How to Implement a Restaurant Accounting System
A Guide to Manage Operations and Finances
When someone decides to open a restaurant, particularly for the first time, they're usually driven by a passion for food coupled with a dedication to hospitality. However, while being a good chef and having a winning personality are two key ingredients, those are not the only ones. If a small business fails, it is often during its first year and usually because of bad business decisions and practices. When you start a restaurant, setting up a good accounting system is paramount to giving your business the best possible chance of survival.
Developing a restaurant accounting system is similar to setting up an accounting system for any small business, but there are important differences to consider. Restaurants have slim profit margins, so keeping on top of their key performance indicators (KPIs) is essential.
How a Restaurant Accounting System Works
Your accounting system will track all the restaurant's financial transactions, prepare reports based on those financial transactions, gather the appropriate information for taxes, and summarize information for you in a format you can understand.
Using that information, you can make the financial decisions for your restaurant that will minimize your expenses, maximize your profit, and keep your customers happy. Without a restaurant accounting system, this would all be a jumble and you would not have the information at your disposal to help you make the best decisions.
Follow these steps to set up a basic restaurant accounting system.
Steps to Implement a Restaurant Accounting System
Hire a Bookkeeper or Accountant
Unless you are an accountant or bookkeeper along with being a chef or restaurant owner, you are going to need some help in order to set up a restaurant accounting system. Even the smallest of coffee shops have to keep financial records so they can file their taxes and make good decisions to keep the business afloat.
You should consider hiring an in-house bookkeeper and outsourcing accounting services.
There is a difference between bookkeeping and accounting. Bookkeeping is the process of recording financial transactions and organizing receipts and other documentation. Accounting, meanwhile, is the practice of analyzing the information supplied by the bookkeeper and developing reports to make the numbers understandable to a non-business-oriented person. Another option is to do the bookkeeping yourself and only retain an accountant. It is a plus if you can hire a bookkeeper and accountant familiar with the hospitality industry.
Choose Accounting Software
There are a number of robust restaurant accounting software packages. You want to choose one that is easy to learn and use but that offers strong reporting and financial analysis features. You need to consider software that generates profit and loss (income) statements and other financial statements. The software also needs to have inventory management features, and it should integrate with payroll software if you do payroll in-house.
Other important features are invoicing, accounts receivable and accounts payable management, employee scheduling, and menu planning to name a few.
The complexity of your restaurant and its offerings should help dictate the software you purchase. Your bookkeeper or accountant can advise you on the software package you should choose.
Restaurant payroll is complicated with different salaries, tips, and varying work schedules. It is often a good idea to outsource your payroll to your accountant or to a payroll service. If you do payroll in-house, you have to choose payroll software. The same is true for tax planning and preparation.
Select Your Accounting Method
You have some decisions to make that go hand in hand with choosing your accounting software. First, you have to decide if you use single-entry or double-entry bookkeeping to organize your books. Since the restaurant industry involves holding inventory, double-entry bookkeeping is usually advisable.
You also have to decide whether to use cash or accrual accounting. Accrual accounting gives you the more accurate financial picture since it records revenues and expenses as soon as transactions occur.
Choose a Point-of-Sale (POS) System for Cash Management
A point-of-sale (POS) is the place where a customer pays for their meal and any other products or services they have purchased in a restaurant. Restaurants need particular features in their POS software, like tracking sales. Some POS packages can help with menu preparation and timekeeping for employees. Restaurants also need POS software that has strong inventory management functions both for the front of house and the back office. The software can even assist in preparing payroll.
A restaurant's POS system should have a keypad at the register due to the volume of credit card transactions. Customers can then use their credit cards to make a contactless transaction.
Compile the Restaurant's Chart of Accounts
The chart of accounts is a listing of all the five categories of accounts that compose the income statement and the balance sheet. These accounts are assets, liabilities, owner's equity, revenue, and expenses. Money flows in and out of these accounts during the normal course of business. When you either spend money or earn money, you debit and credit these accounts appropriately according to accounting principles.
Each of these accounts will have sub-accounts that are industry-specific. For instance, a chart of accounts for a restaurant will be different than a chart of accounts for other types of businesses.
If you invest in accounting software for restaurants, it will help you set up an appropriate chart of accounts for your restaurant.
How to Track the Restaurant's Flow of Funds
There are specific accounts in a chart of accounts that are particularly important for restaurants. Keep a close eye on the following:
Perhaps the most problematic account in restaurants is payroll. Restaurant workers may be both full-time and part-time workers at different rates of pay. It is advisable to either outsource your payroll services or, at least, use specific payroll software for this task.
In a restaurant, your inventory will consist of two broad classes: food and supplies. Track your inventory so you won't have too much, which will end up as waste, or too little, which will hurt your sales. You want to keep your average daily inventory as low as possible without causing shortages. Your POS software is invaluable in helping you keep track of your inventory.
Accounts payable is what you owe your suppliers and is listed on your balance sheet. When you receive an invoice, input it into your accounting software. In this way, you won't be late paying your bills. A good relationship with your suppliers and vendors will help your business run smoothly.
Keep track of how much cash goes into and out of your business. It's helpful to know your cash flow on a daily, weekly, monthly, and quarterly basis. Developing both a cash budget and a statement of cash flows will help you track your cash flow.
It is important for a restaurant owner to know how much of your sales come from food and how much from beverages. You can further break this down into eat-in meals, carry-out meals, and even into different menu items by using your accounting software.
Cost of Goods Sold
Cost of goods sold (COGS) in a restaurant consists of all the food and supplies used to make the items on your menu. You should distinguish COGS from the other costs of running a business, such as rent and utilities or occupancy costs. The chart of accounts for a restaurant lists all occupancy costs as expenses while food and supplies are listed under COGS.
What Reports are Important for Restaurant Accounting
There are reports that are specific to restaurant accounting and other reports that all small businesses should maintain for both taxes and the purpose of accountability. The restaurant-specific reports delineate your KPIs. These reports can usually be generated by the restaurant accounting software and the POS software::
- Daily sales report: This report allows you to compare your week-to-week or month-to-month sales in order to see how your restaurant is doing before deducting expenses.
- Food costs: You need to see how much food is costing as compared to the total revenue brought in by the sale of food items. Your POS system provides these figures.
- Occupancy costs: These costs, like rent and utilities, are your overhead and don't change much.
- Prime costs: This report compares your labor costs plus COGS to your revenue. Usually, labor costs, which include payroll along with employee benefits, make up approximately 30% of revenue. The prime cost in a restaurant constitutes most of your expenses. Keep a close eye on prime cost because it is where you can save the most money.
- Operating expenses: These expenses are everything not covered by prime cost and occupancy expenses, like, for example, marketing and advertising expenses.
These are the reports that every small business should maintain:
- Income statement: The income statement is your profit and loss statement. It will show your expenses over a period of time like a month or a quarter. The income statement lists your revenue as compared to your expenses.
- Balance sheet: The balance sheet shows what the firm owns (assets) and what it owes (liabilities), as well as the owner's equity. If you owe more than you own, you should take steps to increase your revenue and reduce your debt load.
- Statement of cash flows: The statement of cash flows shows the inflows and outflows of the cash within your firm. It is an invaluable tool to keep track of your cash needs.
Internal Revenue Service. "Publication 538: Accounting Periods and Methods," Pages 8-13. Accessed Jan. 19, 2021.
National Restaurant Association. "Keeping Up With a Changing Economy: Indexing the Minimum Wage," Page 6. Accessed Jan. 19, 2021.