Getting into the restaurant business requires a lot of preparation upfront. Before you can even open your doors to new customers, you need to make sure you have a solid financial system in place to keep up with the ever-shifting demands of the food service industry. From keeping track of important transactions to nailing down the most affordable accounting solutions for your specific franchise, there are many restaurant bookkeeping needs at play.
Top 5 Basics of Restaurant Accounting
To help get you started, our pros are going to list the top 4 basics of restaurant accounting so you know where to start your search for the perfect bookkeeping option.
Cost of Goods Sold – COGS
Cost of Goods Sold is a term you will hear thrown around a lot when it comes to selling and buying certain products. Simply put, your COGS is the total cost that goes into making your food, including the cost of ingredients at the vendor, the labor that goes into making the food, the cost of the machinery needed to cook it, and so on. Knowing your COGS can help you make more informed decisions about menu item pricing.
By staying apprised of your COGS number, you can see how much money you are making for every dollar spent on paying for ingredients. This will allow you to increase your menu item pricing so you can make a bigger profit without increasing your costs.
If you are hiring an accountant on your team for the first time, you might be put off by certain words like “prime cost”. While it sounds like something final, it actually just details the total cost you are spending on a certain item. Similarly to COGS, the prime cost takes the Cost of Goods Sold and combines it with the cost of labor to determine a final, ultimate cost on your end. Bookkeepers are very keen on using prime cost in the restaurant industry as certain factors are easily measured such as:
- Beverage cost and production
- Food costs, ingredient prices, and preparation costs
- Wages and salaries, benefits, and taxes for employees
- The overall cost of operations in the workplace
If you or an accountant on your team is looking for the company’s “bottom line,” then they are more than likely going to look at the prime cost.
If you are struggling to maintain your restaurant’s financial health, you might have a wavering cost-to-sales ratio. This particular number is your gauge for determining the health of your company. Plus, it will make it easier for you and your accounting team to determine the best solution to help get your restaurant’s finances back on track.
The cost-to-sales ratio is a mathematical formula to determine if you are spending too much without making enough of a profit in return. The formula is as follows:
Cost-To-Sales Ratio = (Food Cost / Food sales) x 100%
The industry average for restaurant cost-to-sales ratio typically falls somewhere between 28% – 35%, but these numbers can vary widely depending on the type of food service industry you are in. Fast food restaurants may have a lower cost-to-sales ratio, but they are often making larger quantities of food.
Operating Costs and Restaurant Labor Expenses
Running a restaurant business can be tricky when you don’t consider all of the moving parts involved. There are some key expenses that you will have to be on the lookout for in the food industry in particular, like labor expenses and unique occupancy requirements. Restaurant labor expenses detail the labor it takes to run a restaurant. It is important to note that this type of labor is not included in a COGS formula.
Occupancy requirements, on the other hand, include everything that it costs to run your physical building. Rent payments, property taxes, and machine maintenance are some costs that you can’t profit from by increasing menu prices. Any other expense will be included under operating expenses, such as the cost of buying new menus, forks, napkins, and plates.
Chart of Accounts
Last, but certainly not least, a chart of accounts is a major part of the setup process for any type of restaurant accountant. This chart essentially categorizes financial transactions and tracking needs into different places that see your money come and go. A typical restaurant chart of accounts may include expenses, equity, assets, liabilities, and other sources of revenue. This is where your business statements will come from when it’s time to process your progress at the end of each month. Without a chart of accounts, finding essential financial information in an unorganized database would be too big of a hassle to handle.
Automated Accounting Systems Available Today
If you are struggling to get your restaurant off the ground and you can’t afford to hire a team of accountants to help you stay on top of your transactions, you have come to the right place. Indevia offers a variety of automated bookkeeping services for restaurant owners and franchisors alike. Learn more about essential accounting for restaurants when you get in touch with one of our specialists at Indevia today.