Why Restaurant Inventory Management is an Accounting Function

The success of your restaurant group, in the short- and long-term, rests on a solid foundation of restaurant financials.

Restaurant accounting covers all areas of your business, even inventory. While you may think of your restaurant inventory as part of operations, restaurant inventory management should also be considered an accounting function. Every time your restaurant buys, counts, transfers, or wastes inventory, it must be entered as a journal entry in your accounting general ledger. So, inventory has an important place in your restaurant accounting.

You invest a significant part of your budget in purchasing inventory. When you can integrate your restaurant inventory management with your accounting, you can develop better inventory control while also achieving a more detailed picture of your finances.

Understanding restaurant accounting basics

Operators, owners, and managers can all benefit from becoming well versed in the basics of restaurant accounting. If you can master the fundamentals of accounting, you can leverage the information and data to make better decisions in day-to-day operations.

Your overall profit margin depends on your sales relative to expenses. And while it is critical to focus on increasing your sales, one of the most important parts of accounting basics is starting with accurate recording of your expenses.

There are four fundamental categories for expenses:

  • Cost of Goods Sold (CoGS), also known as food cost (cost of all food and beverage ingredients)
  • Labor costs (employee wages, payroll taxes, employee benefits, etc.)
  • Occupancy expenses (fixed costs such as rent, property taxes, and property insurance)
  • Operating expenses (other costs such as equipment repairs, professional fees, or laundry)

Your food costs and labor costs are the two largest costs for your restaurant, making up what is commonly called your “prime cost.”

Inventory’s place in restaurant accounting

While inventory may not be the first word that comes to mind when you think of restaurant accounting, your inventory is an accounting function and represents a large financial investment. Those aren’t just cases of produce sitting on the walk-in shelf; they represent funds that could be in your account.

A streamlined restaurant inventory management system can have a huge impact on your accounting. If your inventory goes to waste, or it spoils before it is sold, it is an expense that directly impacts your bottom line.

In addition, as we’ll get into next, since restaurant accounting relies on an accurate picture of your expenses, accurate inventory management data is key to getting an accurate CoGS number.

restaurant-inventory

How your restaurant inventory relates to net profit

There is no doubt that your inventory impacts profitability. Your CoGS is determined by the cost of creating your menu items. This relies on knowing what you have purchase as restaurant inventory, calculated with a formula such as:

CoGS = Beginning Inventory + Purchased Inventory – Ending Inventory

Your CoGS number is then part of the formula to understand your net profit:

Net Profit = Gross Profit (Total Sales – CoGS) – Labor Cost + Total Operating Cost

Understanding your restaurant inventory is fundamental to your CoGS, and therefore your accounting.

Why you should integrate accounting with inventory management

Your restaurant inventory management is already part of your accounting, whether you recognize it or not.

When your restaurant gains new inventory, transfers it to another store, or records food waste, it represents an expense. As such, it should be a journal entry in your accounting general ledger.

If your accounting software and inventory software aren’t integrated, these journal entries need to be entered manually, which is time consuming and can increase the chance for errors.

If your restaurant accounting solution offers accounting integration with your inventory system and your POS, you can automate tasks like a completed stock count becoming an inventory journal entry. As you refine your systems and improve processes over time, this digital trail allows you to dig into transactions in your general ledger to understand any trends or errors.

Using restaurant-specific categories in your chart of accounts

Your chart of accounts is a key piece of your accounting ecosystem, listing every transaction that happens in accounts related to your restaurant business. It covers your assets, liabilities, revenue, expenses, and equity. It is, essentially, the source of your restaurant’s financial statements.

Controlled by your accounting system, your chart of accounts determines what categories you can use on your financial reporting. The more detailed your categories, the more you can use data in a granular way to identify trends or areas for improvement.

If you are using a legacy accounting system that isn’t restaurant specific, it may lump all restaurant inventory into the general “food and beverage” category.

In comparison, next-generation restaurant accounting software allows you to create a chart of accounts that is designed for the industry. Restaurant-specific accounting software, integrated with your inventory management system, enables you to create specific categories like seafood, chicken, beer, wine, and others.

With the ability to use restaurant-specific categories, tied into direct feeds of point of sale (POS) data and automated invoice coding, you can automate a level of detail that can drive data-informed decision making.

In addition, if you have multiple locations or entities, a restaurant-specific accounting system allows you to create a uniform chart of accounts and compare transaction data side by side.

Simplifying intercompany inventory transactions

For restaurants with multiple locations, transferring inventory between stores can be a common practice. Centralized purchasing that is shared by several locations in the same region may make vendor prices more affordable. In addition, flexible intercompany transfers help individual restaurants avoid food waste or running out of menu items.

While intercompany transactions may help your individual stores, they need to be recorded as accounting transactions by both legal entities.

Legacy accounting programs generally used to require different logins to access different databases. However, today’s restaurant accounting technology can facilitate automatic intercompany entries for different legal entities in a single intercompany transaction.

With a centralized database, transfers between restaurants are automatically recorded in the general ledger, while still allowing high-level management to see what is happening at the store level. This automated process can streamline the tedious task of making multiple separate entries, as well as increase accuracy of data.

Automating vendor invoices for accuracy and cost savings

Your restaurant group may process hundreds of invoices a month, making manually managing accounts payable (AP) an incredibly time-consuming task. A functioning, efficient AP department is critical to get invoices through layers of approval and ensure that payment is issued correctly, and on time. However, individually entering stacks of invoices can lead to wasted time and accounting errors.

Automating AP for vendor invoices can create a more efficient, and accurate process. With AP automation, vendors can upload invoices for processing. As invoices are automatically recorded into one single platform, you can ensure information is accurate by location, vendor, category, and amount.

Additionally, with AP automation, invoice documents are seamlessly added into accounting records that are coded to your general ledger, which automatically adds inventory into the system.

Conclusion

Thinking about inventory management as an accounting function allows you to leverage data to make better financial decisions. Next-generation accounting technology allows you to easily budget for multiple locations at a time, automatically pulling data from your food and recipe costs, inventory and more.

If your restaurant business is focused on streamlining restaurant inventory management as an accounting function, equip your team with tools that will help increase operational efficiency. Restaurant365 is an all-in-one restaurant management system incorporating restaurant accounting software, restaurant operations software, inventory management software, payroll + HR software, and scheduling software into a cloud-based platform that’s fully integrated with your POS system, as well as to your food and beverage vendors, and bank.

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