Accounting is essential to all kinds of businesses, including restaurants. Restaurants face many challenges that are unseen in other industry segments. So we need to keep impeccable accounting records for restaurants. Accounting in restaurants helps us manage financial data and is a great source of information on profit-making areas, and helps us to identify expense centers in a restaurant business. Cost accounting is vital in a restaurant business as we introduce new menu items in restaurants, and proper costing of such items enables us to ensure we maintain our margins on these items.
We must adequately track all our restaurant expenses and cash inflows as it enables us to understand our profit margins. Groceries and Labor are the two chief cost centers in a restaurant business.
Keeping track of accounting requirements specific to the restaurant business:
Taking track of the inventory items
A restaurant’s products include food and beverages with expiry dates. Physical inventory must be assessed periodically, at least once a week. Perishable food which is spoilt and thrown out must be recorded in the spoilage expense account. Keeping track of our inventory also helps us track inventory stock-out items. This ensures that we order the appropriate quantities of food and beverages in the future. Any inventory spoilage reduces profits, so we must maintain control of this expense head. Restaurant accounting services can also help in keeping a better track of inventory items, as experts are involved in handling the tasks.
Many restaurant servers and waiters earn a large part of their income from tips they receive from customers. Our restaurant account heads and payroll processes must also account for dividends received. Certain states stipulate certain minimum wage levels. Any tips earned help to reduce the owner’s hourly payment of wages to the server or the waiter. This means that we, as restaurant owners are responsible for paying the restaurant tip tax credit. Our chart of accounts should have an account head for tips payable. This helps us to capture all the tips paid.
Food and beverage costs: When we sell our products in a restaurant business, the food and beverage sold are captured under food and beverage costs instead of the cost of goods sold charges. So we essentially debit cash received from the customers and credit food and beverage costs to identify the items used out of the inventory. Sales tax and tips payable are the other items credited to bring the debit and credit totals on par. Stock is also adjusted by being credited, and we debit the food and beverage cost to complete the cycle of accounts. Our cost of goods sold or the food and beverage cost is calculated by the formula, beginning inventory + purchases- closing inventory = cost of goods sold.
Creating a proper chart of accounts: This help to analyze all cash flows of a restaurant business under assets, liabilities, income, and expense heads. Various sub-heads denote each cash flow item to correctly categorize and record all accounting transactions. The chart of accounts is the starting point of any accounting system. As the restaurant business has its peculiar income and expense heads, we must make sure that we properly categorize all the items. Otherwise, our accounting transactions will remain incomplete. Without a complete chart of accounts, accounting for all the revenue and expenditure items will be difficult, and our accounting records used for creating tax accounts will also remain incomplete.
Restaurant occupancy and labor costs: Other operating expenses like restaurant occupancy and labor costs also form an essential part of our expenses. Labour includes all restaurant cooks, dishwashers, waiters and servers, cashiers, hosts, and anyone on our payroll. Employee costs include salaries, benefits, and other emoluments. If we own the premises, we incur occupancy costs in the form of rent, property taxes, utilities, and even property taxes. Certain parts of the labor costs and occupancy costs are fixed and cannot be reduced. Some features of the labor costs are variable, like overtime, etc. Operating expenses include a whole gamut of other items, which include napkins, flatware, and other items in daily use. Marketing, advertising, and promotion are fundamental aspects of increasing our restaurant sales. Knowing the distinction between these three expense heads is vital to enable us to optimize our expenditures and maximize our profitability
Prime Costs: Prime costs for a restaurant business include all operating costs plus labor costs. We can streamline our costs, cut costs, and increase profits only by maintaining tight control over these cost elements. The fixed costs components of the operational and occupancy expenses cannot be reduced quickly.
Analyzing Cost to sales ratio: We must remember that analyzing a single metric alone does not reveal anything. Costs are also relative to size, with large restaurants having higher costs and smaller restaurants having lower costs. So expressing most of the parameters as a proportion of sales to assets helps us analyze specific ratios that can then be compared to industry benchmarks. This enables us to evaluate our relative performance and ranking.
It is important to keep a tab on each point to ensure that our restaurant functions in a desirable manner. If required, we can also take assistance from virtual accounting services, which will assist us in maintaining major tasks associated with restaurant accounting.
Key Takeaways
Accounting helps us in the process of running our restaurants better and optimizing their performance. Instead of looking at isolated metrics, comparison ratios help to analyze our performance better and devise practical ways to rationalize costs and improve our performance.
