The 5 Basic Restaurant Accounting Concepts That Will Help You Run a More Profitable Business
Kontabilitetit. Uhasibu. Redovisning. Comptabilite. Apskaita.
As hard as these words are to understand, the concept they all translate to can be even harder to grasp…
We’re talking about accounting.
Not everyone speaks fluent accounting… especially not busy restaurant managers.
But knowing the basics of restaurant accounting can pay dividends in helping you understand your accountant better and manage your money.
Because it’s so important, we put together this downloadable cheat sheet to master restaurant accounting principles.
Whether you hire outside help for your bookkeeping or do it all yourself, these 5 restaurant accounting concepts break down the basics… in plain English.
#1 Chart of Accounts
Chart of Accounts is the term your accountant uses to describe the buckets used to categorize the money that flows in and out of your business.
The Chart of Accounts includes assets, liabilities, revenue, expenses, and equity.
Then all of these are broken down into subcategories… things like marketing, restaurant supplies, and sales are all items you would typically find in a restaurant Chart of Accounts.
Why you should care…
The Chart of Accounts is the source of a business’s financial statements.
Without it, getting insights into anything related to your restaurant’s moneymaking & spending will be a headache… and getting your taxes done will be especially difficult.
#2 Cost of Goods Sold
Cost of Goods Sold (COGS) refers to the total cost that goes into making the product someone is selling.
It basically means the cost of all of the ingredients & items on your menu.
You can calculate COGS the hard way… how many you sold of a menu item X how much it cost to make it.
OR you can calculate your COGS when you take your weekly restaurant inventory… Beginning Inventory – Ending Inventory = COGS.
Note, your COGS should not include labor costs or utilities…
It only includes the cost of the actual ingredients that make up the dishes on your menu.
Why you should care…
Your COGS is the cost of your food and beverage inventory, which directly ties to the profit you make per plate sold.
Keeping tabs on this number will help you keep pricing where it needs to be.
And that will let you make a healthy profit on each plate of food sold at your restaurant.
#3 Restaurant Labor Cost, Occupancy Expenses and Operating Expenses
Restaurant labor cost, occupancy expenses, and operating expenses are all different categories of restaurant expenses and they’re slightly different from those of other kinds of small businesses.
Restaurant labor cost is pretty straightforward.
It’s where you account for the labor it takes to run your restaurant (remember, not in Cost of Goods Sold).
This means your cooks, busboys, servers, hosts, and anyone who’s on your restaurant payroll – from front-of-house to back-of-house.
And payroll taxes and employee benefits are included in labor costs.
Occupancy expenses are all of the costs related to… well, where you’re at.
What’s included: Rent, property taxes, utilities, and even property insurance.
Occupancy expenses are fixed costs… meaning you can’t reduce the cost of them in order to increase profits.
Operating expenses are pretty much everything else it takes to run your restaurant on a day-to-day basis.
Operating expenses are not the cost of the people on your payroll OR the cost of the ingredients or rent.
It’s just everything else from napkins and flatware, to marketing and advertising.
Why you should care…
Restaurants are the only type of small business that has occupancy expenses as a category on their income statements.
That means knowing the difference between occupancy expenses and operating expenses…
Well, let’s just say it’s mucho importante for restaurant owners.
And since labor costs are one of the largest expenses for a restaurant, it’s important to know what it is so you can invest money wisely and increase profits.
#4 Prime Cost
Simply put, a restaurant’s prime cost is COGS + labor costs.
The prime cost constitutes a majority of a restaurant’s expenses because it includes all of the food and beverage ingredients, as well as all payroll costs, taxes, and benefits.
Why you should care…
Prime cost is an important accounting term to know as a restaurant owner.
It’s where you have the biggest chance to avoid accounting mistakes, cut costs, and increase profits.
The other fixed costs (occupancy expenses and operational expenses) aren’t as easy to cut back on, and they usually make up a smaller portion of your overall expenses anyway.
#5 Cost-to-Sales Ratio
When analyzing the financial health of your business, something to keep in mind is that no number on its own can tell you everything you need to know.
For example, a large restaurant will have a high prime cost.
And a small restaurant will probably have a low prime cost in comparison.
But you can’t compare the two since the large restaurant is probably doing much more in sales than the small restaurant.
It’s apples and oranges.
In order to figure out the financial health of your business, you or your accountant should look at your Cost-to-Sales Ratio.
This puts your expense categories as a percentage of sales.
For example:
Food Cost-to-Sales Ratio = (Food Cost / Food Sales) X 100%
What’s a good Food Cost-to-Sales Ratio to aim for?
Well, the restaurant industry average is between 26% and 36%… so anywhere in between those numbers is where you want to be.
Why you should care…
Calculating Cost-to-Sales Ratio allows you to compare your business to other businesses without sacrificing accuracy.
It allows you to see how your business is really doing…
Instead of just seeing scary-high prime costs or deceiving sales numbers on their own.
Food cost management enables you to see where you’re doing well… and what areas need improvement.
In Plain English
Accounting lingo doesn’t have to sound like a foreign language.
And you don’t have to be a bookkeeping expert to master your financials.
You can go from novice to pro by digging into the basics of your restaurant accounting.
You’ll be able to better communicate with your accountant and get practical ways to run your restaurant more efficiently.
You’ll understand exactly where your money is going so you can make changes right away to save more of it.
And that’s a language everyone can understand.
Conclusion: Difficulty with Restaurant Accounting is a Thing of the Past
Eliminate 100% of your paper invoices and put your restaurant food cost management on autopilot with Orderly.
It’s food cost management done for you. And it saves the average restaurant 9 hours per month managing invoices, inventory, and food cost work.
You’ll get all the numbers you need, and you’ll only have to do a fraction of the work.
You’ll be able to manage your food costs in the palm of your hand and never have to deal with invoices again.
It’s a restaurateur’s dream.
We’re big fans of RASI here at Orderly… they’re a restaurant accounting firm that combines the expertise of professional accountants with cutting-edge technology. If you need accounting help… we definitely recommend the experts at Restaurant Accounting Services, Inc.