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.
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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:
- 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.
- 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.
- 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.
- 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.
- 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 our Restaurant Group 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.