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As a restaurant owner, it is crucial that you understand how smart restaurant accounting can bring you closer to profitability and sustainability. Because of the huge impact of cost of goods (COGs) on the bottom line due to the nature of business (i.e. buying raw material, cooking the food, and selling for profit), it’s important that restaurateurs understand how to compute and monitor prime costs so that their business is actually profitable.
The tough news is that 20% of all new restaurants will fail in the first year. In my experience, the multiple struggling restaurants we audit in their first year of operation have almost no business or financial strategy. New restaurateurs are focused on creative and customer-focused areas, but they tend to leave the managing of payables and receivables to an inexperienced accountant, or no one. Juggling payables and receivables is not accounting. In fact, in a COGs-driven business model, it is literally the slow death of the business.
Only 50% of restaurants will survive after the five-year mark. At this point, many restaurants see their sales dwindling, and they will have reached a plateau, and are in need of new business and brand strategies.
The good news is that there are ways for restaurants to get back on track. Here are eight restaurant secrets to help manage your restaurant’s financial management -and do it like a pro- so you can see sustainable results and boost in your profitability:
1. UNDERSTAND YOUR COGs Restaurants are loaded with processes that lead to the bill. We buy, produce, sell, and pay out from what we earn. Keep an eye on your food cost, and manage your sales efforts to achieve lower “actual” food cost by having a good menu mix. You can do this by having a yield-driven recipe, managed with trainings, quality control, periodic menu engineering, and waste management systems in place. The end result of your efforts operationally will show up in your margins monthly with actual cash saved. Accounting reports without sub reports on detailed COGs lead to poor decisions.
2. HAVE SALES TARGETS If you don’t have a strong sales strategy in place, you land up bookkeeping, not running the business with numbers, as is the right way. Sales targets across revenue channels give you a road map to stay profitable. If we don’t know the destination, we lose the right path. A sales target strategy gives everybody a why to the what and motivates strategic decisions based on achievements not emotions. This strategic goal should then be reviewed with your monthly profit and loss (P&L) statements consistently to see red flags that accounts, sales, and operations teams can work on closely together to achieve.
3. BENCHMARK ALL FINANCIAL GOALS WITH A CLEAR BUSINESS PLAN Once you have targets in place, build a plan that uses your roadmap to achieve goals with tools. A good business plan considers industry standard-based numbers that should be your guideline to every move you make. For example, if you have exceeded your labor cost of 20% per month, but your payroll is modest, the problem is low sales, not that you need to fire staff or reduce salaries, which means your business plan needs to analyze potential new revenue channels, or boost current ones. Without a business plan, owners can make some irreversible mistakes.
4. ALLOCATE BUDGETS TO ALL COST CENTERS Budgets should be allocated to each cost center. For example, if actual food cost is set to not exceed 25% as your business benchmark, and your P&L shows an increase in food cost while you haven’t changed suppliers, it means it’s time to look at recipe management, waste management, and even your inventory and stock levels. Or, if you are complaining of low sales, but haven’t allocated at least 5% of your turnover on marketing, that could be an area to focus and allocate a budget to. Or if you have exceeded the 5%, yet no significant change in revenue, it’s time to analyze the efficiency of your marketing budget.
5. MONTHLY INVENTORY AND STOCK MANAGEMENT Track and manage cost of goods sold, goods in hand, and perished items. As our industry is all about producing to sell, this is cash on the shelves for you. Treat it like money- which means know what came in, know what was “invested,” what was “traded,” and what is left behind. Make sure you have a just-in-time (JIT) management system to use highly perishable produce fast. The loss from rotting tomatoes, for example, could be a small percentage, but if it’s habitual, that’s a major leak at the end of the year. This detail should be part of how you account your P&L reports every month.
6. PLAN AND MANAGE LABOR COSTS AND TURNOVERS BASED ON MILLENNIAL AND GEN-Z MINDSETS Planning and managing labor cost and benefits, resignations, turnover is another thing smart owners do. Let’s be real, the millennial mindset loves experiences, adventures, and moves from one job to another faster than you can say hello. We can’t fight the inevitable evolution of our generations. While I believe in doing everything to retain talent, I have understood that there is an expiry date on all relationships, especially in a high-pressure industry like ours. Build a good team, mentor, coach, provide all the stability and benefits of an awesome work culture, but be mindful that when they fly the nest for variety or something else their passion catches, you have built a company on processes and contingencies, not emotions. Allocate rehiring budgets, retraining budgets, and be realistic of labor cost being the higher part of your prime cost, and strategize accordingly.
7. ENGINEER THE MENU EVERY QUARTER Exercise menu engineering every quarter. I can’t emphasize enough on how important it is to review your menu performance. This is the pulse of your business. Remember when you wanted to have a restaurant with great food that people will love and buy? Well, now that you have that, make sure your people are loving it, and buying plenty. What this means is that you should get out of emotional attachments to any one menu item you personally love, and observe how your target market is responding to it. Sometimes, a menu dish may be excellent, but priced wrong, or presented wrong, or just not attractive to your target market. The best way to make sure your menu is making money for you is to analyze its performance on an engineering sheet. That also lets you see if your food cost is hitting the sweet spots by sufficient upsell of sides, water, etc. to give you a profitable margin end of month. This is an exercise your accounting team should carry out with your chef every quarter.
8. HAVE A WELL-STRUCTURED MONTHLY P&L WITH GRAPHICAL VIEWS Understand how to prepare a restaurant business focused P&L for management information system (MIS) reporting and decision-making. Without budgets-driven accounting, you are just shooting in the dark, and watching a bottom line that could be a lie. Numbers never lie, and I have seen most restaurateurs who come to us for help, running their businesses without a well-structured P&L graph. They are making crucial decisions about their business based on cash flow or just sales. If only more restaurateurs understood how numbers drive our industry, we would seriously have less closures.