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Restaurant Financial Management Issues

Restaurant owners, while aware of the financial management of their business, are more likely to be involved in troubleshooting day-to-day issues that keep things running smoothly. Unfortunately, a financial accountant is a luxury that many small restaurateurs cannot afford. This article will discuss six major accounting issues that restaurant owners often encounter and how to prevent them from happening or how to fix problems once they occur. Being a small business owner is always a challenge and the restaurant industry is financially complex.

This article will focus on issues that can be resolved with good bookkeeping skills and procedural methods. By teaching restaurant owners how to find financial problems before they arise, an accountant can help the owner correct or improve the financial techniques used to manage profits and reduce avoidable losses. The six questions addressed here will focus on:

Problem 1 – Absence of an accounting system

Problem Two – When Major Operating Expenses Exceed Total Sales

Problem 3 – Menu offerings

Problem 4 – Food and Beverage Inventory

Problem Five – Problems that arise when inventory is greater than sales

Problem Six – Using a Balance Sheet and Profit and Loss at the End of the Month

By investigating these issues, which are common problems for restaurant owners, it is possible to manage these issues and resolve them before the restaurant gets out of control financially and can help an owner employ accounting methods.

Problem 1 – Absence of an accounting system

The first problem a restaurant owner faces when trying to avoid accounting issues is investing in good computer software that will help track all transactions. Nessel, who is an owner and financial consultant to restaurant owners, recommends QuickBooks for keeping a general ledger of all financial transactions that occur in the restaurant. All financial transactions should be recorded in the general ledger so that accurate records are maintained. Without taking care of this, the owner will not be able to run the restaurant without maintaining accountability in the ledger. Nessel further states that “my experience is that the quality of the proactive management of the business is directly correlated to the way the owner manages their ‘books’. Therefore, it is paramount for the owner to have a system in place to ensure the smooth financial running of the business Lack of accounting and financial controls is the number one reason most businesses fail and if a restaurant is in trouble, it is the first problem to be addressed. recommended by many accountants as a guide to help set up a good accounting system.

Problem Two – When Major Operating Expenses Exceed Total Sales

Statistics indicate that “restaurant food and beverage purchases plus labor expenses (wages plus taxes and employer-paid benefits) account for 62 to 68 cents of every dollar in restaurant sales” . These are referred to in accounting terms as the “main cost” of a restaurant and where most restaurants encounter their biggest problems. These costs can be controlled unlike utilities and other fixed costs. An owner can control product purchasing and handling as well as menu selection and pricing. Other controllable production costs for a restaurant include hiring staff and scheduling staff in an economically efficient manner. “If a restaurant’s Prime Cost percentage exceeds 70%, a red flag is raised. Unless the restaurant can offset these higher costs by, for example, having a very favorable rent charge (e.g., less than 4% of sales), it is very difficult, and perhaps impossible, to be profitable.”

Restaurant rental costs (when including taxes, insurance, and other expenses that may fall into this category, such as association fees) are the largest expenses a restaurant will incur after “main costs”. Rent represents on average 6 to 7% of a restaurant’s sales. Since it is a fixed expense, it can only become a reduced ratio through an increase in sales. If the cost exceeds 8%, it is helpful to divide the occupancy cost by 7% to find out what level of sales will be needed to control rental expenses so they don’t bankrupt the restaurant.

Problem 3 – Menu offerings

Most of the offerings on a menu are priced by the owner after visiting other local restaurant competitors, viewing their offerings and menu prices. However, menu pricing should never be established by simply looking at their competitors’ menus. Menu pricing should be done (and redone periodically as vendor costs fluctuate) and documented in software manuals. Some math skills will come in handy as a menu converts the prices of purchased products into recipe units. A restaurant owner needs to know the cost of making a recipe in order to know how to price it. This means knowing what the ingredients and the amount of ingredients used cost per recipe. There is software available to help you with this and Microsoft Excel can be used to customize menu costs while linking to available inventory items.

Some of the things an owner can do to help with accounting that are controllable through the menu include:

– Menu pricing for minimum wage increases.

– Use value-added meals to increase profits.

– Reintroduce price increases while retaining your customers.

A menu should be periodically updated as supplier costs change. This can be positive or negative depending on the provider. In either case, menu items can be adjusted based on vendor costs with calculations and the help of inventory tracking software.

Problem 4 – Food and Beverage Inventory

It’s a common mistake for restaurateurs to look at the profit and loss account and assume that what they spent on food can be divided by the sales for that period to find the cost of what was sold. It is a mistake. The inventory at the start and end of the period must be known in order to accurately calculate food expenditure. “For a restaurant with food sales of $50,000/month, a difference in inventory of $1,000 between the beginning and the end of the month can translate into a variance of 2%. This variance represents half of the total annual profit of a typical full-service restaurant.” Simply put, you can’t manage food costs if you don’t keep a record of what they are. Inventory changes are essential to consider when calculating profit and loss.

Microsoft Excel spreadsheets can be used to track inventory and document prices and know all inventory totals as it relates to food and beverages. Tracking through Excel will avoid errors.

Problem Five – Problems that arise when inventory is greater than sales

When food stocks are too high, costs will be too high and waste is inevitable. Calculating inventory needs is absolutely necessary to prevent food from spoiling, being overdosed in recipes or even being stolen. “A typical full-service restaurant should have no more than 7 days of inventory on average.”

There is an equation to use to figure out how much inventory is needed for a restaurant to run smoothly. The equation is:

Step 1) Multiply your average monthly food sales by your food cost %.

Step 2) Divide this number (your average monthly food intake) by 30 (days/month)

By using this formula and keeping records of all beginning and ending inventory, the problem of losing money due to wasted food costs is reduced or eliminated.

Problem 6 – Using a balance sheet and a profit and loss account

For a restaurant to be successful, it must be operated as much as possible like a big business by the owner. At least one weekly report is required. The formatting of the report should be categorized. Inventory, suppliers, labor, and sales must all have a start and end period. Fixed expenses such as rent and electricity should be broken down to match the report whether it is weekly or daily. It is not advisable to wait until the end of the month to calculate a report as changes happen quickly in the restaurant business.

It is very important that a start and end date is included in the report and that even fixed expenses are broken down so that a weekly net profit can be calculated. As mentioned earlier, Microsoft Excel and other tracking software can be used for inventory and other cost, even planning that affects profit. Without properly tracking inventory, overages, schedules, menu prices, portions, and everything else covered in this study, can bankrupt a restaurant. A restaurant owner simply needs to take the initiative to implement simple accounting strategies. It may seem like a restaurant owner has to do it all; but, with good software and a systematic method in place, keeping a restaurant on track financially will create financial rewards that are well worth the work.

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