Restaurant Accounting Basics: What to Know and Why It Matters

by:

Industry

Summary:

  • Understanding the details of your business’s financial health can help you improve its profitability.
  • Restaurants have lots of industry-specific terminology that operators should know.
  • Statistics and financial reports can help restaurant operators make informed decisions by removing guesswork.

Cooking and accounting seem like polar opposite skills, and plenty of restaurant operators and chefs would tell you they find accounting a bit laborious. However, no business can avoid proper accounting, and the restaurant business is no different. Whether they’re in the industry out of passion, an entrepreneurial spirit, or any other reason, restaurant owners all need to have a working understanding of restaurant accounting for their business to survive.

While accounting of any flavor has plenty of technical elements, the food and beverage world has its own unique set of terms. Fret not: You don’t need to be a world-class accounting expert to wrap your head around these ideas. Many of them are simply common sense cloaked in acronyms and accounting jargon.

The extent and depth of the accounting system you use depend on the scope of your business and your financial needs. But no matter what, you need to have an accounting system and you need to understand it. Below we’ll take a look at some basic terminology, important statistics, and reports you should expect to generate.

Restaurant Accounting Basics

Restaurant worker performs accounting duties

You can begin by breaking down your cash flow down to specific data points so you can find out what you need to do to optimize your restaurant. Meticulous bookkeeping can give you the edge you need by removing any guesswork from your financial decisions.

Plenty of restaurant accounting software and point-of-sale (POS) software is available to help you break down your business into specific data points. If you’re running a small restaurant and you understand your POS system and your data well enough — and you’re making money — this software can be sufficient.

You can outsource your accounting if you’re running a larger operation, are overwhelmed by managing data, or simply don’t have enough time. You may simply need help with data management and report creation. In that case, you’ll want a bookkeeper. On the other hand, if you want to get some serious financial advice — for example, with taxes — you’ll want a CPA. Both bookkeepers and CPAs can be hired part-time or full-time, and run the gamut in terms of cost and skill level, though you’ll most likely want one that is specifically a restaurant accountant due to the uniqueness of the industry.

Before you work with a bookkeeper or CPA, you’ll need to understand some basic restaurant accounting terminology. We’ll start with a largely catch-all term.

Key Performance Indicators (KPI)

Bartender looks at iPad with laptop open in front of her

Key performance indicators are the data points that track unique portions of your business. By studying KPIs, you’ll get the opportunity to delve into the nitty-gritty of your business and see what’s working well — and what needs improvement. We’ll look at these from three angles: back of house, front of house, and overall.

Back of House

Before any dishes leave the kitchen, you’ll need to know how to break down the numbers to make a profit. Here are some KPI considerations: cost of goods sold, inventory turnover ratio, food cost percentage, and menu item profitability.

Cost of goods sold (COGS)

This is one of the most important KPIs in a restaurant since it gives a holistic overview of how much your inventory is costing you. At the end of every day, subtract the value of your ending inventory from your beginning inventory. That’ll give you an idea of your everyday inventory expenses.

Inventory turnover ratio

The inventory turnover ratio shows you your average inventory replacement rate. Knowing this tells you whether you’re over- or understocking. It’s better to calculate this over an extended period of time rather than one day or even one week since sales at a restaurant can fluctuate significantly. To calculate this, divide the average inventory value by the cost of goods sold over a certain period.

Food cost percentage

The food cost percentage tells you how much your food costs compared to the menu price. The difference is known as the contribution margin, i.e., the value your restaurant adds by preparing and serving the dish. Keep in mind that the food cost as 20-35% of menu price is what many restaurants use as their base line.

Menu item profitability

There are many other factors in food cost besides the raw cost of the ingredients: For example, you can also consider labor costs (how quickly can you move the dish to table?), wastage (how much gets thrown away before it’s served?) or table turnover (how quickly do customers eat it?). Restaurateurs are often surprised at which dishes are actually their most profitable because there are so many variables.

Front of House

Your front of house KPIs can help you understand server and customer behavior. Your POS software can help you greatly with this, since you can automate the generation of records with many programs.

Table turnover rate

This is how many different sets of customers use the same table over a given period of time. To get this number, take your total number of customers served and divide by your number of seats. Different types of restaurants have different expectations. For example, diners generally spend more time eating in a fine dining establishment than a fast casual one, so the table turnover rate would be significantly lower.

Footfall

Footfall is an overall count of customers in a given period of time. Knowing your footfall can help you plan staffing and help you identify the effectiveness of marketing. For example, if you know that your business receives higher footfall on a Thursday than a Monday, you can plan for extra staff to be available.

Revenue per seat

This metric gives you an idea of how much you can expect an average customer to spend. It’s valuable for identifying ways to encourage customers to spend more. This can be done per table, per server, or for the entire restaurant. Simply divide your total revenue over a period of time by the number of diners served.

Revenue per available seat hour (RevPASH)

This tells you how much each seat can be expected to generate and is especially valuable for determining whether you’re over or under seating capacity as well as the overall perceived value of your restaurant. Here is a handy calculator for the formula.

Staff turnover rate

How often do you lose staff? While the restaurant industry is notorious for having a high turnover rate, a higher rate than usual indicates your staff might be unhappy. To get this number, divide the number of employees who have left by the total number of employees over a period of time. Then, multiply by 100. A turnover rate of 60-70% is not unheard of in the restaurant business.

Overall

Some metrics take the whole business into account. These are some of your most important metrics for having an overall understanding of your restaurant’s performance.

Prime cost

Prime cost is perhaps one of the most important restaurant metrics. Add the total cost of labor (including taxes, insurance, benefits, etc.) and the total COGS over a period of time to get the prime cost.

Prime cost as a percentage of sales

This metric lets you know if too much of your operating expenses come from labor and inventory. Generally, a prime cost that is less than 60% of total sales is good in the restaurant industry.

Overhead percentage

Overhead includes all fixed costs outside of labor and COGS like rent, utilities, taxes, marketing, and licensing fees. It’s good to get your overhead percentage as low as possible.

Sales per square foot

This important metric gives you an overall idea of the profitability of your restaurant. To calculate this, take your yearly sales and divide by the amount of square feet in your restaurant. At anything below $150 per square foot, a restaurant will struggle to make any profit at all. Once a restaurant sees between $250-$350 per square foot, it will most likely be profitable.

Gross profit and net profit

Gross profit is calculated by revenue minus the cost of goods sold. Net profit takes into consideration all other costs, including labor, overhead, and variable costs.

Labor cost ratio

Your labor cost ratio relates labor cost to overall revenue. Generally, restaurant operators will want to keep their labor cost at below 30% of revenue.

Accounting Reports

Restaurant accounting: Man talks on phone, smiling, while holding a piece of paper

To get the best idea of your bottom line, you’ll need to spend some time digging through financial reports. While there is no shortage of the types of reports that can be generated, some are more crucial than others. We’ll focus on those. Additionally, if you want to attract investors, they’ll want to see financial statements and you’ll need to be able to furnish them.

Daily Sales Report

A restaurant’s daily sales report is vital to understanding how the restaurant functions day to day. It should have information regarding all costs and sales over the course of a day. It should also include a balance sheet to make sure no money has gone unaccounted for. This is a restaurant owner’s go-to report and should be checked every day.

Profit and Loss Statement

A profit and loss statement (P&L statement), also known as an income statement, shows all sales, costs, and expenses over a period of time — usually a fiscal quarter or a year. Imagine it as a more long-term daily sales report. Where a daily report gives you a short-term view of a restaurant’s performance, a profit and loss statement gives a broader view of its overall financial health. If you’re looking for investors, this is what they’ll want to see.

Chart of Accounts

A chart of accounts shows a categorized breakdown of your costs and revenue. For example, you’ll see your food costs broken down by category, e.g., vegetables, your revenue broken down by type, e.g., credit card, or your overhead broken down by type, e.g., rent. Crucially, beverage sales and food sales are broken down into individual types to see what items sell the best.

Pare Down Confusion, Boost Profits

Hundred-dollar bills laid on plate with fork and knife next to it

By becoming intimately familiar with the financial health of your restaurant, you’ll be in far better shape to make important business decisions. The better your financials are understood — whether by you or by an accounting firm — the higher your profits are likely to be.

One area that constantly runs up a restaurant’s operating costs is high staff turnover rates. The restaurant industry experiences turnover rates 1.5 times higher than other industries at nearly 75%. This turnover costs business owners upwards of $3 billion a year in aggregate. Recruiting and training staff is costly and time-consuming — the last things any restaurant owner needs to add to their plate.

A world in which staff turnover didn’t hurt quite as bad sounds lovely — and Pared is leading the way to make that a reality.

For any of your staffing needs — chef, server, bartender, busser, or anything else — Pared’s app can help you find pre-vetted Pros in as little as two hours. A chef quits in the morning? Find another for the evening shift with Pared. A server calls in sick? Problem solved.

It really is that simple. Check out the Pared app and see what it’s like to never be short-staffed again.

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