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Look up the most common accounting terminology guides and you’ll find 1,000’s of concepts with their individual abbreviations listed out in all their glory; but what do they mean? Unless you’re an accounting or finance major, you most likely know only a few, if any of these terms.

Accounting terms to busy restaurant owners are akin to a Doctor’s terminology to the average Joe. Not everyone speaks the language, but understanding it can be paramount in managing your money when it comes to your business lifeline – your accountant.

We’ve taken the Top 9 restaurant accounting principles you should know and broken them down into plain English.

 #1 COGs

Cost of Goods Sold (COGs) is the cost of the food and beverage products your restaurant sells. It is often the largest expense on a profit and loss statement. Since your goods pertain to your food and beverage inventory, COGS is determined with the following equation:

Beginning Inventory + Purchases – Ending Inventory. 

Why should I know this?

Making a profit is the most important goal for any restaurant owner or manager. Knowing your COGs in relationship to the revenue you are bringing in will help you to control these costs and make sure you are putting the most to your bottom line. Understanding this is important to run a profitable business.

 #2 OPERATIONAL PAYROLL

Operational Payroll is the facet of payroll that operators have the most control over. The areas of payroll that this accounts for are all hourly and tipped positions that make up the FOH (front of house) and BOH (back of house) employees.

Why should I know this?

Restaurants are among the most labor-intensive industries and labor is one of the largest line items on your balance sheet. Keeping control of labor expenses can be one of the best ways to increase profit and contribute to the success of your business. Adjusting weekly schedules and pro-actively regulating the clock-ins, clock-outs, and how many employees you have on the clock compared to daily sales are critical tasks tied to achieving your financial goals.

 #3 GPPC

Gross Profit after Prime Costs (GPPC) is the profit your restaurant makes after deducting the costs associated with making and selling your food and beverage, i.e. Labor and COGs.  Gross profit will appear on your income statement and can be calculated with this formula:

Gross profit = Revenue – Cost of Goods sold – Total Labor. 

 

Why should I know this?

Gross profit margin is generally important because it is the starting point towards achieving healthy bottom line net profit. When you have a high gross profit margin you’re in a better position to have a strong operating profit margin and strong net income. For a newer restaurant, the higher your gross profit margin, the faster you reach the break-even point and begin earning profits from basic business activities. Ideal % of GPPC will vary depending upon specifics to your restaurant; but, a rule of thumb would be for your GPPC to be 35% or higher.  Also, having a higher GPPC ensures that you will have enough revenue to cover the fixed and semi-variable costs involved with operating your business.

#4 NOI

Net Operating Income or NOI is the profitability or loss after factoring in your revenue, minus expenses. Revenue may not solely be food or beverage sales but can include catering, room rentals, merchandise and more. In the same sense, expenses are more than just cost of goods and paying your people – supplies, rent, utilities, advertising and more will be deducted from your revenue to arrive at your NOI.

Why should I know this?

NOI is the best way to grade your operational financial health. Knowing where you’re at with your NOI is valuable for more than just profitability; it shows you the strength and sustainability of your brand. You can use this to evaluate your potential for future growth. A healthy NOI can also be used to leverage decisions to reduce debt or reinvest in your business.

 #5 ACCOUNTS RECEIVABLE

In the simplest of terms, Accounts Receivable is “money owed to a company by its debtors.” Examples of this would be Delivery Services, Whole Sale Accounts or House Accounts.

Why should I know this?

Accounts Receivable is an important factor in a company’s working capital as this is an Asset. This $ value will directly affect the overall bottom line of the business (Asset vs Liability). Companies can use their receivables as collateral for borrowing money. Therefore, keeping your Account Receivable balance reconciled should always be a best practice. Also, holding your debtors accountable for payment terms should be non-negotiable.

#6 PAYABLES

Payables are amounts for items or services that have not yet been paid. They live on the balance sheet and are the sum of money owed at a future date. These can include amounts owed to vendors, tax agencies, credit cards or loan lenders.

Why should I know this?

It’s important to understand that the revenues of the business need to cover both the expenses and the payables that the business owes. When reviewing your break-even analysis, factor in payments that will be made on debt so you have an accurate goal for your weekly sales. Keep an eye out on your balance sheet for any negative payables as this will signify an inaccuracy in the financials.

#7 ASSET

What you OWN! An asset is a resource owned by a company that has future economic value and can be measured and expressed in dollars. Assets can include your petty cash, inventory, kitchen equipment, computers, furniture, or any other large purchase that adds value to your business. Assets are typically listed on your balance sheet at cost or lower.

Why should I know this?

It is important to understand your asset status because assets lose value over time and can affect your cash position when you need to replace them. Because they live on the balance sheet, profitability won’t be affected, but your cash flow will be. If you were to ever sell your business, you’d try to get the highest amount of value for the assets that you own.

#8 LIABILITIES

A liability is money that you owe or have retained for a future sale that will later be expensed or redeemed within the restaurant.  Liabilities live on your balance sheet and don’t directly impact your financial statement until the expense is paid, which in turn reduces the liability owed. Liabilities can include payables, credit card tips owed, payroll taxes and amounts received in advance for future sales including gift cards.

Why should I know this?

Knowing where your Liabilities stand is crucial to understanding the true cash position of your restaurant; you’re forced to factor in what you owe (like your gift card balance that has not been redeemed or catering/banquet deposits). Checking the balance consistently can also ensure the integrity of your business by ensuring all credit card tips due are paid. By maintaining accurate liabilities on the balance sheet you can show the true financial position of your business and avoid large expenses hitting the profit and loss statement all at once.

#9 CASH FLOW

One of the most important parts of owning a restaurant, or any small business for that matter, is understanding your cash flow. Simply put, cash flow is the amount of cash coming in versus the amount of cash going out of your business on a daily, weekly and period basis. Cash flow indicates actual changes in cash, as opposed to accounting revenues and expenses. It also takes into account what you own – think of the inventory on your shelf; and what you owe – such as bank loans.

Why should I know this?

Without sufficient cash, you can’t cover payroll for your staff, pay your vendors, maintain your equipment or fund marketing campaigns to build sales. By analyzing your cash flow on a weekly basis, you can assess how your sales and the corresponding cash flow ebb and flow over time. This will allow you to plan for seasonal times when cash reserves may be an issue. Fluctuating inventory values may come to light, emphasizing the need to tighten up your purchasing procedures.