The food service industry was adversely impacted by the COVID-19 pandemic a few years ago. Nationwide, it’s estimated that 10% of restaurants closed permanently during the pandemic. However, restaurants that survived the downturn have largely recovered. Some have grown or are now positioned to grow. Financial reporting is essential to ensure your food service business is on the right track going forward.
How do restaurants differ from other businesses?
The average life cycle for restaurants is five years — and many start-ups fail within a year of opening their doors. Key challenges restaurant owners face include:
- Setting menu prices to cover costs,
- Managing labor and supply shortages,
- Complying with labor laws, health and safety regulations, and franchise agreements (if applicable),
- Purchasing and updating furniture, fixtures and property,
- Maintaining adequate levels of fresh inventory with minimal write-offs for theft and spoilage, and
- Negotiating contracts with suppliers, vendors and landlords.
In addition, cash flow shortages are common, especially for restaurants that experience seasonal fluctuations in revenue. A line of credit can provide additional funds to meet operating needs, but the lender will typically want to review quarterly or year-end financial statements to ensure your business remains healthy. In addition, most loan agreements include financial covenants — such as liquidity and debt-service ratios — that you’ll need to follow to keep your credit line open.
Can an external accountant help with bookkeeping?
Many restaurants are too small to hire a dedicated, full-time chief financial officer. Usually, servers and other staff enter customer orders into the point-of-sale (POS) system, and the owner or general manager enters other transactions into the restaurant’s accounting software. Accurate financial reporting may require more accounting and tax expertise than in-house personnel can handle. That’s where your CPA can provide guidance.
For starters, you might outsource certain bookkeeping tasks to an outside accountant on a weekly or monthly basis — or on an interim basis if your general manager quits. A CPA can also set up daily or weekly flash reports that are generated by your POS and accounting software to help you track key metrics, such sales and prime costs (direct labor and costs of goods sold). Outsourcing these chores assures that transactions — such as payroll and tips, inventory and supply purchases, and leasehold improvements — are properly recorded. Staying atop bookkeeping through the year helps simplify year-end financial reporting and tax filing.
Which financial reports does your restaurant need?
Some small food service businesses create cash-basis or tax-basis financial statements. However, if your restaurant has outside investors or bank loans — or you’re trying to obtain external financing — you may need to prepare accrual-basis financial statements that conform to U.S. Generally Accepted Accounting Principles.
A complete set of financials includes the following three reports:
- An income statement, which lists revenue, expenses and profits,
- A balance sheet, which shows assets, liabilities and owners’ equity, and
- A statement of cash flows, which categorizes cash coming in and out of the restaurant as operating, financing or investing activities.
Some restaurants rely on daily or weekly flash reports to manage daily operations, and they wait until year end to issue a complete set of financial statements. Others prepare financial statements monthly or quarterly to help optimize financial results. What’s appropriate for your restaurant depends on your preferences and the expectations of any investors, as well as the requirements of any lending or franchise agreements.
Are you using the right accounting software?
Restaurants can choose from a broad menu of accounting software programs with various bells and whistles. For ease of use, accounting software should tie into your POS and other management systems. It should also be secure to prevent cyberattacks, which could lead to stolen employee records or customer credit card data.
In addition, many restaurant owners prefer cloud-based accounting systems. This can help you monitor restaurant operations from home — or while you’re out of town.
After you’ve selected accounting software, you should periodically reevaluate whether it’s still appropriate for your current size and operations. It may be time to upgrade to a newer, more cost-effective accounting solution.
Find a restaurant specialist
Even with the best tools and systems, accounting for restaurants can be complex. When selecting an outside accountant, it’s important to find a professional who understands the challenges and opportunities that lie ahead for your restaurant.
Sidebar: Beyond Tax and Accounting
Outside CPAs do more than prepare tax returns and financial statements. They’re trusted financial advisors who can help interpret financial results and enhance profits margins. You can use them as sounding boards for making well-informed financial decisions. Examples of value-added services that a CPA can provide for your restaurant include:
- Payroll and tips management,
- Menu pricing and costing studies,
- Capital investment decisions, such as new equipment purchases or expansion projects,
- Loan applications,
- Budgeting and business plans, and
- Personal wealth building and retirement planning.
A CPA who specializes in the food services industry can also provide benchmarking data that helps compare your restaurant’s financial performance to competitors in your local market.
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