PODCAST   |   VIDEO

While there may not be a more boring financial statement to discuss, the reality is that a Restaurant Balance Sheet is the most important financial statement an operator has. If the Balance Sheet is not in-line and accurate, then there is no question that the Profit and Loss Statement is inaccurate as well; and therefore, there is no true clear picture of where your actual Net Profit lies. This statement is also extremely important for loan applications, business valuations, etc., so while the Balance Sheet may bore an operator straight to sleep, it is certainly meaningful and impactful that the value of this statement is regularly reviewed.

RASI Director of Client Advisory Services, Sydney Lynn, and RASI Assistant Director of Client Advisory Services, Brian McCaig, host an educational webinar on the basics in understanding how an operator should read their balance sheet and utilize that knowledge into making profitable decisions in order to catapult their organization into growth and success.

RESTAURANT BALANCE SHEET BASICS

 

A company’s balance sheet is comprised of assets, liabilities, and equity. The reason this statement is called a Balance Sheet is that the assets must equal the liabilities plus the equity (Liabilities + Equity = Assets).

ASSETS:

Restaurant assets represent items of value that a company owns and has in its possession or something that will be received and can be measured objectively. Good examples include:

 

  • House Bank/Petty Cash: Every restaurant calls this something different (safe, petty, banks, house bank), but unless you are a cashless restaurant, you have some version of this. It represents the amount of cash you have in your restaurant, NOT including your cash collected for that day’s deposits. You need to have daily or shift-ly counts of this amount to ensure accountability, prevent fraud and inaccurate accounting.
  • Capitalized Expenses: If you have a large expense, like a new piece of kitchen equipment for $5,000, your CPA may suggest you treat this as a capitalized cost and record it as a long-term asset on your balance sheet. This means, the $5K does not hit your P&L statement as an expense within the same period that you purchased it, but it hits your balance sheet as a capitalized asset. You can set up a depreciation schedule to incur the expense spread out over future periods.
  • Accounts Receivable: These are amounts due to your business, but not yet paid for by the customer.
  • House Accounts: These are similar A/R accounts; you can think of them as Norm at Cheers… Norm never paid his daily bar tab until a later date. However, the bar still needs to keep track of that amount through a House Account. Both the House Account and A/R Account should be used only if you will be paid back in the future.

LIABILITIES:

A restaurant liability is something a person or company owes, usually a sum of money. Good examples include:

 

  • Prepaids and Accruals: Depending on if you are accounting on a cash basis or an accrual basis, you may have some prepaids and accruals set up. Something to evaluate when considering setting up an accrual is that managing prepaids and accruals can be time-consuming and can also lead to more work on cleaning up your balance sheet at year-end.  Additionally, when adjustments are made and the accounts are trued up, this could potentially have a negative impact on your Net Profit. Instead of using these options, you may want to consider utilizing a budget by expensing these as they are paid, and seeing the true impact to profit, less the expense in the projected budget. An additional point to consider with prepaids & accruals is the expense automatically hits every period but you could easily miss a payment if you aren’t paying attention to the declining accrued balance.
  • Gift Cards: Gift Cards are not considered a sale until the time of redemption, so all outstanding gift cards sold will be living in your balance sheet until the time of redemption. It’s important for you to stay on top of this amount so you have an idea of how much of unclaimed gift cards are floating around in case a multitude of recipients wanted to redeem all at once. This will mean that you will receive no cash to help cash flow when these are redeemed; On the flip side, this can increase cash flow during times where gift cards are being sold (holidays) and won’t be redeemed until the future.
  • CC Tips Payable: If you’re paying out Credit Card tips collected on paychecks, then the total amount of tips collected for that pay period will show as a credit balance in your liabilities. At the time of processing payroll, that total amount collected should then be paid out in full to your employees. THIS IS NOT YOUR MONEY!! If you have any remaining balance then this means that you have either under or overpaid out tips to employees and this will be a red flag if you were to be audited. It’s critical that you’re reconciling CC Tips Payable to the penny with every payroll that you run. If you are overpaying the amount collected then that is just cash leaving your account that you’re paying to employees, not collected from guests.
  • Credit Cards: The Balance Sheet will reflect what is owed to any of your credit card vendors and would show as a credit amount. You have posted expenses paid by the credit card that increased the credit amount shown on your balance sheet.  When you post payments to the credit card, it then debits the account until you are paid-in-full, down to zero. If you ever look at the Balance Sheet and you see a negative amount reflected, then this is telling you that payments have been made to the balance owed on the credit card but the transactions that created this owed balance were not recorded. Credit card liability should match your credit card statement. Lastly, if you’re carrying a balance month over month, don’t forget to record your interest expense.

LONG TERM DEBT & OWNER’S EQUITY:

 

  • Note Payable: Note Payables is just another word for a loan or debt. These loans are represented on the balance sheet as a liability because you owe this money.
  • Owner/Investor Activity: This is where owner investments or draws are recorded. The best practice is to separate this out by investor/owner name.

COMMON BALANCE SHEET MISTAKES

 

  • Lack Of Frequency Reviewing The Balance Sheet: The balance sheet is overlooked all the time. Many restaurant operators are diligent about checking their P&L on a regular basis but tend to ignore the balance sheet until the CPA needs to file their taxes at the end of the year. The big mistake with this concept is assuming that the Balance Sheet has nothing to do with the P&L that they’re diligently reviewing and basing crucial operational decisions. An inaccurate balance sheet often means an inaccurate P&L.
  • Not Recording All Transactions: How you pay for items matters. You may be performing a bank reconciliation on your main operating account, thus ensuring that all those transactions are being accounted for; but, what about the credit card that you’re not reconciling? Or the cash that you utilized to pay for a delivery? Credit card balances should be accounted for as a liability on your Balance Sheet and the balance should be checked for accuracy on a frequent basis. If the balance is misrepresented, you may have expenses that should’ve occurred on your P&L already. The same idea goes if you pay for something in cash. Truthfully, this is not an ideal practice, and should be avoided unless absolutely necessary because of the lack of receipts and records with cash transactions – it’s an easy one to miss-account for (or not account for at all).
  • Recording Loan Payments Without Expensing The Interest: Don’t pay your CPA to clean this up at the end of the year. Every time you make a loan payment, separate out the interest and the capital. The capital portion should be reducing your liability and the interest should be an expense on your P&L.
  • Gift Certificate Liability Not Being Recorded: To properly forecast your cash flow, you have to know how much outstanding gift card liability you have. Many restaurants are generous with gift cards, whether it’s to build future sales, donations, guest recovery, or trades, gift cards can be a great tool to build business and spread goodwill as part of the community. However, this has to be accounted for accurately on the balance sheet. You may have a gift card program through your POS, which automatically tracks this for you, but, if you don’t have that kind of system, it is on you to record the sale and the expense with any gift card you give away.

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Some restaurants may or may not have the need for setting up Due to Due From Accounts. This is typically needed when you have one or more locations or possibly a holding or management company. Due To/From Accounts are utilized to track money owed to or from a company. This could also be referred to as an Intercompany Receivable.

  • Do you need a Due To/From? The only time that’s needed to make sure this is set up is: If you have more than one entity that you are sharing expenses or INV with, etc.
  • It is important that you record these transfers on both ends. The credit to the company it’s coming out of and the debit to the company it’s going to.

HOW THE BALANCE SHEET AFFECTS THE CASH FLOW STATEMENT

 

The Cash Flow Statement represents how the Balance Sheet and P&L work together to have an impact on your cash and operating accounts. This is a great way to understand where your money is going. The Cash Flow Statement is the answer to the question, “why doesn’t my bank account balance reflect my profit?”.  The more you understand this statement, the better you can forecast your cash flow, and the more you can be strategic and plan out your cash flow activity.

PERIOD END REVIEW BEST PRACTICES

 

If you’re going to trust the information on your Cash Flow Statement, it’s crucial that it’s accurate, and in order for an accurate cash flow statement you need to have an accurate balance sheet. The best activity you can perform to ensure accuracy is a Period End Review.

The 3 most important statements for you to review at the end of each period for identifying any inaccuracies as well as potential areas of opportunity before heading into the next period are the following:

  1. Profit & Loss Statement
  2. Balance Sheet
  3. Cash Flow Statement

It is recommended to thoroughly review the General Ledger Register to review all activity that occurred in each GL for the period.  You can use this to quickly see if there were any vendors or expenses that were miscoded,  see any large expenses that may have been needed to be capitalized versus expensed, etc. 

Another way to review activity on your Balance Sheet is to simply drill down into the values and it will produce the trial balance that will also show you the activity for that period to quickly verify that all was recorded properly.

Before reviewing Financial Statements, it’s also necessary to verify that the bank reconciliation has been completed. You’ll need to make sure that you review your bank reconciliation and post any needed adjustments for missing transactions.

Once posted, perform a thorough review of all 3 financial statements and make sure all have been posted accurately; this will also assist you in identifying any misuse of funds, possible theft, and any errors that could have occurred.

Additionally, you’ll want to ensure you’re reviewing the Cash Flow Statement as well in order to understand what impact the period results had on your cash flow.

You can quickly identify changes from your financing activity via your cash flow statement.

This will show you how activity from your Balance Sheet impacted your cash flow for the period. Remember, Net Profit does not equal cash flow, so to truly know what your cash flow for the period is, you need to review your Cash Flow Statement because the Balance Sheet affects this greatly.

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