. Ideally, you’ll want this to be close to 60%.

To calculate this, use the formula: Prime Cost = Cost of Goods Sold + Total Labor Costs 

Food cost percentage

According to Toast's Restaurant Success Report, about 52% of restaurant professionals say that high operating and food costs are among their top challenges. 

The food cost percentage metric in restaurant accounting measures the difference between the costs of producing an item and how much it is priced on the menu. As a guide, your food cost percentage should be around 30%

To calculate this, you can use the formula: Food Cost Percentage = Total Cost of Food and Beverages / Total Revenue

Contribution margin

Contribution margin is all about measuring profitability for each item on your menu. This could be especially helpful when pricing your food and beverage offerings and determining whether you're making enough money to cover expenses like salaries and rent.

To calculate this metric, use the formula: Contribution Margin = Selling Price – Food Costs

Inventory turnover ratio (ITR)

The inventory turnover ratio measures how often your inventory has sold out during a specific time period. This can help you decide how much inventory to buy so you can avoid over-stocking ingredients (to avoid spoilage) or under-stocking them.

To calculate ITR, use the formula: Inventory Turnover = COGS / [ (Beginning Inventory + Ending Inventory) / 2] 

Menu item profitability

This restaurant accounting metric considers the popularity of a specific item on your menu, the cost to produce it, and its selling price to rank its popularity. This can help you decide whether to keep or remove the item from your menu or whether to retain, increase, or decrease its price.

To compute this, use the formula: Menu Item Profitability = No. of times a specific item was sold x The item's price - (No. of times a specific item was sold - The cost to make it)

Break-even point

Break-even point measures how much money you need to pay for the expenses you incur in your restaurant and still turn a profit. If you're not consistently exceeding your break-even point, you're not earning any money.

To compute this, use the formula: Break-Even Point = Total Fixed Costs ÷ ( (Total Sales - Total Variable Costs) ÷ Total Sales)

Earnings before interest, taxes, depreciation, and amortization (EBITDA)

Reporting financial performance is essential to evaluating whether your restaurant is profitable and running efficiently. The EBITDA is an important metric that can help you with this since it represents your earnings from your core operations.

To calculate the EBITDA, follow these steps:

  1. Calculate your total revenue for a given period of time (could be for the quarter or for the year)

  2. Subtract your restaurant's operating expenses (labor and food costs) from your total revenue to come up with your business' operating income

  3. Add back non-cash expenses like amortization and depreciation.

Net profit margin

Your net profit margin represents the amount left over after accounting for your allowable business expenses or operating expenses like rent, labor, utilities, repairs and maintenance, and COGS.

To compute this metric, use the formula: Net Profit Margin = (Gross Sales - Operating Expenses) / Gross Sales

Knowing your net profit margin can help you decide whether you should reduce your expenses or expand your business.

Best accounting software for restaurant owners and restaurant managers

Using restaurant accounting software ensures accurate data recording and timely payroll and tax processing. Not only that, thanks to new advancements in technology, you can also closely forecast your sales in the coming months based on your historical and current data.

Here are some of the best accounting software for restaurant owners so you can take your finance management to the next level:

For overall restaurant accounting and inventory planning: Microsoft Dynamics 365 Finance

Microsoft Dynamics 365 Finance is all about utilizing AI, automation, and analytics to optimize your financial operations and restaurant accounting reports.

More importantly, this restaurant accounting software can assist you in managing your inventory levels, tracking your stocks, and automating the order process. Real-time access to your stock levels and usage can help you optimize the amount of inventory you order from suppliers to reduce waste due to overstocking supplies.

It’s a little expensive, but this accounting tool is highly recommended for restaurants with huge operations. If you’re looking to access only selected features, you can enjoy them for a slightly lower price. 

Price: Dynamics 365 Finance - $180 per user/month, Dynamics 365 Finance Premium - $300 per user/month

For managing payroll and bookkeeping: Quickbooks

Keeping track of what should and should not be included in computing restaurant payroll is time-consuming, and doing it manually can lead to mistakes. This is where accounting software like Quickbooks comes in.

Quickbooks has almost every essential feature your restaurant business needs to keep its books straight. It imports and organizes transactions (sales income and expenses), automates your bookkeeping process, and assists you in creating general reports like a balance sheet and Profit and Loss statements. 

You can also add automatic payroll processing as an additional feature and take advantage of their live-assisted bookkeeping, which is free for 30 days. They also advise using a paycheck calculator to ensure your employees are paid correctly. 

Annual Plans: Simple Start - $15/month, Essentials - $30/month, Plus - $45/month, Advanced - $100/month

For money tracking and budgeting: Freshbooks

Approximately 30 million people use Freshbooks, and restaurant owners are among them. 

Freshbooks can help you set up automated payment options (like recurring billings) to track expenses with the option to snap and forward receipts to your email.

It also has a feature to assist you in tracking every dollar that comes in and out of your business and utilizing double-entry accounting tools.

The best thing is that you can easily merge your restaurant's POS data with FreshBooks, so you won't have to worry about the tedious process of transferring your data.

Price: Lite - $9.50/month, Plus - $16.50/month, Premium - $30/month

For simplifying accounting processes: Sage50

Formerly known as Sage50Cloud, Sage50 is a restaurant accounting software that simplifies basic administrative processes like financial management and invoicing to more complicated processes like payroll and accounting tasks. 

It boasts of its general ledger outlier detection (all thanks to the power of AI), interactive reporting tools, automatic updates, multi-dimensional reporting, and consolidation, and it is HIPAA-compliant and AICPA-preferred. 

The best thing about Sage50 is that it doesn't limit its users to a one-size-fits-all approach. Instead, restaurant owners can choose the in-class systems that fit their needs and connect their restaurant systems seamlessly to this tool.

Price: Pro Accounting - $595/user/year, Premium Accounting - $970/user/year, Quantum Accounting - $1,610/user/year

All-in-one accounting tool: Xero

Xero is an all-in-one accounting tool for restaurants of all sizes. It can integrate apps that can streamline and compile all your data, manage your fixed assets, auto-calculate sales tax, manage payroll, and more. 

Xero's flexibility and user-friendly interface make it a favorite among cafe and restaurant owners. 

The best thing about this accounting software is that they have an online community consisting of accountants, customers, and bookkeepers who share expert advice, help other customers with any problems they might encounter, and vote for new product ideas. 

Price: Early - $6/month, Growing - $16.80/month, Established - $31.20/month

Conclusion

Restaurant accounting is a challenging but necessary task. Understanding the basics can help you navigate the ins and outs of this essential process to help you make important business decisions, like deciding whether to expand your business or hire additional staff.

When looking for accounting software to use, you should choose the one that suits your business's specific needs and can be easily integrated with restaurant management software to streamline your processes and improve efficiency.

This is where 7shifts comes in. This all-in-one tool can easily be integrated into most restaurant accounting tools so you can simplify your shift scheduling, payroll management, team communication, and the generation of financial reports.

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7shifts Staff
7shifts Staff

7shifts team of writers and experts in the hospitality industry.