While restaurant accounting has plenty in common with accounting in any other business, there are elements that may be foreign to accountants who are new to the industry. Restaurants deal with gratuity, perishable inventory, and an inordinate number of paper invoices, to name a few.
Despite some of the unique challenges presented by restaurant clients, working with the restaurants can be both lucrative and rewarding. The market is massive (and still growing) and the majority of restaurants in the U.S. are small businesses in need of accounting services and expertise.
So, if you’re looking to grow your restaurant accounting practice, here are a few industry-specific considerations to take into account:
1. Tip Handling
There is a lot of variation in the restaurant industry when it comes to handling tips. Whether it’s pooling, mandatory or not, split, or tips by paycheck vs. cash tips—it can be tricky for restaurants to keep employees happy while maintaining an accurate balance sheet and payroll taxes. Since there’s no “one size fits all” approach for handling tips, it’s important to understand each restaurant’s tipping practices to properly account for them.
The good news is that more and more restaurants are choosing to increase wages while doing away with tips altogether. If this trend continues, it would eliminate one of the major accounting challenges for restaurants.
2. Inventory Management
Dealing with inventory is not unique to restaurants – businesses like retailers and manufacturers have hefty inventories to manage. But there are specific considerations when accounting for restaurant inventory.
In other industries, businesses can often get away with quarterly or annual inventory counts. Restaurants, however, need to take inventory counts much more frequently (sometimes even daily) since products are prone to waste, spoilage, and theft.
Many restaurants implement inventory management tools to streamline these processes and assist with assessing inventory values for financial reporting purposes. It’s important to note that financial statements may be subject to inaccuracies, because the prices of ingredients are constantly changing.
3. Profit and Loss (P&L) or Cash Flow Statements
Reviewing frequent P&L statements can have a significant impact on a restaurant’s business. Due to the nature of the business, it’s important for restaurants to know how they are performing on a weekly basis. This allows them to have more flexibility over spending and budgetary goals before it’s too late to take action. Additionally, it gives insights into sales, costs and trends, making it easier for restaurants to control cash flow.
Creating weekly P&L statements can be a challenge since restaurants receive so many paper invoices from vendors. Implementing accounts payable automation for restaurants eliminates any manual data entry, making purchase data available for a weekly P&L.
4. Accounting Periods for Restaurants
In keeping with the theme of taking frequent inventory and reviewing weekly P&Ls, restaurants tend to run on shorter accounting periods than most other business. There are myriad benefits to restaurants if they run on weekly accounting periods:
- Improves the accuracy of comparisons
- Provides flexibility to choose on which day the period starts and ends. Perhaps a restaurant wants their period to end a Sunday, allowing them to schedule inventory counts after — and not before or during — the busiest days of the week
- Facilitates weekly reporting due to the cyclical and seasonal nature of the industry
Additionally, it’s helpful to align bi-weekly payroll periods with accounting periods.
It’s recommended that restaurants manage accounting periods using the 52-week 4-4-5 or 4-5-4 calendar method. With either method, the year consists of four quarters of thirteen weeks each. In the case of the 4-4-5 method, for example, the thirteen weeks consist of two four-week months (the first “4” and second “4”) and one five-week “month” (the “5”).
5. Prepaid Accounts
If a restaurant chooses to set up weekly accounting periods, it’s important to consider how to account for monthly or annual expenses. These expenses may include rent, lease payments, utilities, or even restaurant management software.
For example, the restaurant’s Point-of-Sale software costs $10,000 a year and the provider bills annually in January, that entire expense should not be reflected in January. Instead, it should be distributed across multiple periods. To do this, use a Prepaid Expense account to hold the balance. Each month, chip away at it, moving 1/12 of the amount to an Expense GL code.
6. Vendor Credits/Short Pays
Sometimes a delivery doesn’t include everything the restaurant has ordered or includes spoiled items that don’t meet their quality standards.
In those cases, the restaurant should request a vendor credit and adjust the invoice total. They can either “short pay” the vendor (subtract the credit from the invoice and pay only what they owe) or pay the full amount and account for a credit.
Ultimately, vendor credits need to be accurately accounted for to ensure that the restaurant is not overpaying for goods they didn’t receive. Keeping proper documentation on vendor credits will help resolve any disputes when the vendor submits a monthly vendor statement to be reconciled.
Ready to take on a restaurant client?
Check out xtraCHEF’s Restaurant Accounting Guide for more best practices. Or request a product demo to see how xtraCHEF can help you with each of the above considerations and add more value to your restaurant client engagements.
And make sure to check out xtraCHEF's webinar on February 11, 2020 at 2:00 p.m. Eastern Time, with Insightful Accountant on bookkeeping for your restaurant clients. Register here.