Restaurant accounting guide

There are two primary accounting methods in the restaurant space. Cash and accrual accounting. 

Cash Accounting

This method records revenues and expenses only after an actual transaction occurs. Meaning, income is only recorded when the payment is received and expenses are only recorded after they are paid. 

This is typically a good fit for small businesses because of its simplicity. This option gives a good picture of the cash flow and is an extra bonus for places that have low sales volume or irregular cash flow. But, it’s not as good of an accurate depiction of your financial potion os health since it doesn’t take into account debts or invoices. 

Accrual Accounting

This method records revenue and expenses when they are earned or incurred, regardless of when the transaction happens. This means revenue is recognized when a sale is made even if the customer still needs to pay. Then, expenses are recognized when they are incurred even if the bill still needs to be paid.

This option is more complex and requires better time management and organization. But, it gives the most accurate picture of your business's financial health and position since it takes into account current and future debts and sales. 

A restaurant’s operating costs can be broken down into two categories:

Fixed Costs: Rent, insurance, internet, cable, and any other consistent monthly or yearly bills and/or licensing costs.

Variable Costs: Liquor cost, food cost, labor, and other goods sold costs. 

Fixed costs are costs outside your control. But your variable costs can change and be monitored to maximize profit. Keeping on top of all the accounting and reporting within your restaurant is something you can not do halfway if you want to be successful. How much money is going out directly affects how much profit you’re making.  Let’s break down some of these costs together. 

Restaurant Liquor Cost

Let’s start with liquor costs. This is a vital part of restaurant accounting. There is a huge profit margin with alcohol. However, liquor costs, which can also be referred to as pour costs or simply beverage costs, can seriously increase that amount. That’s why lowering your liquor cost can effectively increase the profits you make from your bar sales. 

The easiest way to lower your beverage costs is to really get a could grasp on what exactly goes into the amount.

What is Liquor Cost?

To put it simply, liquor cost is the percentage of a drink’s menu price that it cost to actually make the drink. Knowing this allows you to dive into your purchases, recipes, and menu pricing to maximize your profits.

The average restaurant liquor cost in the U.S. is about 18-24%. 

How Does Liquor Cost Affect Your Profit?

Problems like overpouring, excessive spillage, unaccounted comps, inefficient menu pricing, and theft are common hard hits to your bottom line. Almost all of these issues can be monitored and settled by keeping an eye on your liquor accounting. 

For example, if it costs you about $5 on ingredients and labor to make a cocktail and your bartender gives it away or spills it you’re not selling that inventory but it’s still costing you to make. That will lower your liquor cost and dig into your profits. One doesn’t sound too bad, but it can add up quickly in a night, week, or month. 

Learn more about liquor cost via our Full Liquor Cost Guide

Restaurant Food Cost

Similar to liquor, from putting together a menu to budgeting for expenditures, food cost is essential. Once you’ve spent so much time and effort crafting delicious menu items, you don’t want to flop because you didn’t price those dishes correctly. Calculating things like food cost percentage can help you decide on concepts like menu pricing and other factors that can maximize your profits. That way you can continue elevating your menu until you’re the hottest spot in town. 

What is the Average Food Cost in a Restaurant?

The food cost percentage is essentially the portion of your restaurant's sales that you spend on food. Not just the final menu item but the ingredients in each item. This should affect how you price options on your menu and what ingredients you use. On average that percentage is about 25-35%. 

To calculate your food cost percentage you should use this equation:

Why is Food Cost Management Important?

When it comes to restaurant accounting management the food cost can be your highest expense. By tracking this per month, or even weekly, you can keep a better eye on your budget and spending. You can’t make a profit if you’re throwing money down the drain. Doesn’t matter if you're a new restaurant trying to stick, a new location to a chain, or a popular spot looking to keep on track with the times, ignoring your food cost is not a smart move.

Plus, analyzing your food cost will help you price your menu appropriately so you can make money without overcharging your guests and making them hesitant to dine at your restaurant or return again. 

How To Optimize Food Cost Percentage 
Let’s look at some possible ways you can optimize your operations to ensure better food cost percentage and increase profitability: 

Adjust your menu prices: Restaurants should use their food cost percentage to calculate menu prices. But, also consider factors such as labor.

Conduct a menu engineering analysis: You should start by breaking down costs for your dishes to figure out the exact cost of each menu item. Then, categorize menu items by how much profit they bring in and their overall popularity to see if there are items you should consider removing or upselling. Finally, try a menu redesign that can include new menu descriptions and visuals.

Reduce food waste: Operators can take several steps to reduce food waste. Like etter managing inventory, finding creative ways to use surplus ingredients, or running limited-time specials. These strategies will not only minimize your food costs but they'll also help the planet.

Find lower-cost suppliers: We know restaurant suppliers appreciate loyalty, but it might make sense to ask around your network and find options for new suppliers if you feel you're being charged too much for raw materials. 

Decrease portion sizes: Are your customers always taking home excess food or finishing their meals with food left on their plates? Plating with smaller portions or even offering smaller sizes options are a great fix for this. You'll reduce waste and possibly save money on inventory. 

Invest in technology: It's difficult to stay on top of your food cost percentage and other calculations on your own, it can be overwhelming. By setting up the right technologies//applications you can save time and also provide the data you need.

A restaurant's labor cost is the total amount it costs to pay your salary (which can also be considered fixed cost but typically hit your labor cost) and hourly employees. It can also include employee benefits, taxes, bonuses, overtime, health care, and sick/vacation time. 

How to Calculate Restaurant Labor Cost

The most simple way to calculate labor cost is with this equation: 

Keeping an eye on this percentage can help make smart staffing decisions. You want to try and keep the percentage at around 30%, but this can be a bit more or less depending on your specific restaurant's needs and also if you’re in your busy or slow seasons.

How to Lower Restaurant Labor Costs (Without Firing)

With the minimum wage changing it can make an impact on your labor costs. While letting go of a percentage of staff is a quick fix, or hiring seasonal workers that have a start and end contract, it’s not always the right conclusion. Here are some other options:

Focus on Employee Retention: Here us out. Employee turnover can be a fast cycle in the hospitality industry. So it might night feel hard to simply let some employees go. But, training new employees takes time and money. So you might find yourself saving effort and money by focusing on creating a create a core team and holding on to them. 

Then if you need additional help you can hire seasonal workers with experience to cut down on the time needed to train them. 

Invest in Good Equipment and Tech: When things like point of sale systems, phones, and expo screens don’t function at optimal levels it causes your staff to waste time trying to do their job. This can lead to unhappy staff which can lead to unsatisfied customers. Happy customers spend money and return. Happy staff helps ensure happy customers.

Streamline: The efficiency of your restaurant also helps keep staff in a good headspace and saves you time and money. Take the time needed to establish clear procedures and train your staff to understand the importance of upholding these procedures. Pre-shift meetings, mobile tablets or updated POS systems, good training, clear recipes, KDS, and more are all simple and important tools. 

Cross Train: The more staff you have that can ware multiple hats the easier it is to staff without hiring additional employees and spending money training them.

Monitor Overtime: There is a fine line between staffing correctly and ignoring the cost of overtime. Overtime hours can add up fast and really cost you by the end of the pay period. 

Hold Manages Accountable for Labor Cost Too: Your managers are the staff that should be handling the hiring and scheduling. So when you notice an inconsistency in labor cost they should be your first point of contact for clarification. Holding them accountable will lower the likelihood of them looking the other way when it comes to overtime and over-approving vacation and sick time.

No matter the type of business, tax season is always a stressful time. It’s important to remember that the better you balance your books and keep clear records throughout the year the easier it’ll be come tax time. 

About How Much Are Restaurants Taxed?

A restaurant has to deal with taxes coming from several different sources. Plus, the amount is dependent on so many factors like how popular the restaurant is, where it’s located, how large the property is, how many full-time and hourly employees on your staff, and more. The amount can be as high as tens of thousands per year.

Common Restaurant Taxes

These common taxes are a good place to start. 

Federal Income Taxes

All restaurants will pay some sort of federal income tax. This is something placed on your business and personal income, and your business and personal expenses can be deducted from it. 

Payroll Taxes

Taxes on your employee's payroll may include Medicare, unemployment, and social security.

Restaurant Tip Taxes

It’s hard to nail down exactly how much each server or bartender is making in tips. The best way to manage this is to explain to your tipped staff that they should record their entire tip out, both credit card and cash, when they end a shift. The easiest way to monitor this is by using your POS system. 

Sales Tax

The tax a restaurant pays on food is almost always a form of sales tax plus whatever the city/county sales tax is on top of that. This will be different from state to state. 

Possible Restaurant Tax Deductions
 

Any way to save during tax season is worth looking into. Here are a few potential tax reductions for restaurant owners you may not know about. 

Marketing

When considering tax-deductible marketing tactics, try and make sure you’re covering all channels. If you’re paying for Facebook, Google, or Yelp promotions, make sure those are accounted for. More traditional advertising applies as well. TV, radio, and newspaper ads can cost a handful and are things you’d want to take off of your income. 

Staffing costs

Between front of house and back of house, all of these salaries can be deducted from a restaurant owner’s income tax, along with the food provided to employees between shift changes. The owner will still separately have to pay their payroll tax.

Equipment

When considering deductibles from your income tax, be sure to remember the cost of ovens, fryers, stoves, dishwashers, and the cost to maintain all of them. 

Food costs

Whatever your ideal food cost is, you’re going to want to write off the cost of these ingredients. 

Legal fees

All of the licenses and permits needed to legally operate along with filing trademarks, business names, and paid legal counseling can rack up costs, all of which can be deducted from a restaurant owner’s taxes.

Insurance

Things like restaurant insurance, business insurance, employee insurance, and insurance for delivery vehicles can almost all qualify for tax deductions for restaurant owners.

Everything you’ve learned about is only as good as what you do with it. The easiest way to track financials and use that information to make informed decisions is by keeping detailed and easy-to-monitor records and reports. Here are the key reports your managers should be keeping track of.

Chart of Accounts

The chart of accounts is the baseline for your accounting financial reports. This categorizes the different transitions associated with your business. Preparing this report entails tracking high-level transactions like assets, liabilities, expenses, revenue, equity, and cost of goods sold. These categories are then divided into smaller subcategories. For example, the expenses account can be broken down into alcohol costs, food costs, laundry, wages, and utilities. 

The chart of accounts is important because:

1. It gives an overview of the major financial reports
   
   
2. It gives a better sense of the restaurant’s financial health
   
   
3. It provides a point of reference to compare the restaurant’s numbers with industry averages
   
   
4. It’s the document investors and shareholders will ask to see to get a clear picture of the financial standing of your restaurant

Balance Sheet

This lists your assets, debt, and equities at any given time. It provides a snapshot of your current financial situation so you plan your short and long-term cash flow goals. Think of your balance sheet as a set of scales. 

Profit and Loss Statement (P/L)

Like its name, this report shows the profit or loss that your restaurant has made over a given period of time. It can also be referred to as the P&L statement, income statement, statement of operations, and statement of earnings. The statement reflects the sales of your restaurant and the costs incurred, reconciling items like food costs, sales volume, operating costs, labor costs, and profits. It’s important because it shows the overall profitability of your business.

Cash Flow Statement

A cash flow statement tracks all the money coming in and out during a specific period. This statement digs into how well your venue generates cash to fund your expenses by tracking the amount of money that flows. This way you can navigate payment cycles or seasonal trends and anticipate additional funds needed to stay above water. 

Additional Key Performance Indicators (KPI) 

Alongside your reports and tracking, there are a few other KPIs that you’ll want to keep an eye on to ensure your restaurant is on track to remain profitable.

Cost of goods sold (COGS): Total cost of all the ingredients you use to make menu items. Everything including the garnishes, condiments, and seasoning. On average, around one-third of your gross revenue goes towards paying for COGS. 

Prime costs: Sum of your total costs to sell food, drinks, and other goods plus the labor. Your prime costs should be between 55% and 60%.

Food cost: How much overall sales are spent on ingredients and food vendors. Your food cost percentage should sit around 28-35% of revenue.

Gross and net profit: Your Gross Profit is the revenue generated from the sale of your goods and services. Your net profit is the amount leftover from your gross profit after you deduct operating expenses.

By tracking these additional factors you can better paint a full picture of how you’re performing and pinpoint where you need to improve.