What Is Restaurant Accounting?
As the term suggests, restaurant accounting focuses on the organized recording, analysis, and interpretation of financial information tailored to the restaurant sector.
A restaurant accountant is mainly responsible for maintaining the general ledger, accurately classifying expenses, and reviewing financial entries. They also manage accounts payable, process vendor invoices and payments, reconcile bank statements, and produce crucial financial reports such as balance sheets and income statements. Moreover, they set budgets, identify key performance indicators (KPIs), and track progress towards business objectives.
Besides that, restaurant accountants also handle tax returns, provide financial guidance, and perform audits. This specialized accounting function enables restaurant owners to assess and oversee their financial health through detailed profit and loss reports and other metrics, promoting operational efficiency, compliance, and profitability.
Are Restaurant Accounting and Bookkeeping the Same?
Restaurant bookkeeping and accounting, though often seen as synonymous, serve different purposes. Bookkeeping involves the day-to-day management of financial records, including tracking sales, managing expenses, processing payroll, and reconciling bank statements. This foundational work ensures accurate and timely financial data that supports operational decisions.
In contrast, restaurant accounting builds on this foundation and analyzes and interprets the recorded data. Accountants prepare financial statements, such as income statements and balance sheets, which reveal the restaurant’s overall financial health. They also conduct cost of goods sold (COGS) analysis, manage labor costs, ensure tax compliance, and assist in budgeting and forecasting. Together, bookkeeping and accounting are vital for maintaining the financial health of a restaurant, with bookkeeping providing the groundwork for the deeper insights offered by accounting.
Key Benefits of Successful Restaurant Accounting
Effective restaurant accounting is essential for guiding financial decisions, optimizing budgets, and ensuring compliance with regulations.
Informed Financial Decisions
A restaurant accountant closely monitors key performance indicators (KPIs), particularly food costs, labor costs and sales figures. For instance, during a monthly review, they notice your restaurant cash flow is negative cash flow, meaning more money is going out than it’s coming in. By analyzing the data, they discover that food costs have risen significantly due to high prices from their current supplier.
To address this, they would advise the procurement team to negotiate better terms or switch to a more affordable vendor. They might also suggest an adjustment in staff schedules to align better with peak and off-peak hours. This would help reduce labor costs without sacrificing service quality. In short, a specialized restaurant accounting function helps the owner make informed decisions to stabilize cash flow and cut costs.
Improved Budgeting
A restaurant accountant uses historical financial data from previous years to create a solid budget for the upcoming year. They analyze past sales trends and identify peak seasons and quieter months. They also assess past expenses, such as food costs and labor, to anticipate future spending and make accurate revenue projections. With this information, the owner allocates resources more effectively, sets aside funds for seasonal promotions during peak times and plans for cost-cutting measures during slower periods. This strategic budgeting, informed by good accounting practices, helps ensure the restaurant’s financial stability and growth.
Regulatory Compliance
A restaurant owner in the UAE relies on their accountant to ensure financial statements comply with the International Financial Reporting Standards (IFRS), which is mandatory for corporate taxation here.
By keeping accurate records of revenue, expenses, and profits in line with IFRS, the accountant helps avoid discrepancies that could lead to legal issues with tax authorities. They also ensure that all tax filings are submitted on time and with proper documentation. This careful adherence to regulations not only keeps the restaurant compliant but also reduces the risk of audits and potential fines.
Different Restaurant Accounting Methods
There are two main accounting methods often used by restaurants.
Cash Accounting Method
With cash accounting, you record revenue as soon as you receive the money. For example, when a customer pays for their meal—whether it’s cash, credit card, or a digital payment—you document it right away. Similarly, expenses are noted when you actually make a payment, like when you pay for ingredients, rent, or staff wages. This method is straightforward and works well for small restaurants or those with simpler financial setups.
Accrual Accounting Method
Accrual accounting records transactions when they happen, even if the money hasn’t exchanged hands yet. For example, if a customer dines at your restaurant and pays with a credit card, you record the revenue at that moment, despite the fact that the payment hasn’t been processed by the card company. Likewise, expenses are recorded when you receive goods or services, not when you actually pay for them.
While most restaurants use the cash method, especially in places like Dubai, the accrual method offers a more detailed financial picture. It helps you see how income matches up with expenses, thereby giving you a better sense of your business's financial health although the payments haven’t been made yet.
6 Key Financial Reports You Should Review
Successful restaurant accounting requires that you review certain key reports regularly, if you want to keep your restaurant business financially health.These reports help you track transactions, forecast sales, set and manage budgets, monitor costs, and assess your financial progress over time. Here are six of the most important ones:
Balance Sheet
A balance sheet offers a snapshot of your financial position, showing what you own (assets), what you owe (liabilities), and your overall investment (equity). Comparing balance sheets over time can help you spot trends in your finances.
Income Statement (Profit and Loss Statement)
This report details your income and expenses over a specific period. It’s useful for determining profitability and identifying areas where you need to cut costs or boost revenue.
Cash Flow Statement
A cash flow statement tracks money flowing in and out of your business. It helps you understand whether you have enough cash to support your operations or if you need additional funding.
Chart of Accounts
The chart of accounts is a complete list of all your business’s financial accounts. It helps you organize your finances and makes collaboration with your accountant much smoother.
Revenue Reports
These reports show how much revenue your business generates over a given period. By analyzing revenue trends regularly, you can forecast sales better and make more accurate budget predictions.
Prime Cost Reports
Prime costs are the direct costs of materials, labor, and expenses incurred in creating a product or service. Tracking these costs helps you manage your profit margins and monitor cost fluctuations over time.
10 Key Restaurant KPIs You Should Track
Like reports, restaurant metrics too, provide valuable insights into customer behavior, performance, and operations. With the right data, you can track every aspect of your business, even down to the smallest detail.
However, not all metrics hold equal value. Below we’ve listed ten key performance indicators in restaurant accounting. By carefully monitoring these KPIs, you’ll have a clearer understanding of your restaurant's financial health and can make informed decisions to improve profitability.
COGS and COGS Ratio
Cost of Goods Sold (COGS) refers to the total cost of food and supplies needed to create your menu items. This metric helps you assess whether you're pricing your dishes appropriately and managing costs efficiently.
You can calculate COGS using the formula:
Beginning Inventory + Purchases – Ending Inventory
Tracking the COGS ratio (COGS/Sales) allows you to detect rising costs and make necessary adjustments.
Prime Cost
Prime cost is the sum of COGS and labor costs, including wages, benefits, and bonuses. Its formula is:
Prime Cost = COGS + Total Labor Cost
It typically represents the largest portion of restaurant expenses, and is therefore a critical KPI to monitor if you wish to control your costs. The ideal prime cost ratio should fall between 55-60%.
EBITDA
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) reflects your restaurant’s core earnings by excluding non-operational costs. This measure is often used to evaluate the overall financial health of a business.
1. EBITDA formula based on operating profit:
EBITDA = Operating Profit + Amortization Expense + Depreciation Expense
2. EBITDA formula based on net income:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Revenue by Head
This metric, also known as sales per head, measures the average revenue generated per customer. It helps set sales targets and track customer spending patterns. The formula to calculate revenue per head is:
Total Sales/Number of Customers
Tracking this over time will provide insights into peak sales periods and customer behavior.
Net Profit Margin
Net profit margin shows how much of your revenue becomes profit after deducting all expenses. It is calculated as:
((Gross Revenue – Operating Expenses) / Gross Revenue) × 100
A healthy profit margin for restaurants falls between 3-5%. Keeping track of this metric helps ensure your menu is priced right and costs are under control.
Break-Even Point
Your break-even point determines how much revenue you need to cover your expenses. Once this point is reached, any additional revenue becomes profit. Its formula is:
Total Fixed Costs / ((Total Sales – Total Variable Costs) / Total Sales)
This metric is vital for understanding when your restaurant starts becoming profitable.
Food Cost Percentage
Food cost percentage measures the difference between the cost to prepare a dish and its selling price.
Food Cost Percentage = Item Cost/Selling Price
Aim for a food cost percentage between 20-40% because that will ensure you cover costs and maintain profitability.
Menu Item Profitability
This metric tells you which menu items are the most profitable. That way, you can promote high-margin dishes or adjust prices on underperforming ones. It can be calculated as:
Menu Item Profitability = (Number of Items Sold x Menu Price) – (Number of Items Sold x Item Portion Cost)
Understanding menu profitability also allows you to make operational decisions about what stays on the menu and what doesn’t.
Inventory Turnover Ratio
The inventory turnover ratio measures how often you sell your entire inventory in a given period. It is calculated as:
Inventory Turnover = CoGs / ( (Beginning Inventory + Ending Inventory) / 2)
Most restaurants aim to turn inventory 4-8 times per month. Monitoring this will help you avoid overstocking (leading to waste) or understocking (causing shortages).
Customer Acquisition Cost (CAC)
CAC measures the cost of bringing in new customers through marketing efforts. The formula is simple:
Marketing Expenses / Total New Customers Acquired
Tracking CAC helps you evaluate the success of your marketing strategies and optimize them for better returns.
Restaurant Accounting Services in Dubai
Balancing your books can feel more complicated than juggling multiple orders during a dinner rush, which is why partnering with the right accounting firm is essential. They’ll help keep your finances in check, optimize tax savings, maximize profits, ensure compliance, and support better decision-making.
The good news is that Oblique Consult makes restaurant accounting a walk in the park!
We streamline the process so you can focus on what really matters: spending less time on crunching numbers and more on crafting unforgettable dining experiences.
