9 Restaurant Accounting Mistakes Hospitality Owners Make
Food lovers and fantastic cooks are not hard to come by; what is hard to come by are those ambitious entrepreneurs who capitalize on their passion for food and hospitality to open an eatery. Sadly, the bulk of these entrepreneurial efforts will fail…but not because their food isn’t top notch. A majority of restaurateurs are not seasoned accounting professionals and lack pertinent financial knowledge essential to operating a successful hospitality establishment. Thus, most restaurants fail due to financial mismanagement of any or all elements necessary to restaurant accounting. This predicament and scenario is not hopeless though…a profitable restaurant can be achieved should the proper accounting protocols be put into place. This article will focus on the nine most common errors made in restaurant accounting.
- Inadequate Analysis of Menu Offerings
It is not uncommon, and not necessarily a bad idea, to gauge your restaurant’s success based on the performance of other establishments in your industry. This should not be a rule of thumb, however, to assess your bottom line and profits or losses. A restaurant’s ultimate success is based on many moving pieces, in particular the costs which are determined by your vendors. Vendor prices can go up or down overnight and such fluctuations are nearly impossible to predict if you are not extremely familiar with hospitality industry accounting. Given the pre-existing thin margin nature of profits in the restaurant industry, this is why you need a competent accountant who can guide you through the process of properly assigning prices to items on your menu.
- Faulty Accounting Systems
Simply put, when our firm meets with clients or potential clients, we more often than not realize that their accounting systems are not up to par. Sometimes, it is even difficult for us to know if these clients have an actual system, let alone whether or not it has been implemented or is operating at maximum efficiency. A good accounting system will categorize and track expenses and revenue, while simultaneously integrating your POS, payroll and inventory systems.
- Bookkeeping Errors
The hospitality industry is unique in the sense that a large portion of revenue is garnered in cash. This is not an excuse for sloppy bookkeeping! If there is one area where your business cannot afford to to be casual with, its record keeping. Dollars, and even cents, will add up over time so accurately accounting for every penny is critical. Your bulletproof bookkeeping notes will help you identify how appropriate your pricing is, and whether or not changes need to be made.
- Accounts Payable Issues
No one is assuming that operating a successful restaurant establishment allows for a lot of free time. Free time is virtually non-existent to any entrepreneur, making the heavy duty tasks of paying vendors, reviewing vendor invoices and writing checks very difficult to adequately complete. At the same time, though, paying your vendors’ invoices on time is critical to operating your business because your vendors supply a majority of the goods used to run your eatery. What your restaurant needs is a robust, and usually automated, accounting system which insures vendors are paid on time in a seamless fashion.
- 4-Week Accounting Period Lapses
Another unique aspect of restaurant accounting practices is that the typical monthly closing of financial statements is not used. Instead, restaurant accounting is based on a four-week accounting period. Each week in this four month period should begin on a Monday and end on a Sunday.
There are many reasons why this weekly accounting period is used- let’s explain those reasons. It’s inaccurate to compare the profit & loss (P&L) of a particular month, in a particular year, to previous years. As an example, July 2016 should not be compared to July 2015. Why? There were not the same number of Fridays and Saturdays in July 2016 as there were in July 2015. Fridays and Saturdays are very popular restaurant days so your P&L will be off. When your establishment uses a weekly cycle, your year-to-year comparisons will actually mean something because you will have the same number of each day in your comparisons.
- Forgetting to Reconcile Monthly Bank and Credit Card Balances
Not completing a flawless reconciliation of credit card and bank statements is going to lead to trouble. After all, errors in accounting are discovered using such reconciliations. And errors in accounting will give you nothing but major problems. Here are some very concrete reasons to always reconcile accurately:
- You can see if all your bills and expenses have been paid
- You can see the overview of your monthly and weekly revenue and expenses; this will simplify year-to-year comparisons
- You can see if you are below, above or on budget
- You can see where your money is going- sometimes this takes examination
- You can see and predict where current, past and future losses may occur
- You can see the big picture of the financial health of your business
- Using the Cash Basis of Accounting
As a business that files taxes and produces financial statements, you have the choice to use accrual accounting or cash accounting. Let’s just define these two terms, which are both based on tracking your expenses and revenue. Cash accounting records an expense or profit when the actual physical cash goes out or in the door and is considered paid or earned. Accrual accounting records the same figures of revenue and expenses when services are rendered; meaning that your restaurant received a vendor’s product, but you have yet to pay the invoice for that product. Within the hospitality industry, an expense should be assigned to the period during which the expense was incurred- that is what accrual accounting offers. From an overall perspective, accrual accounting will give you a better picture of your P&L.
- Lack of Weekly Inventory
Your weekly restaurant inventory is the main mechanism by which you calculate your cost of goods sold (COGS). A restaurant’s food costs go up and down very quickly- a restaurant needs to be on top of these changes, which simply cannot happen if inventory is only reviewed on a monthly basis. Also take into consideration the fact that many restaurant food, and even beverage, items are perishable; you cannot order a perishable item at the beginning of a month and expect it to be good at the end of the month- this would lead to incredible losses. Also, a weekly inventory helps you keep your kitchen more organized!
- Using an Accountant who Does Not Specialize in Hospitality
If you are using a CPA or accounting firm to handle your books, make sure that your selection has ample and solid knowledge of the restaurant industry. We’ve reviewed many factors that are unique to the restaurant business…but every day more changes and regulations are introduced. Your accountant needs to have specific experience in your industry so that he or she can give you the best advice possible.
If you are guilty of making any of the above mistakes, don’t worry. Practically everything can be remedied if you employ the right people to handle your accounting. You need to know where your money is going and what it is being used for in order to be successful in the restaurant industry.