Financial Foodamentals: Accounting and Financial Tips for Every Stage of Your Restaurant’s Life

Throughout the year, we will be writing about accounting and financial tips for restaurants. We want to share insights with you about operations and restaurant growth strategies that you can use for your own restaurant.

Our Restaurant Group provides restaurant accounting, consulting and back office support to organizations across the country. Our restaurant roots run deep and our unique knowledge and experience in the industry allows you to concentrate on running your business while we take care of the rest.

Starting Out

• Budgets – How can I use them to my advantage?
• What to consider when looking for an accounting platform
• How to find, hire and work with your accountant

Building Your Restaurant

• Section 179 Can Help Speed Up Deductions
• Be calm when the storm hits: Get a disaster plan in place
• Back office needs: To staff or outsource?
• When to outsource your accounting and back office
• Surviving a Cash Crunch
• Understanding wage garnishments
• Don’t be fooled by fraud
• 5 things a restaurant owner needs to know about tipping rules

Ready to Retire or Sell?

• Make sure your business (and the owner) is ready before you hand over the keys

Five Mistakes Restaurant Owners Make (Financial Foodamentals)

There are several mistakes new owners make when starting a new restaurant. The following five mistakes are the ones that we see the most often:

  1. Not having enough start-up capital. Restaurants require a lot of capital. You’ll need capital to lease your building, pay your wait staff, outfit the kitchen, buy furniture, stock the bar, purchase insurance, pay your lawyers, order new technology, advertise your restaurant – you get the picture. You’re not going to make money the first day, and it’s important that you have enough cash to not only fund your business, but to weather the early storms you’re guaranteed to face.
  2. Not selecting the right operating structure. It’s best to begin the selection process by thinking about how you’re going to fund your restaurant. Are you going to fund everything through a personal loan? Do you need money from another investor? You also need to think about who you’d like to have involved in the business. Are you going to have multiple business partners? Who will be the other decision-makers, and how much power do you want them to have?Once you determine your goals, you can select the operating structure that can best help you meet those goals. And keep in mind that the selection of operating entities you have will be heavily influenced by where your restaurant is located. You will be limited to the operating structures available in your state.
  3. Not getting an accounting system in place before you open. Whether you have an internal accountant or are looking to hire an outside CPA, it’s important you have an accounting software package in place from day one. A good software setup should include an accounting system where you book your debits and credits; a Point of Sale (POS) system where you take orders; and a back-office system for food inventories and planning your menus. If these three systems can be integrated, even better. Together, they can help you track your progress and monitor your expenses, so you can stay on budget.
  4. Having inadequate staffing. Efficiently staffing your restaurant is easier said than done, and while it may take some experience to get it perfect, you can avoid some of the common mistakes by planning. First, before you make any hiring decisions, select a payroll provider or hire a payroll service. Second, spend the necessary time to hire good-quality staff for both the front and back of house. Turnover can be very expensive; avoid it if you can. Third, estimate the times of day you will be busiest, and know how to schedule your shifts to cover those peaks. Fourth, take advantage of your payroll reports by looking for patterns of under- and over-staffing. And last, know how often and in what manner you are going to pay your employees. Decide whether direct-deposit should be used or if cash payments might be better.
  5. Opening in the wrong location.You may think that a highly-visible location or locations with heavy foot traffic are your best options but remember that those prime locations come at a cost. Know your budget and stick to it. Also, know whether you should be renting or buying. Work with your accountant to see which decision will work best with your available capital and your long-term goals.

If these common restaurant mistakes sound familiar, contact Sean Dawson, CPA, Shareholder, to get on track and set up for operational success.

What Are Your Restaurant’s Financials Telling You?

There are three financial statements that you should review regularly to help you determine your restaurant’s profitability.

The Balance Sheet

The balance sheet is a point-in-time snap-shot of your assets and liabilities. Your assets are split into two categories: current and long-term. Current assets are items like cash, receivables, and inventory. Long-term assets are items like equipment and real property. Your liabilities are split into these same two categories. Current liabilities are items like accounts payable, accrued payroll, or income taxes. Long-term liabilities are items like car loans or mortgages.

The difference between your current assets and current liabilities will give you your “working capital.” Your working capital is a metric that reveals how healthy your restaurant is in the short term. A good working capital (i.e. more current assets than current liabilities) will show your investors that you can meet your daily operational expenditures.

The final part of the balance sheet is the equity section. If your restaurant is organized as a partnership, this would show up as “Partners’ Capital.” If your restaurant is an S corporation, it would be represented as “Shareholders’ Equity.” Whatever it is called, this equity shows how much value you have built into your business.

The Income Statement

The income statement is helpful in a different manner: it can show you the profitability of your restaurant. It also allows you to compare your sales to their associated costs to determine if you’re charging enough; it lets you see how much you’re charging in overhead; and it can reveal expense outliers that you wouldn’t have been able to determine from looking at the daily sales report from your POS.

The income statement will show your revenue and expenses over a specific period. All good accounting software will allow you to generate comparison reports, as well. For example, you can see whether you made more money this December compared to last December, or you can see if your second quarter was more profitable than your first quarter. Your income statement has a lot of helpful information in it if you learn how to utilize the reports to your advantage.

Cash Flow Statement

The statement of cash flows will show your restaurant’s cash position. It will show all the cash going in and all the cash going out of the business over a certain period. This information will be grouped into three large categories: operating activities (daily cash deposits, interest payments, vendor payments, etc.), investing activities (principle payments on loans, fixed asset purchases, etc.), and financing activities (cash paid to shareholders, dividends paid, etc.). It can be a tool to help you fully understand how you generate cash and how those funds are being used.

The cash flow statement is especially helpful to businesses who use the accrual basis of accounting, because there is no other report that reveals anything about the company’s cash activities.

Using all three of these types of financial statements is key to knowing the true financial picture of your restaurant.

If you have questions about how to interpret your financial statements, we’re here to help. Contact Sean Dawson, CPA, Shareholder, for more information.

Which business entity is the right one for your restaurant?

Water glasses on tableEntity selection can be one of the most influential decisions a restaurant owner can make. The entity that you choose will impact how you file your taxes, and perhaps even the amount of taxes that you pay. While there is no one-size-fits-all solution for restaurant owners, here are a few questions you can ask to help you make the correct entity selection for your restaurant business.

What are your business goals?

Entity selection will affect all the “big picture” sectors of your business, so it’s best to think of your long-term goals when making the determination. Is your goal to grow slowly over time? Do you want to franchise your business? Do you want to create a successful business but then sell off your voting shares? Having flexibility in your ownership structure may be valuable to you, or you may be fine with sticking to a small group of more permanent owners.

How will you fund your restaurant?

If you need additional funding, you can choose to fund your business with either debt or equity. By offering equity to potential investors, you will be giving up a portion of your business, and perhaps a portion of the control as well. 

How much liability do you want to carry?

Many entities will protect its owners from being on the hook for the business’s debts, but not all. A sole proprietorship, for example, will most likely expose your personal assets to the risks of your business. A limited liability company (LLC), on the other hand, does a good job at shielding your personal assets from your business’s potential debtors.

What are the tax implications?

Taxes can play a big part in entity selection, especially with the Congressional changes we’ve seen lately. If you’re a sole proprietor, your restaurant’s taxable activities will be comingled on your personal return. If you’re an LLC or a partnership, your restaurant’s activities will be reported on a separate return, but you will pay the tax yourself. If you’re a C corporation, the restaurant will act as its own entity and will pay its own tax. And beyond just your annual tax considerations, you’ll need to think about how exiting the business will be taxed. Often, restauranteurs forget to consider the cost of exiting the business, but it should be an important part of the conversation.

If you’re unsure about the right entity selection for your situation or to find out if you’ve made the correct selection for your restaurant, contact Sean Dawson, CPA, Shareholder, for more information. 

Do You Know How to Pay Your Employees?

Image of waitressAs you begin planning for your new business, are you fully aware of the payroll responsibilities you are about to take on? Payroll laws can be one of the most confusing areas for restaurant owners, and for good reason: labor laws differ depending on your location. While the Federal government creates the labor laws we follow in this country, it is up to the states to interpret those laws. No matter what state you’re in, though, there are a few basics you should understand about payroll.

How do I set up payroll?

Each state will be different, but generally, your first step is to contact your state’s Department of Revenue or equivalent division to obtain a payroll or withholding tax account number. Your state can help you determine your filing frequency (quad-monthly, semi-monthly, monthly, etc.) and help you set-up withholding and payroll tax remittance.

What reports will I have to file?

When a new employee joins your workforce, you are required to confirm that they are lawfully allowed to work in the US. This is done by filing form I-9, Employment Eligibility Verification, on their behalf. New employees also need to fill out Form W-4, Employee’s Withholding Allowance Certificate, which informs you how much Federal tax to withhold from their paychecks every period. Many states have a state-specific version of this form, as well.

Four times per year, you need to file Form 941, Employer’s Quarterly Federal Tax Return, which reports all payroll-related amounts collected, paid, and remitted that quarter. In addition, at the end of the year, you need to report Form W-2, Wage and Tax Statement, which serves as the employee’s main tax document showing their gross wages, amounts withheld, and taxable wages and Form 940 for federal unemployment. 

What will my employees’ pay stubs look like?

A pay stub will begin with an employee’s gross pay. This is the amount earned before any deductions. From that amount will come pre-tax deductions such as 401(k) contributions, HSA contributions, and commuter benefits. Next, Federal and state taxes will be taken out, like Social Security, Medicare, and withholding taxes. Some states will require unemployment taxes to be withheld, as well. The remainder will be the employee’s take-home (or “net”) pay.

I’m nervous I’ll do it wrong. What else do I need to remember?

Here are a few quick tips to remember:

  • File your payroll taxes timely, no matter what. The Failure to Deposit Penalty can be significant, and it can be difficult to catch up if you skip a pay period. 
  • Fill out your forms correctly the first time. You may be dinged for miscalculated withholding amounts.
  • Keep clean records. The Fair Labor Standards Act dictates what records to keep, and how they should be maintained. 
  • Choose a payroll provider you trust. If possible, find a provider who works with other restaurants.
  • Protect employee information. Confidentiality should be of the utmost importance.

Our restaurant advisory group can help you set-up payroll for your restaurant. Contact Sean Dawson, CPA, Shareholder.

Cash vs. Accrual Accounting Methods:
What is the best choice for your restaurant?

Image of restaraunt kitchenMaking decisions – even small ones – about your business can have long-term ramifications if you don’t do your homework first. One of the most important decisions you make when opening a restaurant is choosing which accounting method to use for your financial reporting.

In a nutshell, you have two options: cash accounting or accrual accounting. Each has its strengths and weaknesses depending on the size of your business, your restaurant’s niche, and the growth phase you’re in.

The method you choose for your restaurant accounting affect when revenues and expenses are recorded. 

Cash Accounting

For most non-accountants, cash accounting (aka “cash basis”) is the easiest method to understand. Under cash accounting, both revenue and expenses are recorded at the moment of receipt or payment. Pretty simple.

Income is booked when you receive cash or charge a credit card, not when a customer places an order with your restaurant. This is similar to how you manage your personal household with your checkbook. Under this method, it is not required to recognize revenue (and thus pay taxes) until you receive payment from your customers.

Example: Your business offers catering services, and you typically collect 50% of the payment upfront and 50% at the event. Under the cash method of accounting, you recognize 50% of the revenue when the customer places their order and 50% the day the food is delivered.

Under the cash method of accounting, expenses are booked as vendors are paid. This method gives you, within certain limitations, the freedom to control your restaurant’s bottom line. In other words, you can take expenses as your income statement needs them.

Example: On December 1st, your business ordered a shipment of napkins from a supplier, who has a trade credit of net 60. This means that they require payment within 60 days. Your tax accountant tells you that your annual tax return will be better if you put off paying that invoice until the next tax year. You pay that invoice on January 10th, well within the 60-day time period required by your vendor, and the expense is recorded on the next year’s income statement.

Accrual Accounting

Accrual accounting (aka “accrual basis”) is a bit more complex than cash accounting. Under accrual accounting, revenue is recorded as it is generated, and expenses are recorded as they are incurred, regardless of whether or not cash has changed hands.

Let’s look at the revenue side: income is booked at the time the sale is made, even if payment as not yet been received.

Example: Your business offers catering services, and you typically collect 50% of the payment upfront and 50% at the event. Under the accrual basis of accounting, you recognize all of the revenue when the customer places their order, even though you haven’t been paid in full.

When considering expenses under the accrual method, they are booked in the period you order, use, or consume the item in your business. 

Example: On December 1st, your business ordered a shipment of napkins from your supplier, who has a trade credit of net 60. This means that they require payment within 60 days. Your tax accountant tells you that your annual tax return will be better if you put off paying that invoice until the next tax year. Even though you pay that invoice on January 10th, you must record the expense on December 1st, the day that you placed the order.

How do you know which method fits your business?

Both cash and accrual methods have their pros and cons. The cash method of accounting can be great for new businesses whose cash reserves are tight, because it better matches taxable revenues with the cash received. However, your income statement won’t match your true financial position if income or expenses are expected but not yet recorded. On the other hand, the accrual method can be great for restauranteurs because it better matches revenues with related expenses. Seeing an income statement that represents your true financial position can help you make better business decisions.

While both cash and accrual are approved restaurant accounting methods for tax purposes, the use of cash method is much more restricted. Often, a business just starting up will be able to use the cash basis until it earns more revenue. This allows for tax planning in the critical first year of operation. As your business grows, or if you begin accounting for inventory, you will probably need to switch to accrual. 

What happens if your business changes? Can you switch methods?

In some instances, it might make sense, or even be a requirement, to change from one method to the other. 

Some changes are “automatic”, meaning they do not require IRS approval; others require approval. A change may require you to file an extra form or two, and you will have to follow the IRS’s guidelines for determining your income in the year of change and in future years. 

Our restaurant advisory group can help you determine the best accounting method for your restaurant. Contact Sean Dawson, CPA, Shareholder.