Problems with the financial management of restaurants

While restaurant owners are aware of the financial management of their business, they are more involved in fixing the day-to-day issues that keep it running smoothly. Unfortunately, a financial accountant is a luxury that many small restaurateurs cannot afford. This article looks at six main accounting problems restaurant owners often encounter and how to either prevent or solve them once they occur. Being a small business owner is always challenging and the restaurant business is financially complex.

This article focuses on the problems that can be solved with some good accounting knowledge and procedural methods. By teaching restaurant owners how to look for 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 topics addressed here focus on:

Problem one – lack of accounting system

Problem 2 – When the main business expenses are higher than the total sales

Problem Three – Menu Offerings

Problem Four – Food and Beverage Inventory

Problem Five – Problems that arise when inventory exceeds sales

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

By examining these issues, which are common problems for restaurant owners, it is possible to manage and fix these issues before the restaurant spirals out of financial control and can help an owner employ accounting methods.

Problem one – lack of accounting system

The first problems a restaurant owner has to face when trying to avoid accounting problems is investing in good computer software that will help keep track of all transactions. Nessel, owner and financial advisor to restaurant owners, recommends QuickBooks for maintaining a ledger of all financial transactions that take place in the restaurant. All financial transactions must be recorded in the general ledger so that accurate records can be kept. Without heeding this, the owner will not be able to run the restaurant without keeping accountability in the ledger. Nessel continues: “My experience is that the proactive management of the business is directly related to how well the owner manages their ‘books’. Therefore, a key concern for the owner is to set up an accounting system to ensure the business runs smoothly financially. The lack of accounting and financial controls is the number one reason most businesses fail, and when a restaurant gets into trouble, this is the first problem to address. The Restaurant Operators Complete Guide to QuickBooks is recommended by many accountants as a guide to setting up a good bookkeeping system.

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Problem 2 – When the main business expenses are higher than the total sales

Statistics say, “Restaurant food and beverage purchases plus labor costs (wages plus employer-paid taxes and benefits) account for 62 to 68 cents of every dollar in restaurant sales.” most restaurants are the biggest problems. These costs, unlike utilities and other fixed costs, can be controlled. An owner can control product purchase and handling as well as menu selection and pricing. Other controllable expense costs for a restaurant include hiring staff and scheduling staff in a commercially efficient manner. “If a restaurant’s prime cost percentage exceeds 70%, a red flag will be raised. If the restaurant cannot compensate for these higher costs with, for example, very cheap rental costs (e.g. less than 4% of sales), it is very difficult, and perhaps impossible, to be profitable.”

The cost of renting a restaurant (when you include taxes, insurance and other expenses that may fall into this category, such as association fees) is the highest cost a restaurant will incur after prime costs. Rent averages about 6-7% of a restaurant’s turnover. Since these are fixed costs, the only way to reduce the quota is to increase sales. If costs exceed 8%, it makes sense to divide occupancy costs by 7% to find out what level of revenue is needed to keep rental costs under control so they don’t put the restaurant out of business

Problem Three – Menu Offerings

The prices for most offerings on a menu are set by the owner after visiting other local restaurant competitors and viewing their offerings and menu prices. However, menu pricing should never be done simply by looking at their competitors’ menus. Menu prices must be fixed (and periodically renewed as supplier costs fluctuate) and documented in the software books. Some math skills come in handy as a menu converts product prices from purchases into recipe units. A restaurant owner needs to know the cost of making a recipe in order to know how to price it. That means knowing what the ingredients cost and the amount of ingredients used per recipe. Software is available to help with this, and Microsoft Excel can be used to adjust menu costs while linking to available inventory items.

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Some of the things an owner can do to help with bookkeeping that are controllable from the menu would be:

– Prices in the menu for minimum wage increases.

– Using value-added meals to increase profits.

– Reintroduce price increases while maintaining your customer base.

A menu needs to be updated regularly as supplier costs change. Depending on the provider, this can be positive or negative. In any case, with math and some help from inventory tracking software, menu items can be adjusted according to supplier costs.

Problem Four – Food and Beverage Inventory

It’s a common mistake for restaurant owners to examine the income statement and assume that food expenses can be divided by sales during that period to find the cost of what was sold. This is an error. For an accurate food cost calculation, the inventory at the beginning and end of the period must be known. “For a restaurant with $50,000/month grocery sales, a $1,000 inventory difference between the beginning and end of the month can result in a 2% variance. That variance is equivalent to half of the total annual profits of a typical full-service restaurant. “Put simply, you can’t manage the cost of groceries if you don’t keep a record of what they are. It’s important to account for inventory changes when calculating profit and loss.

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

Problem Five – Problems that arise when inventory exceeds sales

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If the food inventory is too high, the cost becomes too high and waste is inevitable. Calculating storage needs is absolutely necessary to prevent food from spoiling, being over-portioned in recipes, or even being stolen. “A typical full-service restaurant shouldn’t last more than 7 days on average.”

There is an equation you can use to figure out how much inventory is required for a restaurant to function properly. The equation is:

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

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

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

Problem Six – Using a Balance Sheet and an Income Statement

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

A very important point is that the reporting should contain a start and end date and also break down fixed costs so that a weekly net profit can be calculated. As mentioned, Microsoft Excel and other tracking software can be used for inventory and other expenses, even for planning that affects profits. Without a proper inventory, excess, planning, menu pricing, portioning and everything covered in this study can cause a restaurant to go under. A restaurant owner simply needs to take the initiative to adopt some simple accounting strategies. It may seem like a restaurant owner has to do everything; But with good software and a systematic method in place to keep a restaurant on track financially, there will be financial rewards worth the work.