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Even for the most experienced, accomplished restaurateurs, restaurant accounting is like a foreign language. How do you calculate prime costs? How do you choose a restaurant accounting software? What’s a profit and loss statement? What’s the difference between accountants and bookkeepers and accountants?
Restaurant accounting is a complex process with many moving parts measured against industry standards. To put it lightly, it’s pretty intimidating - not to mention time-sensitive, time-consuming, and accuracy-dependent.
Even though restaurant accounting is daunting, understanding the basics is not impossible. When you do, you can make wiser finance-driven business decisions. Trust us, it’s worth the initial headache!
Let’s go over the steps you need to take to set up your restaurant accounting, as well as helpful software solutions that will make this job easier.
In this article, you’ll learn:
- How to set up your books
- Everything you need to track
- Financial reporting and analytics
- Calculating the cost of goods sold
How to Set Up Your Books
1. Find an Expert Bookkeeper
You’ve heard the old business adage - outsource your weaknesses so you can focus on your strengths. Managing the books by yourself is like hiring an accountant to be your chef. Not a great move!
As a restaurant owner, you spend your days dealing with inventory management, staffing, and controlling the cost of goods sold. An expert accountant frees you of the burden of complex financial analysis and monotonous daily tasks that would distract your focus from managing restaurant operations.
It’s essential to find a bookkeeper who understands the nuances of the food and beverage industry, including both front-of-house operations and back-of-house management. A seasoned restaurant accountant will be aware of what balanced financials look like within the context of the restaurant industry, as well as what KPIs you should be concentrating on based on your business model.
Restaurant accountants are trained to compile data precisely and purposefully. They can analyze your financials and identify operational flaws, unnecessary spending, and trends to pay attention to long-term.
2. Use Accounting Software
Implementing accounting software can help you and your accountant stay on the same page. The right software can streamline your data entry tasks, log payroll, capture tax information, track your revenue, create profit and loss statements, review your cash flow, create customized invoices, and more. The ideal accounting software for restaurants should provide advanced reporting features, be easy to use, and allow you to track and access your data from anywhere at any time.
Connecting your accounting software to your POS will automate the collection and organization of transactions and financial data. Along with your POS, it will help you keep a close watch on your financial performance in real-time. Accounting software also takes away the cumbersome burden of manual accounting while eliminating the effort, time, and errors that come with it.
3. Set Up the Chart of Accounts
The next step is to set up your chart of accounts, which is used to organize the money flowing in and out of your restaurant. The chart of accounts records high-level transactions such as assets, expenses, liabilities, revenue, equity, and cost of goods sold. This is further reduced to business-specific categories such as sales, inventory, and marketing.
Accounting software can seamlessly aggregate your chart of accounts for you and populate key financial reports with accurate information. It can show you an overview of your key financial reports, such as your balance sheet, cash flow report, and profit and loss statement. It’s a high-level point of reference when comparing your data to industry averages and also assists in keeping track of your expenses.
Setting up a chart of accounts will give you a sense of the financial health of your restaurant so you know exactly where your money is coming from and how you can spend it. It also may be requested by investors and shareholders to prove your financial standing.
4. Select a POS System
Whether you’re running a small cafe or an upscale restaurant, you need a POS system for order management, back office-reporting, cash management, inventory management, and sending receipts. Select a POS system that is user-friendly for employees and customers and that integrates with your accounting software.
Your POS data allows you to see your financial performance in real-time. For example, you can take a look at your sales-to-labor ratio or determine if sales are hitting industry averages. These financial snapshots give you the opportunity to take action without crunching your own numbers, and give your accountant lots of data to work with.
Here’s What You Need to Track
There are a few essential bookkeeping processes that are essential to restaurant accounting. While your accountant will likely handle the majority of these processes, it’s important to be aware of them so you can speak the same financial language.
Payroll can be challenging in the restaurant industry, as tracking employee hours can be quite complicated. It’s common for staff members to have multiple wages and positions, so the ability to adjust for different rates is critical.
According to a report by the National Restaurant Association, there are 14.7 million people working in the restaurant industry. This equates to a whopping ten percent of the entire workforce in America, and most of these workers are hourly and part-time staff.
With different pay rates, irregular work hours, and multi-positions, calculating restaurant payroll can be a pain. We recommend outsourcing the payroll job or use payroll software to do the hard work for you.
Accounts Payable represents the amount you owe the suppliers and vendors that stock your inventory. Be sure to pay your bills on time to keep them happy!
It’s best practice to reconcile accounts payable before inputting invoices into your accounting software. To do this, you can try a process called the “Three-Way Match.” To begin, view your restaurant’s purchase order, then the receiving order, and lastly, the vendor invoice. Ensure that the order was fulfilled and the amount owed is right. Then, you can go ahead and pay the invoice.
It’s a good idea to set up an inventory management system that reduces waste and optimizes food cost. This will also help you avoid food surpluses and shortages, and instead strike a more accurate balance.
Determine your daily inventory costs and calculate the value of the food items you have in stock by tracking your consumables and supplies.
Cash flow is the amount of money coming in and the amount of money going out of your restaurant on a daily, weekly, and monthly basis.
Keep tabs on your revenue and use your accounting records to figure out how much you earn from food sales, merchandise sales, catering jobs, and more. Pinpoint how much revenue you make on a daily basis and then break them further into categories.
Account reconciliation confirms that you’ve accounted for all transactions and that the amount of cash in your account is correct. Modern accounting software can easily automate the account reconciliation process.
Accounts that require reconciliation include loans, lines of credit, credit cards, bank accounts, and payroll liabilities. It’s a necessary process that ensures that nothing is left unaccounted for.
Reconciling accounts will make you aware of incorrect deposits, cash variances, lost checks, and more. It also catches potential accounting errors.
Financial Reporting and Analysis
Your restaurant’s success will be measured against key performance indicators (KPIs) which will be measured through financial reporting and analysis. Here are some important ratios to study when you review the financial statements for your restaurant.
Food costs refer to the cost of preparing a menu item divided by the total revenue earned from the item. This formula is used to make sure that you’re making a profit from each item you sell.
How to calculate food costs:
(Food Cost / Total Sales) x 100 = Food Cost
Prime costs are one of the most essential KPIs for restaurant owners. Calculating prime costs help you find where you can cut costs, boost profits, and increase efficiency.
Prime cost accounts for all your labor costs and your cost of goods sold. For every dollar you earn, the prime cost is the amount of that dollar that goes to labor (your staff) and product (food items).
Ideally, labor costs should take up less than 30 percent of the revenue according to industry standard. However, it depends on the type of restaurant you run, as costs may be higher or lower. To calculate the costs, divide the staff into groups of back-of-house and front-of-house and figure out which group is costing you more.
How to calculate prime costs:
Total Labor Cost + Cost of Goods Sold = Prime Cost
Ideal prime cost ratio: 55%–60%
Every restaurant has overhead, or fixed costs of running your business, such as rent, insurance, and equipment rental. This ratio can be calculated on an hourly, daily, or monthly rate, and will give you insight into how much your restaurant costs to run.
How to calculate overhead rates:
Total Fixed Costs / Total Operating Hours = Overhead Rate
Your breakeven point shows how much revenue you need to earn to pay for your expenses. An ideal breakeven point is a surplus.
How to calculate breakeven point:
Total Fixed Costs ÷ ( (Total Sales – Total Variable Costs) / Total Sales) = Breakeven Point
Cost of Goods Sold (COGS)
Cost of Good Sold (COGS) is a KPI that shows how accurately you’re pricing your food items and controlling your inventory. COGS shows the actual cost of food used to produce your sales. Keeping track of your COGS ration will help you reduce and maintain your inventory costs.
How to calculate Cost of Goods Sold:
(Beginning Inventory of Food & Beverage + Purchases) – Ending Inventory = COGS for the period
The beginning inventory is the amount of food that you have in your kitchen at the beginning of the period. Purchases refer to the inventory you buy in vendor orders in that period of time. Final inventory is the amount of food items you have left when the week is over.
Ideal COGS ratio: This is dependent on your restaurant type. A restaurant can be profitable with a 50% food cost as much as a restaurant with a 15% food cost can be losing money.
After you pay business-related expenses, the amount of money remaining at the end of every month equals your gross profit.
How to calculate gross profit:
Total Sales – Total Expenses = Gross Profit
Total Sales Per Head
Total Sales Per Head can be used to understand mealtime averages and track trends over time. For example, you can use this formula to figure out how much you’re selling at brunch versus dinner. You can also use total sales per head to set and track targets for upselling and marketing strategies.
How to calculate total sales per head:
Total Sales / Number of Customers = Total Sales Per Head
Perfect Your Accounting Setup with MarketMan
Diligent bookkeeping and expert accounting will lay the foundation for wise business decisions for your restaurant.
The more you can monitor the financial health of your restaurant, the better. MarketMan can level up your operational workflow by seamlessly integrating your bookkeeping, POS and inventory management solutions.It’s a complete restaurant inventory management system that integrates with popular POS systems and bookkeeping software like Quickbooks. We can help you track your inventory and automate your accounts payable process. Check out our full list of integrations here and contact us to learn more.