lavu Management - Restaurant Accounting Importance

An efficient back-office plays a critical role in the success of a restaurant. It is the system that takes care of your financial information and ensures that you are making enough revenue to cover your expenses. Even if you do not have a background in accounting, understanding this administrative area puts you in a better place of knowing how your business is performing.

As a restaurant owner, being aware of your business’s financial health is an important factor in ensuring that you are not running your business blindly. With 50% of businesses failing within 5 years due to a lack of profits, understanding your finances can help you avoid major pitfalls. You will be able to see how your business is fairing in the market and take on challenges that come in raising income for your business.

Before looking at the role that accounting plays in your restaurant, let’s first understand what it entails.

What is Accounting?

Accounting refers to the collection, interpretation, classification, analysis, and reporting of financial data. It goes a notch higher than bookkeeping, which is just recording the financial transactions of the business.

Another way of looking at accounting is that it is the process of preparing and communicating the financial statements of a business entity. This includes communication of financial statements like income statements, balance sheets, and cash flow. Although the process is almost the same across many industries, it is quite different in the restaurant industry.

Restaurant accounting involves the collection, interpretation, and analysis of restaurant financial information. This includes the revenue of the restaurant, cashflow, inventory levels, and income statements. The process allows restaurant owners and managers to document all financial transactions of the business and determine how well it is performing.

A restaurant accountant is a professional who has specialized in restaurant accounting. They document all the financial transactions of the restaurant, keeping track of the inventory, cash flow, and income statements. 

The information provided by restaurant accounting allows you to manage your cash more efficiently, predict your profits, balance your financial books, and plan for your business future. Now let’s take a detailed look at how accounting is important to your restaurant.

Better Financial Management

For a business to be successful, it needs to have solid financial management. If you are running a restaurant, you need to have a way of accounting for the salaries paid to the employees, recording transactions, reporting total sales, and analyzing your restaurant. Without an efficient accounting system or function, such administrative areas of your business will be mismanaged and inefficient.

Accounting helps you get the necessary financial information needed for running every aspect of your business. This allows you to make proactive decisions and structure your business in a way that improves your profitability.

For you to run a successful restaurant business, you need data, reports, records, analysis, and accurate information about your finances. You need to know how much you have in your assets, your liabilities, and the amount of profit your business is making. Restaurant accounting allows you to have a clear picture of all this and manage your business in a better way: It involves:

  •     Business planning
  •     Budget preparation
  •     Tracking and managing cost of goods sold
  •     Tracking and managing labor costs
  •     Payroll
  •     Preparing daily sales reports
  •     Preparing financial statements like P&L and balance sheet

Provide Deeper Insights into Your Business Financial Status

Accounting information provides a deeper insight into the financial status of your business. Using real-time reporting of your restaurant’s financial activities, you can regularly understand what is going on with your business. You will be able to determine which expenses cost you the most or which menu items are selling the best. This means you will be able to make better decisions and pursue strategies with greater outcomes. You also have a clear way of handling your business since you have a proper record of what is happening.

The two important financial statements that provide insights into your business financial status are the profit and loss (P&L) statement and the balance sheet. While the restaurant P&L shows the profitability of the business during a given period of time, the balance sheet shows how much your business is worth at a specific time.

A profit and loss statement provides you with a clear sense of how your restaurant business is currently performing financially. You will know how much you are spending on labor or creating each menu item, and your best and worst sellers. By showing you the profitability of your business, it allows you to determine areas of your business that need improvement. Since you can prepare this statement under various time periods like monthly or yearly, it allows you to make necessary adjustments and continuously monitor your business for growth.

The balance sheet provides a summary of your business assets, equity, and liability at a specific point in time. While the assets are what your business owns, the liabilities are what your restaurant owes others. Equity represents your net worth in the business and it is calculated by subtracting liabilities from the assets. If this figure is negative, it means that your restaurant liabilities are more than assets. This means that your business will not be able to fulfill all the liabilities by liquidating its assets if they all come due at the same time.

Better Tracking of Cash Flows

Good accounting practices allow restaurant owners and managers to track their business cash flows and record transactions. This is a critical factor in getting an accurate understanding of how the restaurant earns and spends money and the exact flow of it in and out of the business. Using such information, you can plan and allocate resources to specific divisions of your business to ensure it is running efficiently.

The cash flow statement shows the sources of your restaurant’s cash and how you spent over a given period of time. Since this statement does not include any non-cash items, it gives a clear impression of the financial health of your business. It also helps you understand the difference between having cash on paper and actually having cash in your business accounts. This information is important in planning and forecasting the needs of the business. It allows you to introduce products and services that meet the needs of customers better and enhance your returns.

Control Your Prime Costs

Prime cost is among the most important key performance indicators (KPIs) of a restaurant business. It represents the total sum of your cost of goods sold or inventory and your labor costs. This is the cost incurred to ensure you have both the products and services needed for the restaurant to run. Controlling these costs is critical in keeping your business profitable.

Prime cost is what guides you in managing the day to day revenue of your restaurant to achieve a good profit margin. Restaurant accounting helps you analyze your prime costs to decide how much you are going to charge your services to make a profit. It also helps in calculating the amount of money that you can spend in running your business without compromising it. Monitoring costs is the first step in controlling them.

Tracking Inventory

Restaurant accounting plays a crucial role in ensuring accurate tracking of inventory and cost of goods sold. At any one time, you can tell what your ingredient stock count is, your current purchase orders, and the amount of money spent in purchasing the ingredients. When the accounting function has been integrated with a restaurant POS system, the process is fully automated. This means that you will have an easier and simplified way of calculating menu item costs, getting insights into the most profitable items, and monitoring your food waste and portioning.

Accurate tracking of your inventory will help you reduce food waste, budget mismanagement, customer dissatisfaction, and theft.

Help in Pricing Your Menu Items

Accounting helps in tracking costs and calculating how much money you spend on your restaurant. Among the important data that you derive from accounting is the cost of goods sold (COGS). This figure is crucial in determining the prices of your products and controlling your revenue.

Knowing how accounting ratios are calculated and the impact of your COGS in determining the price you should place for your menu items. The price that you choose should be able to cover the cost incurred in preparing the meal. It should also generate a desired profit margin to ensure that your business is running at a profit.

Tracking of Your Restaurant Expenses

Your accounting system usually provides two types of information that can help you in tracking your expenses better. First, it shows the types of payments you make periodically, such as remitting taxes. Second, it shows the things that you pay for continuously throughout the life of your restaurant business. This includes your food costs, beverage costs, and labor costs and their relation to your sales. Each of these items is useful and important in controlling how much money you spend on your restaurant. In tracking these items, accounting helps you in keeping accurate records of:

  •     Sales: The amount of revenue that you make on a day to day basis. This can be broken down to food and beverage revenue, or be presented in categories of individual dishes depending on the type of restaurant that you are running. If you have good accounting software integrated into your restaurant POS, generating daily sales reports should be quite easy and straightforward.
  •     Orders: Accounting information shows how many orders your restaurant has received and how many were fulfilled. Apart from the sales made, you also need to find out how well your restaurant is meeting the needs of your customers. This is also a great approach to determining the amount of inventory your restaurant needs to run smoothly.
  •     Payroll: Payroll is all about what you pay someone else to work in your restaurant. As one of the key expenses of running a restaurant, you need to accurately track and manage how much you are paying your employees. Accounting provides such information, helping you to budget better.
  •     Value of Inventory: The value of inventory is not just about the physical or manual count of your inventory. It is also about how much revenue you can generate from the inventory and how to capitalize on it. Restaurant accounting can help you determine the amount of inventory you have on hand and estimate how much revenue can be generated from it.

Evaluate the Performance of Your Business

The accounting record of your restaurant reflects both the result of your operations and your financial position. This means you can identify areas that are performing well and those that require certain measures to improve. With several ratios being calculated from accounting information, you can analyze the performance of your restaurant and compare it with other players in the industry. You can also compare your current financial performance with previous accounting data to determine whether the business is moving in the right direction.

Ensure Your Restaurant is Compliant

Every business is required to be compliant with the laws of the land and taxation policies. Proper restaurant accounting ensures that your liabilities are paid and recorded on time. This includes statutory requirements like payment of sales tax, VAT, and income tax. You will be able to manage and monitor cash flow to ensure that money within your business is being directed to the right channels.

Bottom Line

The success of your restaurant business greatly depends on the accuracy of your financial records. Regardless of the size of your business, accounting helps in providing information showing where your business is headed. You can determine whether you are running a profitable business or measures need to be taken to achieve better financial outcomes.