As a restaurant owner or manager, restaurant accounting jargon or terminology doesn't have to sound native to you, nor do you have to be solely in charge of bookkeeping to understand your financials. After reading this post, you’ll understand everything you need to; you won’t leave a specialized accountant, but you’ll be able to understand where your money goes, and you’ll also be able to communicate with your accountant easily and understand things more proficiently.
Are you familiar with the following terms?
- Charts of Accounts
- Occupancy Expenses
- Prime Costs
- Cost-to-Sales Ratio
A Chart of Accounts, or COA, is a list of accounts where all transactions, i.e., the money that goes out of the restaurant, and the money that comes in, are recorded. This list of accounts is divided into the following key sections.
- Expenses - funds used to keep the restaurant running, including rent, wages, electricity, etc.
- Revenue - income, proceeds, or profits, earned day-by-day
- Liabilities - what the restaurant owes, e.g., creditors, bank loans, credit cards, etc.
- Assets - what the restaurant is owed and owns, e.g., vehicles, equipment, debit cards, debtors, savings accounts, cash, etc.
- Equity - remaining restaurant or business assets after bills and loans have been paid off
- Cost of Goods Sold or Sales - direct cost of goods or items sold, e.g., cooking ingredients and alcohol
A well-prepared Chart of Accounts determines how well or poorly your financial information will be reported and understood by you and other stakeholders, e.g., investors, money lenders, vendors, suppliers, etc. Without this report, it will be difficult to get insights into how well or poorly the business is performing. That’s not all, without a well-prepared Chart of Accounts, getting taxes done efficiently becomes difficult.
The Cost of Goods Sold (COGS) is the cost of goods, products, or items that go into producing your menu items. Labor and utility costs, though involved in the production of these items, are not included in your COGS, what’s included are the actual ingredients used.
Why Every Restaurateur Should Care About COGS Report
Cost of Goods Sold directly impacts the profit made per item sold; therefore, keeping a close watch on this number will enable a restaurateur to price items properly if a profit is to be generated at the end of the day.
How to Calculate the COGS Rate for Your Business
The COGS can be calculated a couple of different ways. The quickest way to determine your COGS is to calculate the variance between the beginning inventory count and ending inventory count within a specified time. However, for this method to produce the COGS, both the beginning and ending inventory counts must be accurate.
The second method, which is more accurate, is to track each item as it moves from the storage room to the kitchen or bar.
While labor, occupancy, and operating are part of a restaurant’s expenses, they differ when compared to the expenses of other businesses.
- Labor Costs - this accounts for every penny spent on labor is not a part of the COGS (Cost of Goods Sold). When we talk of labor, we are referring to everyone on your payroll, from your head chef, servers, hosts, to your cleaners. Employee benefits and payroll taxes also fall under this category.
- Occupancy Costs or Expenses - occupancy, in this case, means your tenancy, i.e., the building that holds your restaurant. As expected, this where you categorize your rent, utility costs, property taxes, and property insurance. These are fixed costs that can't be adjusted or reduced to increase your profits.
- Operating Expenses - all expenses for day-to-day operations are categorized as operating expenses. Items like flatware, napkins, and even advertising, and marketing costs, can qualify as operating expenses. However, rent, ingredients, and labor should not be included in this group.
Of the types of businesses, it's only restaurants that have occupancy costs categorized in their income statements. Therefore, it makes sense you know the difference between operating costs and occupancy expenses or costs. Also, as labor costs are among the biggest expenses for restaurants, understanding what this category entails is important, as it is the only way you can control it.
Prime costs, in this case, refer to the majority costs of a restaurant, and they are Costs of Goods Sold (COGS), plus labor costs.
Why Every Restaurateur Should Care About Prime Costs
Prime Costs is the category including some of the most important costs and expenses, such as payroll costs, benefits, taxes, and food and beverage ingredients, and it is also the only category that can be adjusted to increase profits.
The Cost-to-Sales Ratio compares the expenses or costs generated by the sales activity of a restaurant to the revenue or proceeds. It is a vital ratio and the key to the success of any restaurant. If you want to gauge the performance of your restaurant, this ratio will give you a clear picture of everything.
The Cost-to-Sales Ratio puts costs or expenses as a percentage of sales, as seen below.
Food Cost-to-Sales Ratio = Food Cost/Food Sales X 100%
A good ratio falls anywhere between 26 and 36%.
Why Every Restaurateur Should Care About the Cost-to-Sales Ratio
The Cost-to-Sales Ratio is the only dependable way to tell how a restaurant is doing, and it even gives insight to areas needing improvement.
Hopefully, this article has been able to provide you some insight into the financial background and backings of establishments in the foodservice industry. If you’re interested in learning more information about improving your restaurant business, feel free to read our articles on “6 Easy Ways to Lower Your Restaurant’s Utility Costs” and “How to Easily Prepare Restaurant and Business Reports for Success,” which are also on the Hubworks Blog.