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Accounting for Restaurants


With the financial pressures on food service businesses in today’s highly competitive marketplace, comprehensive and accurate financial reporting systems are essential for your restaurant’s long-term success and stability.

The National Restaurant Association estimates that last year U.S. consumers spent $997 billion at restaurants, including dining out, takeout, and delivery services. Today, there are nearly 750,000 businesses in the food service industry. This means your restaurant likely has a lot of competition.

According to the National Restaurant Association, 90% of food service businesses have fewer than 50 employees, and 70% are single-unit operations. Small businesses tend to be particularly vulnerable to cash flow shortages and economic uncertainty.

Restaurants that survived the pandemic have largely returned to pre-pandemic sales and employment levels, and they’re positioned to grow. However, operating a successful food service business remains challenging. The average life cycle for a restaurant is only five years, with 90% of new independently owned restaurants failing within the first year of opening. In addition to adjusting menu prices for rising costs and managing labor and supply shortages, owners must constantly stay atop fickle consumer tastes, discretionary spending trends, health and safe regulations, and labor laws.

Accurate, timely financial data can help you make the business decisions necessary to address these issues and not just survive but thrive.

Food service businesses, whether independent or franchised, face unique operational and financial challenges.

The industry is as varied as the food and beverages served. It includes full-service and quick-service restaurants, bakeries, catering companies, personal chefs and more.

This industry offers an opportunity for people with limited financial resources to become entrepreneurs. However, restaurant owners typically work long hours, and their workweeks can often be unpredictable. Inventory spoilage, seasonal fluctuations in demand, and worker absenteeism and turnover are ongoing challenges that can increase workloads and cause cash flow shortages.

Restaurants often lack comprehensive in-house bookkeeping and accounting expertise, and many turn to external specialists for help with their unique operational and financial reporting challenges.

That’s where Padgett Advisors comes into play. We specialize in providing bookkeeping and accounting services for restaurants. We can help manage the financial side of your business, allowing you to focus on providing customers with the quality food and drink, appealing atmospheres, and level of service they crave.

Among other things, a well-designed restaurant accounting process can help you:

  • Make informed business decisions;
  • Maximize profitability;
  • Reposition menu options and revise pricing;
  • Manage point-of-sale (POS), payroll, accounts payable and inventory systems;
  • Evaluate leasehold improvement projects; and
  • Comply with applicable labor and tax laws, as well as the financial requirements of franchise agreements, if applicable.

To learn more, reach out to your local Padgett office

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Outsourced bookkeeping

Bookkeeping for restaurants can be time-consuming for your back-office staff. Our bookkeeping specialists can handle these administrative chores directly for your restaurant on a weekly or monthly basis — or temporarily if your existing general manager unexpectedly leaves. However, many owners prefer to monitor key performance metrics — such as sales and prime costs — daily to mirror how credit card transactions are processed. We can set up daily reporting processes to help you identify and fix operating problems before they spiral out of control.

The use of a trusted specialist in restaurant accounting gives you the peace of mind of knowing that sales, payroll, inventory and supply purchases, leasehold improvements, and other financial transactions will be recorded in the appropriate general ledger accounts with detailed, accurate descriptions. Invoices should also be reconciled to purchase and receiving orders prior to payment to ensure you don’t lose track of short pays and vendor credits.

These tasks can alleviate headaches when it’s time to prepare your year-end financial statements and income, sales, and payroll tax returns. If your restaurant operates as a general or limited liability partnership or a limited liability company with multiple owners, effective bookkeeping throughout the year will also make K-1 form preparation easier.

Preparation of monthly and year-end financial statements

Comprehensive financial statements include three reports: 1) the income statement, 2) the balance sheet, and 3) the statement of cash flows. These provide an overview of your restaurant’s financial health.

We can issue financial statements for your restaurant that comply with U.S. Generally Accepted Accounting Principles. Alternatively, some small food service businesses may prefer to issue cash-basis or tax-basis financial statements. We can help you determine what’s appropriate for your current situation, including any financial reporting requirements called for under franchise agreements (if applicable).

Interim operating reports

Year-end financial reporting isn’t enough for most food service businesses due to the cyclical and seasonal nature of the industry. Effective restaurant accounting requires analyzing financial performance on a regular basis to maximize profits, identify operating inefficiencies, and pivot as needed. Interim reporting can also help you identify the need for a line of credit to temporarily cover operating expenses. We can identify key metrics to help food service operators monitor financial performance on a real-time basis using daily, weekly, needed or monthly flash reports.

  • Sales of food/beverage/gift cards/merchandise;
  • Sales by register/server/shift;
  • Cash/credit card sales;
  • Dine-in/takeout/delivery/third-party delivery sales;
  • Average ticket sales (also known as sales per head);
  • Prime costs;
  • Cost of goods sold by food and beverage category;
  • Plate costs by recipe;
  • Sales to labor costs;
  • Gross margin;
  • Breakeven sales;
  • Earnings before interest, tax, depreciation and amortization (EBITDA);
  • Available cash balances;
  • Inventory waste and spoilage;
  • Outstanding accounts payable;
  • Short pays and vendor credits; and
  • Return on investment (ROI) for promotional campaigns and capital investment projects.

Menu pricing

Rising operating costs have prompted food service operators to increase prices in recent years. Costing data is a key ingredient to setting appropriate prices. Close attention should be given to your restaurant’s prime costs, which include:

1. Direct labor. This is the amount you pay to front-of-house staff and the kitchen crew, including payroll taxes, paid time off, and benefits.

2. Cost of goods sold. This term refers to the food, beverage, and dry supplies that are consumed by your customers. Today, most restaurants invest in computerized inventory systems to track items purchased and used in their daily operations, as well as write-offs. Cost of goods sold equals your beginning inventory plus purchases minus ending inventory.

Gross margin is the difference between your restaurant’s sales and its prime costs. However, this metric, which is often reported as a percentage of sales, tells only part of the story. It’s also important to factor overhead costs into your menu prices.

Restaurants operate on slim margins. The National Restaurant Association reports that the pre-tax profit margin for a small restaurant typically ranges from 3% to 5%. Each of the two components of prime costs accounts for an average of 33 cents of every dollar in sales. Other expenses — including rent, utilities, marketing, insurance, and other operating costs — generally account for 29 cents of every dollar in sales.

Costing studies can help you engineer menu pricing that covers plate costs and other expenses, thereby maximizing your profits. This can help reduce the need to combat inflation by other means, such as taking on additional debt, delaying vendor and supplier payments, cutting staff, or postponing necessary equipment purchases and leasehold improvements.

Payroll and tips management

Food services businesses employ roughly 10% of the U.S. labor force, according to the National Restaurant Association. However, paying workers and reporting payroll taxes and benefits can be tedious for food service businesses, because they have many different types of compensation arrangements. Many workers are hourly and part-time, but managers may be salaried.

In addition to paying wages, most restaurants operate on a tipped structure. There are a variety of methods of tip handling, including tip pooling, split tips, or tips by paycheck vs. cash tips. We can help evaluate whether your current tip-handling method makes sense — or whether it should be simplified for your convenience or otherwise revised to keep your front-of-house staff happy. In fact, some restaurants are choosing to increase wages and doing away with tips.

It’s important to stay atop developments in national, state, and local labor laws that apply to your business, especially if you operate in more than one location. Many restaurants outsource payroll to a third-party provider, but compliance is ultimately the owner’s responsibility.

Capital investment decisions

The condition of your restaurant’s property and equipment is critical to its success. Food service operators must continuously evaluate their fixed assets — and make needed replacements and improvements — to stay competitive.

More than half of restaurants currently have short-term plans to make capital improvements, according to the National Restaurant Association. Whether you want to update your restrooms, expand your lease to an adjacent space, or buy new tables and chairs, you’ll need to invest a substantial amount of capital to get the job done. Our restaurant accounting specialists can help you evaluate the return on leasehold improvements or expansion plans before work begins. We can also handle accounting for fixed assets and help you claim valuable tax breaks, including Section 179 deductions and bonus depreciation.

Budgets and forecasting

Historical financial results may be used to project how your restaurant will perform in the future. We can prepare budgets and forecasts to help determine whether you have the space, menu options, equipment, and staffing to meet future demand, as well as identify competitive threats and growth opportunities in your local market. These reports can also be useful when applying for bank loans, expanding your existing space, or opening a new location.

Throughout the year, we can compare your actual results to your budget. This analysis can ensure your daily/weekly sales and costs stay on track. Major deviations may require revisions to your original budget or corrective actions. It’s always better to find out this information early, rather than to wait until year end!

Financial benchmarking

The purpose of accounting for food service businesses should extend beyond compliance with lending, tax and franchisor reporting requirements. Most restaurants want to know how they measure up against competitors.

We can provide industry benchmarking data, based on your location, size, and specialties, such as those provided by the National Restaurant Association. These benchmarks can be compared to your financial results to determine operational strengths and areas for improvement. Benchmarking can also help you evaluate your restaurant’s workflow, prime costs, menu pricing, and the competitiveness of your compensation programs.

Accounting software selection

Effective bookkeeping and accounting for restaurants requires an investment in technology. This is a costly, but necessary, expenditure for food service businesses as they aim to lower costs, minimize waste and spoilage, and improve efficiency.

For starters, you should have an easy-to-use point-of-sale (POS) system for sending or printing receipts, reporting cash and credit card sales, and managing cash. A robust POS system will provide breakdowns of sales to help you identify areas of improvement.

Your accounting software should integrate with your POS and other restaurant management systems. It also must handle your unique operational and financial reporting needs. We can help evaluate technology investments, including which tax breaks may be available.

Your restaurant needs specialized accounting software to track such items as:

  • Cash deposits and credit card receipts;
  • Inventory and write-offs;
  • Accounts payable, including short pays and vendor credits;
  • Front-of-house, kitchen and back-office wages, benefits, and payroll taxes;
  • Rent (or mortgage payments if the restaurant owns its space);
  • Marketing, insurance, and other overhead expenses;
  • Equipment, leasehold improvements, and depreciation expense;
  • Credit lines, commercial loans, and interest expense; and
  • Tax-related information.

Security is another vital consideration when selecting accounting software. Hacked or stolen customer credit card records can lead to financial losses and harm to your reputation. Restaurant owners typically prefer cloud-based accounting systems that secure data through encrypted Secure Sockets Layer (SSL) protocol so unauthorized parties can’t intercept it. Other benefits of cloud-based systems include simplified data sharing and document retrieval, paperless storage, and ease of access. You can remotely access cloud-based systems when you’re away from the restaurant, whether you’re at home or on vacation.

There are several reliable bookkeeping and accounting solutions for food service business that vary in capabilities and cost. We can help you select a program that’s appropriate based on your size and daily operations.

If you already have accounting software in place, it may be time to review it. For example, software that you selected when your restaurant opened may no longer be appropriate or a new product may have become available that’s a better fit for your current needs. We can help you assess your current software and evaluate alternatives to ensure you’re utilizing accounting software to its full potential.

We encourage you to contact us with any questions.

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