- Cash and accrual are the two accounting methods used for restaurant accounting.
- Restaurants benefit from doing inventory and profit and loss statements weekly.
- Two ratios – food/beverage to expenses and revenue per seat – are helpful for restaurant accounting.
You might think accounting is the same across the board, but it can differ quite a bit from industry to industry.
So what sets restaurant accounting apart? On the surface, it’s not all that different from standard accounting practices – restaurant accounting uses many of the same costing methods, as well as profit and loss statements and cash flow reports, just like many other industries do. However, much like a restaurant comes with its unique expenses, restaurant accounting has its nuances.
The easiest way for a restaurant to maintain its books is by using business accounting software.
Here are some of the main things you need to know.
Like other industries, restaurants can use the cash method or the accrual method to do their accounting, though there are some subtle differences. According to Chron.com, restaurants that generate less than $1 million per year can choose their method, but those that generate more than $1 million must use the accrual method.
The cash method is the most common accounting method for restaurants because customers pay for their food and services rendered right away. That means they don’t owe you money later on (like what might happen with a construction project). This also means restaurants probably won’t have an accounts receivable balance. With this method, activities are simply recorded when payment is received. While this might be the easiest method for restaurants, it’s not necessarily the most accurate.
The accrual method, on the other hand, records transactions as they happen, regardless of when payment occurs, which allows for a different analysis of activity, shows a more accurate perspective of how expenses are incurred and income is generated, and how income compares to expenses.
Of course, in the restaurant industry, along with the standard tax considerations for employees, there’s also the need to factor in tips. Tips (not including automatic gratuities, which work differently) are considered employee income, not restaurant income, and are not subject to withholding.
However, that doesn’t mean you don’t need to consider them in your accounting process. Employees at your restaurant are still required to report tips to you, and both they and you are required to pay taxes on them – you just don’t need to report them as part of your restaurant revenue.
Since the day of the week tends to affect business (for example, a Friday night might be busier and bring in more customers, thus making you more money than a quiet Tuesday), it’s useful for restaurants to use a four-week accounting period instead of a monthly accounting period, according to Orderly.
A four-week accounting period would look at four weeks at a time, each starting on a Monday and ending on a Sunday. That way, you can combine time periods from year to year. July of last year and July of this year would have a different number of Fridays and Saturdays. In other industries, this wouldn’t be a big deal, but it’s essential to note in the restaurant business.
Types of restaurant expenses
Like any business, restaurants will have fixed and fluctuating expenses. Fixed expenses are often cost of operations, including rent, utilities, insurance, loan payments, and salaried employees are all fixed expenses.
Fluctuating expenses are more difficult to budget because they change frequently. Hourly wages for employees and food costs are the largest fluctuating expenses. Profits will vary as well, so it’s important to use percentages instead of only a fixed dollar amount.
Your labor and food costs will be higher if you have a busy week and sales are $10,000 vs a slow week when sales are $5,000. Keep labor and food costs at 30% of sales each to stay profitable.
While other businesses, like retail stores, might not need to take stock of their inventory on such a frequent basis (many businesses can get away with doing so monthly, quarterly or even once a year), restaurants need to monitor their inventory weekly. Why? Because restaurant inventory is food, much of which is perishable and will spoil before a month is over.
The cost of goods sold (COGS) is also an important part of inventory management. Lowering COGS is an excellent way to increase profits.
Start with categorizing your items. Meats, dairy, and fruits for example. You can then set a percentage for each group, which makes it easier to manage.
It’s also important to minimize waste. Measure ingredients carefully, and ensure that all employees do the same. If a recipe calls for one-quarter cup cheese, but a half cup is consistently used, this can double your cost for cheese. These expenditures add up to a significant impact.
Cash flow and profit and loss statements
Like with inventory, some businesses might do profit and loss statements on a monthly or quarterly basis (though you can do them as often as feels necessary). Weekly profit and loss statements are smart for restaurants because it can help with managing inventory. Cash flow reports should also be more frequent for the same reason.
Important restaurant ratios
According to Investopedia, there are several ratios relevant to the restaurant industry. A few of these are food/beverage to expenses and revenue per seat.
Food and beverage expenses to sales ratio can tell you how much profit you are making from a specific menu item. You’ll take the cost of the ingredients needed to make the dish one time and divide it by the menu cost of the item. The food cost should be 30% or less.
Some items will provide you with a lower food cost to profit ratio than others. Once you identify these items, consider promoting them or offering them as suggestive sales.
Revenue per seat is calculated by dividing the revenue from a given day by the number of seats. This can be helpful when considering renovation or downsizing. If revenue per seat is lower on certain days or periods, consider closing an area to decrease the available seating in these periods.
More seating requires more employees and increased utilities, so closing an area can result in significant savings. If you’re often filled to capacity, you will have a high revenue per seat. In these situations, it can be beneficial to offer more seating to make room for more customers.
For more information on restaurant accounting, check out Restaurant Accounting 101, as well as our in-depth Restaurant Accounting Guide, which can also help you choose restaurant-specific accounting software.