Restaurant Financial Management Problems

Restaurant owners, while knowledgeable about financial management for their businesses, are more likely to get involved in solving the day-to-day problems that keep things running smoothly. Unfortunately, a financial accountant is a luxury that many small restaurant owners cannot afford. This article will address six major accounting problems that restaurant owners often encounter and how to prevent them from occurring or how to resolve problems once they do occur. Being a small business owner is always challenging, and the restaurant business is financially complex.

This article will concentrate on those issues that can be resolved with some good accounting skills and procedural methods. By teaching restaurant owners how to look for financial problems before they arise, an accountant can help the owner correct or improve financial techniques used to manage profits and reduce preventable losses. The six topics addressed here will focus on:

Problem One – Absence of an Accounting System

Problem Two: When Core Operating Expenses Are Higher Than Total Sales

Problem Three: Menu Offerings

Problem Four – Food and Beverage Inventory

Problem Five: Problems that occur when inventory is greater than sales

Problem Six: Using a Balance Sheet and End-of-Month Profit and Loss

By researching these issues, which are common problems for restaurant owners, it is feasible to manage these issues and fix them before the restaurant gets out of financial control and can help the owner use accounting methods.

Problem One – Absence of an Accounting System

The first issues a restaurant owner has to deal with when trying to avoid bookkeeping issues is investing in good computer software to help keep track of all transactions. Nessel, an owner and financial advisor to restaurant owners, recommends QuickBooks for keeping a ledger of all financial transactions that occur in the restaurant. All financial transactions must be recorded in the General Ledger so that accurate records are maintained. Without attending to this, the owner will not be able to run the restaurant without maintaining accountability in the ledger. Nessel further states that, “My experience is that how well the business is proactively managed is directly related to how well the owner manages his ‘books.’ Thus, establishing an accounting system is a primary concern for the owner. in order to ensure that the business runs smoothly financially Not having accounting and financial controls in place is the number one reason most businesses fail and if a restaurant is in trouble this is the first problem that needs to be addressed The Complete Guide to QuickBooks for Restaurant Operators is recommended by many accountants as a guide to help set up a good accounting system.

Problem Two: When Core Operating Expenses Are Higher Than Total Sales

Statistics say that “restaurant food and beverage purchases plus labor expenses (wages plus employer-paid taxes and benefits) account for 62 to 68 cents of every dollar in restaurant sales.” These are known in accounting terms as the “core cost” of a restaurant and where most restaurants find their biggest problems. These costs can be controlled unlike utilities and other fixed costs. An owner can control product purchasing and handling, as well as menu selection and pricing. Other controllable production costs for a restaurant include hiring staff and scheduling staff in an economically efficient manner. “If a restaurant’s Prime Cost percentage exceeds 70%, that raises a red flag. Unless the restaurant can offset these higher costs by, for example, having a very favorable rental expense (for example, less than 4 % of sales), it is very difficult, if not impossible, to be profitable.”

A restaurant’s rental expenses (if taxes, insurance, and other expenses that may fall into this category, such as any association fees, were included) are the largest expenses a restaurant will incur after “Primary Costs.” Rent averages around 6-7% of a restaurant’s sales. Being in the category of a fixed expense, it can only be converted to a reduced proportion through an increase in sales. If the cost is more than 8%, then it’s helpful to divide the occupancy cost by 7% to find out what level of sales will be required to keep rental expenses in check so they don’t bankrupt the restaurant.

Problem Three: Menu Offerings

The owner determines the price of most offerings on a menu after visiting other local restaurant competitors, viewing their offerings, and menu prices. However, menu pricing should never be done simply by looking at your competitors’ menus. Menu pricing should be done (and redone periodically as vendor costs fluctuate) and documented in software books. Some math skills will come in handy as a menu is converting shopping product prices to recipe units. A restaurant owner needs to know the cost of making a recipe in order to know how to price it. This means knowing how much the ingredients cost and the number of ingredients used per recipe. Software is available to help with this and Microsoft Excel can be used to customize the cost of the menu while linking to the inventory items that are available.

Some of the things an owner can do to help with accounting that can be controlled through the menu include:

– Menu pricing for minimum wage increases.

– Use of value-added meals to increase profits.

– Reintroduce price increases while maintaining your customer base.

A menu should be updated periodically as the provider’s costs change. This can be positive or negative depending on the provider. Either way, menu items can be adjusted according to vendor costs with math and a little help from inventory tracking software.

Problem Four – Food and Beverage Inventory

It’s a common mistake for restaurant owners to look at their profit and loss statement and assume that what they’ve spent on food can be divided by sales in that period to find the cost of what was sold. This is a mistake. Inventory at the beginning and end of the period must be known to calculate food costs accurately. “For a restaurant with food sales of $50,000 a month, a $1,000 inventory difference between the beginning and end of the month can translate into a 2% variance. This disparity represents half of a restaurant’s total annual profit typical full-service.” Simply put, you can’t manage your food costs if you don’t keep track of what they are. It is essential to take inventory changes into account when calculating profit and loss.

Microsoft Excel spreadsheets can be used to track inventory and document prices and know all inventory totals when it comes to food and beverages. Tracking this through Excel will prevent errors.

Problem Five: Problems that occur when inventory is greater than sales

When the food inventory is too high, the costs will be too high, and waste is inevitable. Calculating inventory needs is absolutely necessary to prevent food from spoiling, over-portioning in recipes, or even being stolen. “A typical full-service restaurant should have no more than 7 days of inventory on average.”

There is an equation to find out how much inventory is needed for a restaurant to function properly. the equation is:

Step 1) Multiply your average monthly food sales by the % of your food cost.

Step 2) Divide that number (your average monthly food intake) by 30 (days/month)

By using this formula and keeping records of all beginning and ending inventory, the problem of losing money due to wasted food costs is reduced or eliminated.

Problem Six: Using a Balance Sheet and Profit and Loss Statement

For a restaurant to be successful, the owner must operate it as much of a large business as possible. A minimum of one weekly report is required. The report format should be categorized. Inventory, vendors, labor, and sales must have a start and end period. Fixed expenses, such as rent and electricity, must be broken down to fit the report, whether weekly or daily. It is not recommended to wait until the end of the month to calculate a report as changes happen quickly in the restaurant business.

It is a very important point that a start and end date is included in the report and that even fixed expenses are broken down so that a weekly net profit can be calculated. As mentioned above, Microsoft Excel and other tracking software can be used for inventory and other costs, including scheduling which affects profit. Without proper tracking of inventory, overstock, scheduling, menu prices, portions, and all that has been covered in this study, it can result in the bankruptcy of a restaurant. A restaurant owner simply needs to take the initiative to implement some simple accounting strategies. It may seem like a restaurant owner has to do it all; But, with good software and a systematic approach in place, keeping a restaurant on track financially will yield financial rewards that are well worth the work.

Leave a comment

Your email address will not be published. Required fields are marked *