Restaurant Accounting

This is the kind of stuff that puts most people to sleep but can save a restaurant from certain doom. Go get some coffee cuz this is important (if you own a restaurant or are thinking about owning one). Restaurant back offices are often like giant junk drawers, with the bare minimum functionality needed to generate enough records to comply with the IRS. Someone, somewhere, stated out loud: “managers should not be in the office!”… and it stuck as restaurant lore… as if face-time with customers and employees is the only important part of controlling operations.

Restaurants need functional, comfortable office space, not a closet with a desk.
The problem with this logic is that it emphasizes a culture of management-from-the-hip while demonizing data-based decision making…the kind of decision making that comes from collecting and analyzing accurate data and which drives most retail and production businesses to success. Owners push their architects and designers to keep the office space cramped and uncomfortable, crowing to anyone who dares criticizes the tank-cockpit office ala “I don’t want ‘em in here! I want ‘em out on the floor!”

Let’s talk about restaurants as a “risky business” for a moment. In conjunction with this article, I’m on a mission to dispel the conventional wisdom that “most” restaurants fail within the first two years. It is factually correct, but this figure is grossly exaggerated. Did you ever think to yourself “I want to open an airline” or “I want to open a toilet paper manufacturing facility”…probably not. Then why do so many people (with ZERO experience working in or managing a restaurant) think they’re qualified to open a restaurant?  I make my living by teaching people how to open and run restaurants so I love to see people getting in the game, but I hate to see them make decisions based on flawed assumptions.  It is important to mention because one of the main reasons restaurants fail is that their owners / managers do not accurately track their performance and, therefore, cannot steer their restaurants clear of the rocks…indeed they often never see the rocks even after they’ve hit them.

Quickbooks works for your taxes and reports monthly income the way the IRS needs to see it. June is June… June 1 to June 30. February is February… Feb 1 to Feb 28. But June 30 might be a Wednesday while February 28 might be a Sunday. This doesn’t really work for restaurants. There is nothing wrong with Quickbooks…but it is not meant to be the end-all / be-all accounting platform that so many restaurant owners think it is for managing their business. Quickbooks is, however, well suited to retail businesses and production businesses.  To understand why, let’s back up and look at what a restaurant is.

A restaurant is a Production facility and a Retail store rolled into one. Much of its inventory is perishable and has a shelf life, relying on proper storage at proper temperatures. A lot can happen to the raw commodity inventory before it arrives (vendors can try to pass off aging or abused product; product specifications can be marginalized by mispicks at the warehouse; it’s a guess whether the product has been kept refrigerated throughout the transporting process; etc.) let alone abuses that occur at the hands of your staff after it arrives. Since most people can cook (or someone in their family can cook), raw commodities have value to your employees and there is incentive to steal that beautiful beef tenderloin or take home a pound of sugar. Fierce competition for good employees makes it almost mandatory that employers offer some meal benefit where the employees eat the finished product at a discount (or for free) or are allowed to concoct their own finished product using raw ingredients. It’s tough to convince your employees that “eating” the inventory is considered theft …it’s just considered “eating” so employees of restaurants have an unwritten license to steal. Hire a priest as a part-time line cook and he’ll make himself a sandwich every now and again, and never pay for it… without blinking.  And if your refrigerator goes down, your product (often thousands of dollars worth) goes in the trash, leaving you with a restaurant that may lose revenue for a day and a difficult insurance claim.  Oh…and don’t forget the electricity bill from the refrigeration…and the gas bill for cooking…and the water bill for washing the egg yolks off the plate… and soap, napkins, silverware, plates, glasses, cable tv, music, …

Best Buy is a RETAIL store. It doesn’t MAKE the TV’s it sells
…it buys them pre-packaged and assembled. Inventory is easy: you either have one on the shelf or you don’t… and it doesn’t need to be refrigerated. If your sales quantities don’t match your inventory depletion then you have a thief. Automatic re-ordering systems are a snap: every time a TV is sold through the register, the enterprise software system electronically removes one TV of that particular flavor from inventory. When the quantity of TV’s gets to a pre-determined level, the system automatically re-orders more TV’s. All you have to do is occasionally count how many you have to make sure you don’t have theft and to keep inventory quantities clean. This process defines “perpetual inventory”. Employees at Best Buy don’t expect a pack of batteries or a CD or a DVD or a video game at the end of every shift. They work and get paid for the work while inventory is off limits. At lunch they punch out and go to lunch, paying for their meal from their own wallets. In restaurants, employees expect to consume the inventory and will find work elsewhere if you don’t give it to them.

Texas Instruments is a PRODUCTION business. It makes calculators, among other things. They have assembly lines that produce a variety of models. Each assembly line has various piles of parts distributed along the assembly line at installation stations. The company assesses demand and sets production to match that demand. If the company has set daily production to satisfy a demand for 200 of its TI-73 Explorer calculator, each station will need 200 of each component. 200 “+” buttons, 200 screens, 200 bodies, 200 batteries, 200 processors, etc. Theft is probably not much of an issue at Texas Instruments because there is probably not much demand (or use) for “+” buttons, so there is an inherent / predictable relationship between the targeted production and the quantity of parts needed to assemble the products. At the end of the day, when the 5 o’clock whistle blows, there may be a few calculators on the line locked in the middle of production but those products just sit there until the next day. In restaurants, any products that are “in process” at the end of a shift must either be discarded (a batch of cheese grits or pancake batter), or cooled and wrapped for use the next day (meatloaf or cooked & portioned pasta). Many of these products are either eaten by employees, improperly stored, or improperly cooled, resulting in leftovers that must be discarded the next day unless the restaurant is ok with serving an inferior product.

Back to accounting: since the relationship between raw commodities and finished products for sale is pretty straight forward at Texas Instruments and Best Buy, as it is at most Production or Retail businesses, the costs incurred for either component parts or saleable goods are relatively static and predictable. Operating costs are still critical (labor, utilities, etc.) but managers use other measurement tools to drill down and control these areas. The Profit and Loss statement is merely a record of what happened, not a weekly tool used to steer the business. At Best Buy, all hands are on deck to control shrink including the strictly controlled “back door” and the physically imposing guy at the front door who checks your bag.

The difference in the accounting processes for Restaurants versus the accounting process for Retail or Production facilities is that it is extremely difficult to accurately control all the variables that plague food production and sales on the front end…so restaurant managers rely on a tool to measure what happened on the back end. This is the Profit and Loss Statement. Retail or Production facilities don’t really need to look at a Profit and Loss statement very often, sometimes only once per quarter. Restaurants, however, need to look at results weekly in order to steer purchasing and identify patterns that might expose theft or product mismanagement.

It is very difficult to attempt a “perpetual” inventory system in a restaurant because the Point of Sale (cash register) system’s ability to decrement inventory by an ingredient is limited by the accuracy of a recipe. Chicken salad consists of chicken, mayonnaise, celery, onions and spices.

Can you accurately tell me how much raw chicken it takes to make enough Chicken Salad for one sandwich?
The recipe says 4oz. of Chicken Salad…does that equate to 3oz of cooked chicken breast…which, based on assumed yield, equals 3.679oz of raw chicken? But what if it was poached too fast and the yield is different? What if there was fat or gristle that an employee trimmed off? What if an employee popped a cube of cooked chicken into her mouth as she prepared the chicken salad? It’s easy to see that counting the number of chicken salad sandwiches you sell at the end of the day will only give you a rough estimate of how much raw chicken you needed to satisfy demand. Sure, demand is relatively predictable, but because of the inexact science of turning raw commodities into finished items, restaurants are smart to rely on chefs to apply a combination of calculations, ordering history, and “feel” to set pars and keep inventory levels high enough to satisfy demand and low enough to discourage mismanagement (ooops, I just burned 10 gallons of chili… I’ll just make another batch) or theft.

Because restaurant sales are persnickety, it follows that the labor required to produce the finished product, and to operate the retail side, varies with those sales. Just like any production facility, the raw commodities brought in through the back door will vary with sales, but with restaurants that cook from scratch, the margin of error when following a recipe is greater than when assembling a calculator or a TV.

A weekly Profit & Loss statement should reveal your restaurant’s business trajectory
Back to Quickbooks: a restaurant must stabilize its accounting periods so that one period can be compared to the next, revealing the trajectory of the business. If you can see your trajectory, you can change your trajectory. Generally, restaurants will view a year in terms of “periods” instead of “months”. If Quarterly data is important and the restaurant wants to mimic the calendar year as closely as possible, they’ll create a 12 period year where one of the periods in the quarter is a 5 week period while the other two are 4 week periods (called a 5/4/4 or 4/4/5 system). If a restaurant values a system where each period is identical and quarterly data is not important, they can use a system with 13 equal periods of 4 weeks each (called a 13 x 4 system). In either system, a week ends on the same day allowing operational performance to be compared week to week and allowing inventory to be counted on the same day of the week. It doesn’t do much good for a restaurant if July begins on a Tuesday while August begins on a Friday.

Quickbooks does not allow a restaurant to do several critical things:

1) Setting up a 5/4/4 or a 13 x 4 system cannot be done very easily…dates must be spread manually for whatever snapshot the viewer wants to see but there is no regard for any period spread other than a calendar spread.

2) It won’t allow the user to set up relationships between category cost of sales and category sales. A bar manager, for instance, needs to see Beer costs versus Beer sales…not Beer costs versus Total sales. It can drill down one layer but not two or three as is often needed from a tool that steers the business.

3) The labor recorded in Quickbooks is always the labor charge as it hits your bank account, not the labor cost incurred while generating the sales for that period.

Restaurants need to jive today’s labor with today’s sales. This is not specific to restaurants and most Retail and Production businesses use other tools to manage labor…restaurants can do the same but, since the P&L is being used as a weekly tool, it might as well have the ability to marry labor with the sales generated from that labor.

For corporately owned restaurants (if you have a home office and multiple units), we recommend a tool from a company called Compeat as it neatly generates weekly P&L’s based on information imported from the Point of Sales system including labor, cost of goods, direct expenses, as well as accruals for things like utilities, salaries, etc.

For independent restaurants (single location or a small, unsophisticated home office) we recommend using Quickbooks to keep track of purchases and to keep out of trouble with the IRS, but we only use it as a check register with a Chart of Accounts that matches a separate P&L. The P&L is an Excel spreadsheet that slices and dices the data from Quickbooks, the Point of Sale, and whatever Time and Attendance labor system that is in place (including time clock punches).

Restaurants who rely on Quickbooks as their sole accounting tool are not able to see their business clearly.
They’re winging it and likely leaving piles of money on the table… but no one can see it if they have to be shoe-horned into an office that doesn’t support a solid data gathering philosophy or a place to analyze it.

by Ray Camillo

Blue Orbit Restaurant Consulting can get you on the right path to get a solid back office foundation and tools to help you see and steer your business.

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