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- Restaurant Financial Management Issues
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## Restaurant Financial Management Issues

While restaurant owners are aware of the financial management of their business, they are more likely to be involved in troubleshooting the day-to-day issues that keep things running smoothly. Unfortunately, a financial accountant is a luxury that many small restaurant owners cannot afford. This article discusses the six main accounting problems that restaurant owners often face and how to prevent them from happening or how to fix them once they do occur. Being a small business owner is always a challenge and the restaurant business is financially challenging.

This article focuses on those problems that can be solved with some good accounting skills and procedures. By teaching restaurant owners to look for financial problems before they occur, an accountant can help the owner improve or correct the financial techniques used to manage profits and reduce preventable losses. The six questions discussed here focus on:

One problem is the lack of an accounting system

Another problem is when the main operating expenses are greater than the total sales

The third problem is the menu offerings

Fourth problem – food and drink supply

Fifth Problem – Problems that occur when inventory is greater than sales

Sixth Problem – Using the Balance Sheet and Profit and Loss at the end of the month

Researching these issues, which are common problems for restaurant owners, can help manage and troubleshoot them before the restaurant is out of control financially, and can help the owner use accounting methods.

One problem is the lack of an accounting system

One of the first issues a restaurant owner must deal with when trying to avoid accounting problems is to invest in good computer software to help keep track of all transactions. Nessel, an owner and financial consultant to restaurant owners, recommends keeping a ledger in QuickBooks for all financial transactions in the restaurant. To maintain accurate records, all financial transactions must be recorded in the general ledger. Without addressing this, the owner cannot run the restaurant without maintaining accountability on the ledger. Nessel further notes that “My experience shows that how well a company is proactively managed is directly correlated to how well the owner manages his ‘books’. Therefore, it is of utmost importance for the owner to establish an accounting system to ensure the financial running of the business. Accounting and Financial Control absence is the number one cause of failure for most businesses, and when a restaurant is struggling, it’s the first problem to address.The Restaurateur’s Complete Guide to QuickBooks is recommended by many accountants as a guide to setting up a good accounting system.

Another problem is when the main operating expenses are greater than the total sales

Statistics say that “restaurant food and beverage purchases plus labor costs (wages plus employer-paid taxes and benefits) account for 62 to 68 cents of every dollar in restaurant sales.” These are referred to in accounting as a restaurant’s “prime cost” and are where most restaurants run into their biggest problems. Unlike utilities and other fixed costs, these costs can be controlled. The owner can control the purchasing and handling of products as well as the menu selection and pricing. Other controllable output costs for a restaurant include hiring employees and scheduling employees in a cost-effective manner. “When a restaurant’s Prime Cost percentage exceeds 70%, a red flag is raised. If the restaurant cannot offset these higher costs with, for example, a very favorable rent (eg, less than 4% of sales), it will be very difficult and possibly impossible to be profitable.”

A restaurant’s rental expenses (if they included taxes, insurance, and other expenses that may fall into this category, such as association fees) are the largest expense a restaurant incurs after “prime expenses.” On average, the rent is about 6-7% of the restaurant’s sales. Since it belongs to the category of fixed costs, it can only be reduced through an increase in sales. If the cost exceeds 8%, it is useful to divide the occupancy by 7% to know what level of sales is necessary to control the rental costs so that they do not destroy the restaurant’s business.

The third problem is the menu offerings

Most menu offers are priced by the owner after visiting other local restaurant competitors, looking at their offers and menu prices. However, menu pricing should never be done simply by looking at their competitors’ menus. Menu prices must be made (and redone periodically as supplier costs fluctuate) and documented in the software books. Some math skills come in handy as the menu converts product prices from purchases to recipe units. A restaurant owner needs to know the cost of making a recipe to know how to estimate it. This means you need to know how much the ingredients and the amount of ingredient used cost per recipe. Software is available to help with this, and Microsoft Excel can be used to adjust menu costing while linking to available stock items.

Some of the things an owner can do to help with menu-driven accounting include:

– Menu pricing to raise the minimum wage.

– Using value-added foods to increase profits.

– Reinstating the price increase while maintaining your customer base.

If the supplier’s costs change, the menu must be updated periodically. It can be positive or negative depending on the supplier. Either way, menu items can be adjusted based on supplier costs using math and inventory tracking software.

Fourth problem – food and drink supply

A common mistake is for restaurant owners to look at the income statement and assume that the amount spent on food can be divided by sales for the period to find cost of sales. This is a mistake. In order to accurately calculate food costs, the inventory at the beginning and end of the period must be known. “For a restaurant with $50,000 in food sales per month, a $1,000 difference in inventory between the beginning and the end of the month can turn into 2%. That difference is half of the total annual profit of a typical full-service restaurant.” Simply put, a person cannot manage food costs if they do not keep track of what they are. When calculating profit and loss, it is important to take inventory changes into account.

Microsoft Excel spreadsheets can be used to track inventory and document pricing, as well as food and beverage inventory totals. Keeping track of this through Excel will prevent mistakes.

Fifth Problem – Problems that occur when inventory is greater than sales

If food supplies are too large, costs are too high and waste is inevitable. Calculating the need for supplies is essential so that food does not go bad, is not exaggerated in recipes or even stolen. “A typical full-service restaurant should have no more than 7 days of inventory on average.”

There is an equation you can use to know how much inventory is needed to keep a restaurant running properly. The equation is:

Step 1) Multiply your average monthly grocery sales by your grocery spend percentage.

Step 2) Divide this number (your average monthly food intake) by 30 (days per month)

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

Sixth problem – using the balance sheet and income statement

For a restaurant to be successful, the owner must run it as much as possible like a large business. At least a weekly report is required. The format of the report should be categorized. Inventory, suppliers, labor and sales should have a start and end period. Fixed expenses like rent and electricity should be broken down according to the report if it is weekly or daily. It is not worth waiting until the end of the month to calculate the report, as changes occur quickly in the restaurant business.

It is very important that the report should include the start and end date and even break down the fixed costs so that the weekly net profit can be calculated. As previously mentioned, Microsoft Excel and other tracking software can be used for inventory and other expenses, even for schedules that affect profits. Without proper tracking of inventory, leftovers, scheduling, menu pricing, portioning, and everything else discussed in this study, a restaurant can go under. A restaurant owner just needs to take the initiative to put some simple accounting strategies in place. It may seem like a restaurant owner has to do it all; but with some good software and a systematic method, keeping a restaurant on track will create a financial reward that is well worth the work.

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