- Restaurant Accounting and Bookkeeping Basics
- Restaurant Accounting Resources
- Restaurant Accounting Key Metrics
- Restaurant Bookeeping Reports
1. Restaurant Accounting and Bookkeeping Basics
Your love of cannolis may have gotten you into the restaurant business, but the only thing that’s going to let you stay there is being able to pay the pastry chef and for all that delicious ricotta. Because behind every good business is great accounting.
You need to know where money is being spent and exactly how much, the sources of your revenue, and how much income is needed in order to turn a profit.
The end goal -- more money is coming in than going out – is simple, but getting there is much more complex. Restaurant accounting involves tracking massive amounts of real data as well as industry benchmarks. It has its own language of KPIs, EBITDAs and CoGs. In the end, accounting is not only incredibly time-consuming, it’s also time-sensitive. And it’s dependent on 100% accuracy as one wrong decimal point can sink your books.
Take a deep breath: there’s help out there. Because accounting is such a complex, detail-oriented process, you can outsource the job to professionals such as accountants and bookkeepers, and you can automate some of it with accounting software. But even with these resources available, any restaurant operator worth their salt has to first understand the core concepts and key terms involved in accounting.
We know that keeping tabs on your operation’s financial health is just one of the many plates you have to keep spinning as a restaurant operator so we’ve created this guide to restaurant accounting.
2. Restaurant Accounting Resources
Bookkeepers vs. Accountants
You’re probably thinking it’s time to call in the professionals. But do you need to seek out a bookkeeper or a Certified Public Accountant? Bookkeepers can assist you in tracking your data, keeping records and ledgers of specifics such as accounts payable, payroll, etc.
Meanwhile CPAs are trained to provide in-depth operational analysis and tax consulting. You can seek out CPAs via small or large accounting firms or hire an independent accountant on a part-time basis. Whichever route you choose, find a CPA that has experience in the industry because restaurants have their unique accounting needs. (For instance, restaurants are the only type of small business that has occupancy expenses as a category on their income statements.)
If you don’t know where to start your search, ask for recommendation from fellow restaurateurs who have had success with bookkeepers and accountants in their business. You could also check with online directories of CPAs that allow you narrow your search by industry and location. Next, you’ll want to meet with a handful of accounting professionals to discuss their industry-related experience, business strategies as well as fees before choosing the CPA that’s best for your operation.
Fortunately some of the grunt work of accounting can be automated through software that tracks and generates reports of accounts receivable and payable, banking, payroll, and inventory management.
You’ll want to consider whether it’s important for the program to be accessible online from any location or from your smartphone, how intuitive it is to use, and whether it can integrate with your restaurant’s POS system and other software that manages scheduling. You’ll also want one that connects to your business bank account and can automatically import your transactions each day so you don't have to perform this task manually.
Don’t know where to start? Some popular accounting software include Microsoft Dynamics, Quickbooks, Xero, Wagepoint, and Sage 50. Your selected CPA can also help direct you towards the best accounting software for your business. Lastly, check in with your peers in the industry to find what software is working well for them.
3. Restaurant Accounting Key Metrics
It’s time to familiarize yourself with the kind of data that accountants and accounting software will track and analyze in order to get a picture of your restaurant’s financial health. In the next section, we’ll go over how these key performance indicators (KPIs) are used in various reports that can help fuel your business decisions. Spoiler alert: It involves plenty of math.
Acquisition: Understanding How You Acquire Customers
- Customer Retention Rate: Are you attracting enough repeat business?
- Customer Acquisition Cost (CAC): How much does it cost to attract new business?
Revenue: How Exactly Are You Generating Income?
- Table Turnover: How many times in a given time period are you serving new customers at the same table? To calculate, divide the number of customers served by the number of seats available. (e.g. If you served 60 guests over an evening and the restaurant has 30 seats, the table turnover would be 2.)
- Time per Table Turn: How long are guests seated?
- Average Cover (aka Restaurant Revenue per Seat): This measures how much one customer typically spends per server. To calculate, divide a server’s total meal sales by the number of guests served. This can help pinpoint those who need more training on upselling.
- Average Customer Headcount: This breaks down the amount of customers served in a given period of time. It can help forecast more accurate staffing or opportunities to acquire more business.
- Revenue per Available Seat Hour (or RevPASH): This breaks down the amount of revenue generated by each seat. To calculate, find the total seat hours (available seats multiplied by total hours open). Then divide the day’s total revenue by seat hours.
- Revenue per Square Foot (or Sales per Square Foot): Take your annual sales total and divide it by your restaurant’s square footage. This can help identify whether you’re as profitable as possible and any opportunities for expansion or a new location.
Expenses: Pull Back the Curtain, Know Where You’re Spending
- Employee Turnover Rate: How often are employees leaving their position? To calculate, divide the number of employees who left (or were let go) in a given period by the total number of employees and multiple that number by 100 to get your turnover rate percentage.
- Labor Cost Percentage: This measures how much of your revenue is spent on labor, including salaries and wages as well as workers’ compensation, benefits, taxes, and insurance. To calculate, divide your total sales for a given period by your total labor costs for the same period. (If you notice too much overtime expenses, consider automating overtime alerts via scheduling software. If you have a chain of operations, scheduling software can break down labor costs and total sales by location.)
- Overhead Rate: This is the amount you’re paying for fixed costs and operational expenses (rent or mortgage, utilities, property taxes, licenses, fees, and permits) in a given period of time. To find the rate, add up all your monthly fixed costs and divide that total by the hours you are open in a month.
- Cost of Goods Sold (CoGS): This is the cost required to make each menu item you sell. To calculate, add the dollar value of your beginning Inventory to any purchases during the period and then subtract the value of your inventory at the end of the period.
- Prime Cost: This is the sum of your labor costs plus your cost of goods sold (CoGS), including all food and liquor costs. To find your prime cost ratio, divide your prime cost by your total sales and multiple by 100. Ideally, you’ll want this to be close to 60%.
- Food Cost Percentage: This measures the difference between what it costs to produce an item and its price on the menu. This can be helpful is setting menu prices as industry standards dictate that your food cost percentage should be around 30%.
- Contribution Margin: This is the revenue leftover after the cost of ingredients has been subtracted on an item. To calculate, simply subtract the cost of ingredients for one serving from the selling price.
- Inventory Turnover Ratio (ITR): This is a measurement of how often you have sold out of total inventory during a period of time. To calculate, divide your CoGs by your average inventory (found by adding your beginning inventory to your ending inventory and then dividing by 2). Knowing this number can help prevent over- or under-stocking.
- Menu Item Profitability: This metric takes into account a menu item’s popularity, cost to make, and selling price to rank its profitability. To calculate, multiple how many of the item was sold by the item’s price. From that subtract the total when you multiple how many of the item sold by the cost to make.
- Break-Even Point: This number is how much revenue you need to earn to cover your expenses. To calculate, subtract your total variable costs from your total sales and then divided that total by your total sales. Use this number to divide into your total fixed costs to find your break-even point.
- Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): This represents earnings that are a result of operations only. As this is a very complex topic, read a longer breakdown here.
- Net Profit Margin: This is a measurement of what is leftover after you account for all operating costs, including CoGS, labor, rent, equipment, and utilities. Subtract your operating expenses from your gross sales and then divide this total by gross sales.
- Gross Profit & Gross Profit Margin: This measures what’s left after you subtract CoGs from your total revenue. It shows you how much you have left to pay rent, labor, and other overhead expenses.
4. Restaurant Bookeeping Reports
Although you may be tempted to let the experts and computer run your restaurant’s accounting system, as the operator, you need to understand your own bookeeping basics.
- Profit and Loss Statement: Also known as a P&L, income statement, statement of earnings, or statement of operations, this presents your revenue, food costs, labor costs, and operating expenses in a given period of time. In short, they show your revenue minus your expenses so you can figure out in your in the black or in the red. They often include columns to compare the current period to same period in the past or to compare actual totals with what was budgeted. The P&L Statement in central to figuring out ways to cut cost or improve revenue.
- Daily Sales Report (DSR): This shows how much you made and comped in a day. Your day’s total settlement amounts (cash and credit card deposits, gift certificates redeemed, coupons, etc.) are subtracted from the day’s total revenue (food and beverage sales, gift cards sold, etc.) The resulting total shows whether you are over or short on cash for the day.
- Chart of Accounts: This is a snapshot that lists your various accounts such as assets, liabilities, , revenue, expenses, and equity. Each section can be further subcatorized into meat, alcohol, labor, etc. This chart can give you a sense of your restaurant’s financial health at a glance to quickly see how the restaurant makes and spends money.
- Cash Flow Statement: This keeps a ledger of how cash is coming in and how it’s is going out. It can show you whether you’re able to generate enough positive cash flow to maintain or grow your operations or whether you should seek external financing.
- Balance Sheet: Also called a Statement of Financial Position or Statement of Assets and Liabilities, this lists your assets against your liabilities to find net worth.
- Revenue Report: This presents your total revenue by a set period of time and can be drilled down by food or beverage and average by customer or table. It’s typically used to attract investors and estimate sales targets and projections.
- Controllable Costs Report: This lists expenses you can control such as food and beverage inventory and labor. It is used in calculating Prime Cost.
- Start Up Costs: This report tracks both your one time and recurring costs to see how you’re spending your capital when launching a new restaurant. Find a helpful worksheet here.
The End of The Beginning
We hope we’ve helped you understand the essential principles, terminology, and applications of restaurant accounting. At this point you should be better equipped to find and communicate with an accountant on your restaurant’s financial health.
You’ll also be able to see how accounting software can take over some of the daily, weekly, and monthly number-crunching so you can get back to those tasty cannolis.