How do you know your restaurant’s doing well?
You’ve got a waitlist every night…
People leave GOOD reviews on Yelp…
Your staff seems happy…
Yes, these are all reasons why you may think you’re running a healthy business. The problem is… they don’t necessarily mean profits are up.
The one way to tell if your restaurant is doing well?
Looking at your books regularly.
The truth is, if you don’t take your restaurant accounting seriously – seeing exactly where your money is going and why – you’re most likely headed towards disaster.
There’s no way around it… your finances are a major part of your daily operations. Which means every penny you save or spend has an impact on your bottom line.
Because managing your budget and keeping an eye on your money is so important, we’ve put together 5 critical mistakes restaurants make with their accounting… and how to fix them.
#1 Not Using a 4-Week Accounting Period
The first mistake you should avoid with your restaurant accounting is only looking over monthly financial statements. In other words, only balancing your budget at the end of every month… October, November, December, etc.
Instead, you should use a 4-week accounting period that begins on a Monday and ends on a Sunday.
There are a few reasons for this…
First, using a 4-week cycle makes it easier to compare profits and losses (P&L) to other financial statements.
For example, it’s not accurate to compare your P&L for July of this year to July of last year. There weren’t the same number of Fridays and Saturdays during July of last year as this year… so your numbers are going to be off.
On the other hand, when you use a 4-week cycle from Monday to Sunday, you can accurately compare time periods from this year to the same time periods last year. In other words, each statement includes the same number of Mondays, Tuesdays, Wednesdays, etc.
A 4-week cycle may not be as important in some industries, but it’s essential in the restaurant industry.
That’s because the majority of your business lands on specific days of the week, so it’s easier to see trends and changes by doing your accounting using a 4-week timeline.
#2 Looking at Your Financials on a Cash Basis
The other huge mistake restaurants make when it comes to their accounting is looking at finances on a cash basis instead of on an accrual basis.
What’s the difference between cash and accrual accounting?
Glad you asked. The concepts are pretty simple…
Accounting requires you to look at expenses and revenue. And with cash accounting, you record these expenses and earnings when they’re actually paid, not when the services are rendered.
But that means if you order maintenance work on an oven in your kitchen and don’t pay the invoice until the following month… the expense won’t be reflected in the proper time period.
This makes it impossible to see the proper balance of profits and losses during any given time period… so when you look at your finances on a cash basis, you’re not getting an accurate number.
#3 Not Reconciling Bank and Credit Card Balances Every Month
You’ve got a million things to do. So sometimes tasks slip through the cracks… like remembering to reconcile your bank and credit card balances every month.
The problem is if you don’t take the time to make sure they match… you’re going to have major problems.
Well, it’s perfectly natural – even common – for accounting errors to happen a few times a month. And if you don’t reconcile your bank and credit card statements each month, you won’t catch these errors.
This could leave you short of funds. Or you may find yourself without the overhead you thought you had. Both of which are major uh-ohs.
Reconciling your bank and credit card statements can also help you proactively address a bunch of other problems that might pop up…
1. You’ll see whether you’ve paid all your expenses or not. For example, if a distributor claims they haven’t been paid, reconciling your statements will help you catch a check that hasn’t cleared or other missing payments.
2. You’ll be able to keep a finger on the pulse of your business’ health. After all, your main concern as a restaurant owner is knowing exactly where your money is going.
3. You can track all your monthly expenses and revenue. Then you can compare it to your 4-week financial period to see if you’re staying on budget or not.
4. You can prevent loss. Reviewing your financial statements will allow you to identify if money is missing. Even a small amount of money missing each month can add up over the course of a fiscal year.
Make sure you check your statements from the bank and credit card companies every month. Compare these statements to your books to detect errors, mistakes and theft… and save more of your hard-earned money.
#4 Not Paying Attention to Your Cost of Goods Sold
Not taking a weekly restaurant inventory can have a negative impact on your accounting and finances. You can’t accurately calculate food costs and make changes to improve your business if you’re not paying attention – nor can you get your Cost of Goods Sold, which is the most important metric for the health of your restaurant.
For example, at the end of the month, there’s nothing you can do about over-ordered ingredients. You can’t take those perishable items that were over ordered and place them on a weekly special so they don’t go to waste… by the end of the month, they’ve already gone bad and you’ve already lost your money.
This is why knowing your COGS is a must.
It will allow you to see how much you’re spending on food, how much is going to waste, and which items never get touched. You can get a clear picture of what’s selling and what’s not.
The bonus of knowing your COGS? You’ll find your shelves are more organized and you’ll know exactly what’s moving through your kitchen.
#5 Choosing an Accountant That Doesn’t Specialize in Restaurants
The final mistake restaurants make with their accounting is hiring someone to do their books that doesn’t specialize in accounting and taxes for restaurants.
Most restaurants aren’t even aware they’re making mistakes with their accounting. And an accountant who doesn’t specialize in restaurants probably won’t know either.
In fact, the restaurant accounting mistakes listed above are only the most critical ones… there are plenty of other issues restaurant owners should avoid.
Only an accountant with specific experience in the restaurant industry will give you the valuable advice you need for the unique accounting issues your business faces.
To Sum It Up…
If you’re guilty of making one or more of these mistakes… don’t worry… it’s not hard to make a change.
In fact, it’s pretty easy…
Switch to a 4-week financial period, don’t use cash accounting, reconcile your statements monthly, know your COGS, and hire an accountant that knows what they’re doing.
Making these changes will give you a handle on exactly where your money is going and why. And it will help you truly gauge the health of your business.
Pro Tip: Make the entire restaurant accounting process easier by using a restaurant app to manage invoices and eliminate data entry.
The Orderly App eliminates all invoice data entry for you and your accountant.
Our guest author for this post is William Lee. We’re big fans of William here at Orderly. William is the accountant extraordinaire at Bookkeeping Chef. He specializes in restaurant accounting and his clients can count on him to do everything from bookkeeping to payroll to controller services. If you’re located in New York and are looking for accounting help, we highly recommend William Lee.