How Modern Restaurant Accounting Impacts Profitability

Restaurant accounting on tablet

Keeping track of your finances is time-consuming, and yet it has enormous implications for your bottom line. Staying competitive in the modern restaurant industry requires devoting time, energy, and resources to restaurant accounting. 

Modern restaurant accounting methods depend on accurate and timely data about your business. Tracking and measuring key restaurant metrics against industry benchmarks, through restaurant accounting, can help you understand your business trends, stay competitive, and strategically act on future projections. 

What is Restaurant Accounting?

The restaurant industry is infamous for slim margins. This reality means that to stay profitable, your restaurant shouldn’t focus only on attracting more customers. You also need to turn your focus inwards, increasing profit by analyzing and optimizing in-house costs using restaurant accounting.

Restaurant accounting requires tracking and analyzing the flow of all your revenue, expenses, assets, and liabilities. Staying up to date with your bookkeeping isn’t just for paying your taxes. Diligent, knowledgeable restaurant accounting can help you create a solid foundation for your restaurant and enable smart, forward-thinking decisions for your restaurant’s financial health. With accurate reporting about key performance indicators (KPIs), you can make fast, proactive decisions about potential issues.

Restaurant Accounting Basics and Why It Is Unique

The success of your restaurant depends on many factors, but restaurant accounting delivers some of the most clear indications of the fundamental financial health of a restaurant.

Like accounting in other industries, restaurant accounting typically breaks down expenses into controllable and non-controllable costs. Non-controllable costs, like the fixed costs of rent, insurance, and salaries, are predictable expenses. Controllable costs, like your prime cost of food and labor, fluctuate over time with vendor prices, sales, and other external factors. To stay on top of your operations, your restaurant accounting should track both types of expenses.

Foundational restaurant costs can be divided into:

  • Cost of Goods Sold (CoGS): also known as food cost, the total cost of all food and beverage ingredients your restaurant used during a specific period of time
  • Labor costs: expenses associated with payroll, payroll taxes, and employee benefits
  • Occupancy expenses: fixed costs like rent, property taxes, and insurance
  • Operating expenses: everything else it takes to run your restaurant, like plateware, marketing costs, or professional fees

Tracking these costs will help you understand and streamline your expenses as a restaurant owner. By comparing your costs against industry standards, you can identify cost leaks or trends that require action. Restaurant accounting allows you to decide where to focus on in the immediate and long-term, based on the state of your financial health.

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The restaurant industry has unique qualities and business structures. For example, restaurants tend to have a large, fast-changing inventory with a limited shelf life, which affects food cost calculations. On the labor cost side, many restaurant employees are paid in wages and tips, which presents payroll, tax, and labor compliance challenges. Restaurants face some unique operational challenges, making restaurant accounting a particularly important priority.

Modern Restaurant Accounting Issues That Impact Profitability

Modern restaurant accounting is a powerful tool that, when used correctly, can play a large part in protecting a restaurant’s bottom line. Here are 7 common modern restaurant accounting issues that can impact profitability.

Not using a restaurant-specific accountant or accounting system

As mentioned above, restaurants have specific KPIs and business and tax structures that are unique to the restaurant industry. In order to meet slim margins, restaurant accounting needs to meet high standards for accurate labor and inventory metrics.

When choosing an in-house or external accountant or bookkeeper to work with, make sure to choose someone who is familiar with the restaurant industry. Whether these accounting professionals do financial consultations, manage payroll, or help you create advanced business projections, they should have a familiarity with the special operational challenges restaurants face.

In addition, consider using restaurant accounting software that contains tools built specifically for the restaurant industry. While general accounting software may be able to handle some bookkeeping functions, restaurant-specific accounting systems are designed to handle things like frequent reporting periods or tipped labor.

Too many systems without adequate integrations

For every new technological task, there are dozens of new software systems built as a solution. Unfortunately, many accounting systems are not built with integrations in mind, leading to manual, time-consuming exporting and import workarounds.

Modern restaurant accounting systems should involve full integrations between tools. The most important integration is between your restaurant accounting system and your Point of Sale (POS) system. The POS system has real-time, detailed snapshots of daily sales, menu performance, and labor cost metrics. Having this data stored and tracked with your accounting system can help you identify historical trends, make decisions about current costs, and forecast future sales and labor needs.

Infrequent or insufficient KPI reports

Your Key Performance Indicators (KPIs) are critical to your business health. While most KPIs can be controlled through smart business decisions, metrics can quickly get off track if not monitored.

You should review critical KPIs about your prime cost, CoGs, inventory, and labor as frequently as possible. These reports should be examined on at least a weekly basis, rather than by month or quarter. When you’re tracking KPIs on a weekly basis, you can head off issues before they become long-entrenched problems, stopping leaks in your bottom line.

Some key reports, like your Profit & Loss (P&L) statement, should be run every day. Your P&L statement reflects your total sales and costs, giving you a financial snapshot of the day. Other key reports include your operating cash flow, which shows whether you are able to generate enough cash flow to maintain or grow your operations, or whether you should consider external financing. Your financial forecast also tracks how much you spend on controllable vs non-controllable expenses, and what profit remains. These KPI reports are critical components of modern restaurant accounting that help you maintain your profitability.

Burdensome bank account reconciliation

Reconciling your bank accounts is a time-consuming but absolutely necessary task. It proves that you have matched up all of your daily sales transactions and your books are accurate. From looking at all recorded financial transactions to comparing records against bank statements, credit cards, and other financial transactions, it’s a lot of work to make sure that records match. However, this process is essential to make you aware of lost checks, incorrect deposits, and other variances. 

Restaurants have a high number of transactions, making it especially important to keep track of transactions and catch accounting errors. Because manual entry is incredibly time consuming and error-prone, some restaurants are now moving to restaurant-specific accounting systems to make automated bank reconciliation a fast, easy, and efficient process.

Using inefficient and inaccurate Accounts Payable system

Your Accounts Payable (AP) handles paying invoices from the vendors who provide your food and beverage inventory and other restaurant services. Some of these suppliers deliver to restaurants up to twice a week, making keeping up with invoices a time-consuming task.

Modern end-to-end AP automation for restaurants means that restaurants can capture, approve, and pay invoices, all from one customized workflow. AP automation enables you to pay bills on time, without any errors, so your orders remain on schedule. In addition, avoiding fees and maintaining good relationships with vendors helps protect your bottom line, freeing you to focus on other parts of operations.

Inaccurate tracking of prime costs

Your prime cost, made up of your food cost and labor cost, is by far the biggest expense for your restaurant. When you efficiently slim down your prime cost, you add money back to your profit margin.

Modern restaurant accounting software can help you control your prime cost through tools built to help you optimize food and labor costs. Restaurant inventory management software can help you track your inventory to spot and minimize food waste, and it can also help you keep tabs on vendor pricing changes. Restaurant accounting systems can help you track your labor hours, by day part or specific role, to help you meet your labor goals and optimize your labor based on sales forecasts.

Not outsourcing technical, complicated tasks, like payroll

While some tasks are best done in-house, other tasks may be best suited to external specialists. For restaurant owners, payroll can be a difficult, time-consuming task. A professional payroll specialist can help you manage your payroll, saving you hours each week to focus on restaurant operations, as well as ensuring you are complying with all applicable local and state laws.

Technology Innovations that Improve Restaurant Accounting

Restaurant accounting software has advanced in recent years, with innovations designed to help you and your accounting team easily work together to improve your restaurant financials. In particular, automation tools like automatic journal entries or automated bank reconciliation have helped improve restaurant accounting. Miskeying numbers is a common human error, but incorrect information in your books can hurt the accuracy of all your business reports and KPIs. 

Through integrations and flexible accounting software, a modern accounting system can automatically collect and accurately organize financial data and transactions. This removes the time, effort, and many of the errors in the accounting process.

Modern restaurant accounting solutions can also help you track your financial health in real time. Many times, restaurants struggle not because they don’t have customers, but because the restaurant’s expenses are too high day-to-day. Keeping your restaurant expenses streamlined and optimized is one of the most important and effective ways to keep your restaurant profitable. 

Restaurant Accounting Informs Your Business Strategy

No matter what unique challenges your restaurant faces, restaurant accounting can help you stay on course. Modern restaurant accounting systems offer more tools than ever to keep your restaurant running smoothly and your bottom line in the black.

Restaurant365 is a cloud-based restaurant accounting software platform that integrates with more than 90 POS systems, as well as food and beverage vendors, payroll providers and financial institutions. For more information on how you can benefit from modern restaurant accounting, download The Essential Guide to Modern Accounting for Restaurants.

Ready to learn how Restaurant365 can help you streamline your back office and discover profits?

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