Restaurants are well attuned to making it work on thin margins, and the operators who find the most success are those who have a true understanding of their fiscal health and keep their finger on the financial pulse of their business at all times. In this episode of The Tip Share, RASI New Business Strategist, Dave Downs takes a moment to chat with RASI Squad Leads, Dave Holzer and Jesse Brown, both tenured accountants, to provide insight and expertise on the top 5 areas that restaurants should be focused on in order to keep the upcoming period purely goal-oriented based on current results.
TOP 5 AREAS A RESTAURANTS SHOULD REVIEW IN ORDER TO SUCCESSFULLY CLOSE OUT THE END OF A PERIOD
There are 5 main areas where restaurants should focus at the close of a period:
- COGS: This is most often a main focus; your food costs and your poor cost
- LABOR: The employees that are working for you in your FOH, your BOH, or any other payroll that you may be managing
- EXPENSES: Any items below the line (items on the income statement that do not directly impact profit)
- ANALYSIS: Focusing on any particular category and taking a deeper dive into each of those accounts (COGS, Balance Sheet, etc.)
- RECONCILIATION: Determining where items were coded, what items need further review, and what adjustments you may need to make
Just remember, Cogs, Labor, Expenses, Analysis, Reconciliation: CLEAR. If you want to get a clear financial picture, it’s imperative to review these areas at the end of each period!
TOP CONSIDERATIONS WHEN IT COMES TO EVALUATING COGS AND LABOR AT THE END OF A PERIOD
COGS: COGS tends to be the bread and butter for the restaurant; It’s where the managers can make the most impact and it’s where the day-to-day is really focused and driven, so when you’re analyzing COGS you’re going to be looking at your big-ticket items – anything that’s critical to get food to the customer.
Especially right now during the pandemic, restaurants should drill down into trying to find ways to save money through things like purchasing programs, or disposables savings, and ways to cut back on costs, all while still increasing the benefit to the consumer.
How does this happen?
Make sure you’re looking at period trends; review the last 3 periods and look at your overall food costs and see how they’re trending.
Even further, it’s helpful to make sure you’re looking at the Period from the previous year as well to view historical trends.
What was your total food cost last year as compared to this year?
In the current situation with the pandemic, it may obviously be a little difficult to compare the two, but the overall idea is to look at those trends and see where there might be areas of opportunity; maybe to negotiate a price with your vendor, or capitalize on available product discounts, etc.
LABOR: When you’re looking at your period and then looking at your labor, right now looking back at trends is going to be difficult due to the pandemic.
There were shutdowns and restaurants lost labor and reduced staff next to nothing, then the PPP loans roll in and all of the sudden staff are being brought back so restaurants were faced with even more labor expenses than they really needed to run their restaurants efficiently, and now, most of those PPP loans have run out.
Hopefully with this second round of PPP funding will help, but it’s imperative to understand that when you’re reviewing trends, you have to do so in context (this falls in line with COGS as well – but even more so labor).
Understanding exactly what was going on at the time of the trend will help paint the picture in the long run so you can understand if you’re comparing apples to apples, or apples to oranges.
The best way to alleviate any outliers is to always look at your trends in the scope of a budget versus actual in the period end review, and even more frequently throughout the course of each week so that every analysis is really tied directly back to the budget.
WHAT RESTAURANTS SHOULD LOOK AT WHEN DISSECTING BELOW THE LINE COSTS ON THE P&L
COGS and Labor are dissected daily in most restaurants, so below the line expenses are an area that often gets overlooked, and this can be a huge detriment to the business.
There are a lot of hidden items below the line that you really can make a difference.
Looking at your overall supply cost; what you’re needing to purchase for the restaurant; looking at your rent; reviewing your common area maintenance are just a few of the areas that can make a major difference and shed a bright light on areas of opportunity to lower costs.
USEFUL TIPS TO VIEW A RESTAURANT COMP ANALYSIS
Every restaurant’s accountant should have a standard set of GL’s (general Ledger accounts) where comps can be separated out into more detail, providing a clearer picture of why or when certain items are getting comped.
This can range anywhere from Employee Discount, to Alcohol Employee Discount, to VIP Promo, to Alcohol VIP promo, and so on and so forth. Getting a more granularly detailed analysis of your comps will set you up for greater success in the bigger picture, especially in relation to compliance and tax implications (use tax etc.).
WATCH THE FULL VIDEO below:
TOP 3 ITEMS ON THE BALANCE SHEET THAT A RESTAURANT OWNER SHOULD ANALYZE
The Balance Sheet is often the statement that gets overlooked; it’s not your income, it’s not your COGS, it’s simply not as entertaining to look at. However, the Balance Sheet holds its weight. The main accounts you need to review are the following:
- PETTY CASH: Your cash drawer’s money and your safe. The day-to-day operations of a business affect that petty cash number. There may be a paid out you take out of your petty cash to go get produce, and if that doesn’t get booked into your financials, you’re missing a produce expense.
- CREDIT CARD TIPS PAYABLE: You collect X amount of dollars in credit card tips throughout the week, so you pay that dollar amount onto the payroll. Ideally, that should be the same amount paid out. If there are any discrepancies, you’re going to see a balance in credit card tips payable and you can ask yourself, “Do I owe employees money, or did I overpay employees?”
- OPERATING EQUIPMENT: Your salad tables, your freezer, any restaurant equipment. Those are assets that your CPA depreciates cost over a certain amount of time. If you cod a $50 expense or a $200 expense to an asset account, that’s not hitting your P&L as an expense, and your CPA is going to see that at Year-End and have to reclass that and potentially charge you for the adjustments or the time it takes them to review your statement.
BONUS: ADVICE FOR A PERIOD END REVIEW WHEN IT COMES TO LOANS
It’s critical to ensure that on a period basis, you are correctly coding your interest and your principle.
A lot of times we see full payments go to the principle and you’re actually going to understate what you owe; additionally, on the P&L side, it’s important to remember that the interest is an expense and not part of the loan.
WHY BANK RECONCILIATIONS ARE CRITICAL TO A PERIOD END REVIEW
If you can’t verify that the information you have is accurate, then really, there’s no point in even starting to look at the information in the first place.
When you’re reconciling accounts, this needs to go beyond your operating account.
If you have credit cards or if you have cash in the restaurant, all of this needs to be reconciled before you even start to look at your numbers; You want to make sure you have all your cash paid-outs recorded properly; you want to make sure that all your expenses paid out with a credit card are recorded properly; and really, ensuring that even those loan balances are all accurate before you can even start to look at how profitable you were for a period.
Your bank reconciliation can be thought of as your grading piece.
If you’re looking at hundreds of reconciliation questions, the statements you were looking at in between where the period closed and where it was reconciled, don’t actually hold accurate information because of the countless unreconciled items.
Use the number of reconciliation questions you have as a learning tool to understand where your areas of opportunity lie.
FINAL PIECE OF ADVICE FOR CLOSING OUT A PERIOD SUCCESSFULLY
Make sure that you’re reconciling and reviewing everything on a period end review on a regular basis. You can identify any accounts that need adjusting and make those adjustments to the financials.
It doesn’t do you much good if you’re looking so far into the past that you can no longer adjust, so decide on a time frame that works for you and make sure you’re making those corrections right away – it will enable you to pivot when you need.