restaurant-management | 11 mins read

How a Restaurant Chart of Accounts Can Help You Maintain a Healthy Cash Flow

how a restaurant chart of accounts can help you maintain a healthy cash flow 1666799142 1607
Debdutta Bhattacharjee

By Debdutta Bhattacharjee

What is a Restaurant Chart of Accounts?

A restaurant business has to keep a keen eye on its financial transactions in order to be successful. Even the smallest increase in costs can cause a big dent in net profits. And when you consider that profit margins of restaurants are usually razor-thin (averaging between 3-9%), you can appreciate how important it is for restaurants to closely monitor money flowing in and out.

A chart of accounts is a handy managerial and financial tool, helping restaurant owners keep their house in perfect financial order. A restaurant chart of accounts is a comprehensive list that describes each account, identifies types of accounts, sums up account balances, and places all financial transactions into clear categories.

These categories include liabilities, assets, revenue, equity, expenses, and cost of goods sold (COGS). A restaurant chart of accounts essentially organizes and itemizes disparate pieces of financial data and lets restaurant owners gather data on the state of each and every account, in order to ascertain the financial health of the business.

How Can a Restaurant Chart of Accounts Help You?

A chart of accounts allows restaurants to track money flowing in. It gives restaurant owners a clear picture of their income sources and lets them decide which assets can be liquidated if the business is in urgent need of cash.

Restaurants can also get an in-depth idea of their debts with the help of a chart of accounts. It lets them strategize their payment schedules, maximize their cash flow, and ensure that they don't deviate from planned budgets.

A chart of accounts also lets you understand the nature of your expenses, so that you can control unnecessary expenses and increase allocation in areas that have the potential to give good returns. With the help of a chart of accounts, you get a clear idea of the funds allocated, for instance, for buying and maintaining inventory and employing workers. When you see these allocations in terms of your current and predicted demand, you are able to decide on ways to rejig your expenses according to changing realities.

For example, if you see that your food and labor costs have increased and are constricting your profit, you may want to rethink your plans to wheel out a new menu item. However, if you are confident that the new dish is going to be a money-spinner in the long run, it may be prudent to wait for it to gain a firm foothold in the market before expanding it to new locations.

Similarly, a comprehensive view of sales and costs lets businesses understand which menu items are doing well or poorly, and strategize accordingly. It prevents restaurants from under- or over-purchasing stocks and ensures that they are neither faced with insufficient inventory to fulfill demand, nor excessive stocks resulting in resource wastage.

Analysis of accounts also lets restaurants optimize their staff numbers according to requirements, keeping staffing in sync with demand at different times of the day or in different seasons.

An analysis of the chart of accounts of various franchise locations gives the parent organization a fair idea of which units are faring well and which ones are lagging behind. This calibrates spending to either support a floundering unit or strengthen an already successful one.

A close look at the accounts also allows business owners to decide which discounts and loyalty programs to continue with, expand, or scale down. Furthermore, it allows organizations to take a call on whether to invest in business expansion, including an increase in the seating capacity, purchase of sophisticated software and hardware, opening of new stores, adding exotic menu items, and so on.

A chart of accounts is also your best mate when it's time to file your taxes.

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What Expenses Should a Restaurant Chart of Accounts Include?

The most prominent expense that a restaurant chart of accounts must include is labor cost. A restaurant typically employs varied staff, such as waiters and servers, chefs, bussers, managers, dishwashers, cleaners, hosts, and even temporary staff to take care of high footfall days. Labor cost refers to the amount the restaurant spends on salaries, wages, employee benefits, and overtime pay. The labor cost of a restaurant is usually 30-35% of its revenue and forms the largest area of expenditure for food businesses.

The restaurant chart of accounts must also include food cost and beverage cost. Food cost refers to the price of food purchased by a restaurant for every dollar value of its sales. This is another crucial area of expenditure for restaurants and is usually in the range of 28-35% of revenue.

Food cost is usually seen apart from beverage cost because typically beverages don't need much labor and come with better profit margins. On average, beverage costs are around 20% of sales.

Expenses incurred by a restaurant also include fixed costs such as insurance, property taxes, rent, and expenditure on utilities like water, electricity, heating, waste disposal, and sewage.

Restaurants also incur expenses on buying cutlery, dishes, takeout containers, paper napkins, kitchen equipment, and other supplies. Money is also spent on marketing, repairs and maintenance, licensing fees, credit card processing fees, telephone connection, Wifi connection, office supplies, and so on.

Expenditures may also be made on running loyalty programs and discounts, maintaining company vehicles, paying vendors and third-party food aggregators, and on hardware and software like point of sale (POS) and restaurant management systems.

Cost of Goods Sold (COGS), on the other hand, is a separate category in a chart of accounts. It involves the direct expenditure made to produce the goods sold by a business. It is arrived at by adding the value of the purchased inventory to that of the starting inventory and then deducting the ending inventory value. The COGS of a restaurant includes the expenses incurred on the ingredients that go into making a dish and on the labor that had been used. It, however, doesn't take into account the amount spent by the restaurant to distribute its products outside its precincts.

Restaurant accounting also deals with prime costs. This can be computed by adding COGS to labor costs. The prime cost of a restaurant essentially includes the expenses on food and beverages, payroll, employee benefits, and taxes.

Restaurant Accounting Terms You Should Know

Some restaurant accounting terms have already been discussed in the preceding section. While those were related solely to expenditure, here's a look at accounting terms that cover a broader ambit.

1. Accounts receivable- It refers to money that customers owe a business for goods and services received. A higher-than-usual accounts receivable may mean that the business is having trouble collecting its dues, which may lead to bad debt. It, however, assumes considerable monetary value when the company gets its dues. Accounts receivable is usually converted into cash within a year, but if it's held on the balance sheet for a longer time, it turns into long term fixed assets and falls under the category of current assets.

2. Accounts payable- This refers to the short-term obligations of a company towards its suppliers and/or creditors who have not yet been paid. An increase in accounts payable indicates that the company is buying more on credit than on cash. A falling accounts payable, on the other hand, reveals that the company is clearing its earlier obligations faster than buying new products on credit. It is categorized as a current liability in the balance sheet and is critical for managing the cash flow of the organization.

3. Assets- These are company resources possessing a future economic value and this value must be expressible in dollar terms. For a restaurant, buildings, POS equipment, kitchen equipment, cash, or accounts receivable can all be classified as assets. A company's assets can also be expressed as a sum of its liabilities and equities (share value).

4. Liabilities- These are essentially financial obligations or payables of a company. Some restaurants, for example, are funded with the help of debt, which is entered as a 'liability' on the company balance sheet. Every company has to deal with liabilities unless it solely uses cash to run its business.

5. Gross Profit after Prime Costs (GPPC)- The prime cost of a restaurant has already been explained in the preceding section. The amount of money left with a business after subtracting prime costs from sales gives you the GPPC.

6. Total per head sales- This can be computed by dividing the total sales made over a period of time by the total employees of the organization. This indicates the revenue generated per employee and gives restaurant owners a fair idea of how efficiently they are making use of their employees.

Benefits of Accounting Software

Restaurant accounting can be improved immensely with the help of modern technology. Accounting software helps in automating financial monitoring so that businesses no longer have to depend on accountants. Automated software does away with inadvertent errors that may creep into human accounting. It also ensures that accounting is done regularly and with formulaic consistency.

Monitoring of expenses is automated by software solutions. As a result of this, restaurants have a complete view of their costs and can see to it that their cash flow doesn't go dry. Business owners are also alerted about the payments they have to make. Accounting software reconciles the cash transactions of the business with bank statements, giving business owners a clear view of the cash status of the organization.

Furthermore, accounting solutions help in gathering data from a variety of sources like the restaurant POS system, workforce management system, inventory management system, customer relationship system, task and time management system, food safety management system, and business intelligence system. The in-depth financial reports generated are then interpreted with the help of software to produce insights in the form of easily comprehensible visuals (as graphs, charts, tables, etc). These insights allow businesses to take strong, data-driven actions that address cost escalations and barriers to revenue growth.

Restaurant accounting software improves budgeting and demand/sales forecasting. It also facilitates asset management, including managing acquisition, depreciation, capitalization, and retirement of assets like restaurant buildings, kitchen equipment, refrigerators, furniture, POS hardware, air-conditioners, and so on.

Accounting solutions make tax calculation and filing easier and hassle-free by automating various processes. They also act as a repository of tax forms. Accounting solutions, therefore, ensure tax compliance.

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Top 3 Restaurant Accounting Software of 2022

1. Zip Reporting-
This software solution, which can be purchased from the Hubworks app store for restaurants, brings together and consolidates highly complicated financial data in one place. It turns data into attractive and easy-to-understand visuals and produces detailed insights. Zip Reporting generates data for multiple locations, all of which can be accessed from one place. This software solution resides in the cloud which allows it to be viewed in real time, from any place and at any time. It offers visibility on all aspects of a business operation in a manner that makes sense across multiple devices.

2. QuickBooks Online-
Businesses can generate customized invoices and sales receipts in a completely hassle-free manner with the help of this software solution. The banking integration it supports allows financial statements and transactions to be automatically updated. With the help of customizable reports and dashboards, the financial health of businesses can be monitored in real time. Accounts can be accessed and operations managed from remote locations, at any time. This software saves time through payment scheduling, and helps track employee time too.

3. Sage Intacct-
This is a cloud-based platform that automates and streamlines complicated billing processes. It lets businesses track multiple accounts and offers real-time visibility into those accounts. This ensures that cash management is efficient. This software solution helps automate and quicken quote-to-cash cycles, or sales cycles, from the time a quote is shared to the deal being sealed. The software comes with robust reporting features, which lead to quick insights and data analysis on demand. Businesses are able to choose from over 200 options for data visualization and customize the way data is framed.

Conclusion

No food business can fail to track its finances if it wants to stay competitive and profitable. It can do this by monitoring its income, expenditure, accounts receivable, and accounts payable with a view to increasing income while controlling costs.

A chart of accounts, in this regard, is a valuable tool that allows organizations to monitor their financial health easily and accurately. Essentially, a chart of accounts is akin to an index of each and every financial account in a company's general ledger, organized over a period of time and divided into sub-heads, such as income and expenses by location and menu item.

The significance of a chart of accounts is in its comprehensive nature, which allows organizations to gain a complete understanding of where money is coming from and where it is going, where it is being spent more/less than required, which revenue streams are generating more/less than expected, and so on. This knowledge enables organizations to cut costs, optimize expenditures, and get the most out of their products and services.

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