Running a successful restaurant requires more than just culinary skills and a knack for hospitality. Restaurants have the highest rates of failure for new businesses, that is right, they are #1. Effective financial management, specifically restaurant accounting, is a key component for maintaining profitability, understanding, and sustainability. Unfortunately, many restaurant owners and managers trust themselves or an underpaid accountant who make common accounting mistakes that can lead to financial pitfalls. In this article, we'll explore some of these mistakes and offer practical solutions to help you steer clear of them.
One of the most fundamental aspects of restaurant accounting is maintaining accurate and up-to-date records. This includes tracking all income and expenses, maintaining detailed receipts, and documenting all financial transactions. Neglecting this crucial task can lead to discrepancies, missed deductions, and inaccurate financial reports. Solution: Implement a reliable accounting system for your restaurant. Use
accounting software that you also have access to. The goal here is to automate and streamline record-keeping processes. Also remember to regularly reconcile accounts to ensure accuracy. Our firm utilizes QuickBooks Online as a way to not only complete the majority of the accounting process on our own but also to create an easy access point for our clients to view their own financial records.
A common mistake among small restaurant owners is mixing personal and business finances. This can lead to confusion, tax issues, and difficulty in tracking the financial health of the restaurant.
Solution: Open separate bank accounts and credit cards for your restaurant. Ensure all business transactions are conducted through these accounts to maintain clear boundaries between personal and business finances. We recommend utilizing Relay Financial as a software which allows you to separate and have better control over how your money is managed and spent.
Cash flow is the lifeblood of any restaurant. Poor cash flow management can result in an inability to pay suppliers, staff, and other operational costs, leading to potential closure.
Solution: Regularly monitor your cash flow, especially for distributors. Create cash flow forecasts to anticipate future financial needs and identify potential shortfalls. Implement practices such as managing inventory efficiently, negotiating better payment terms with suppliers, and optimizing labor costs. A large portion of this is managing your tax liabilities through estimated payments. Unfortunately, this is the highest failure risk for small business and is often unmanaged, as we will talk about later.
Inventory management is a critical component of restaurant accounting. Poor inventory practices can lead to overstocking, waste, and increased costs, ultimately affecting profitability.
Solution: Use inventory management software to track stock levels, monitor usage patterns, and reduce waste. Conduct regular physical inventory counts to ensure accuracy and adjust purchasing accordingly. This step requires a great deal of time and effort which is often undervalued by managers and owners. Keeping track of food walking out the backdoor and alcohol being overpoured is a long-term cost saver
Restaurants are subject to various taxes, including sales tax, payroll tax, and income tax. Ignoring these obligations can result in hefty fines, penalties, and legal issues.
Solution: Stay informed about the tax requirements specific to your location. Use accounting software that includes tax compliance features to track and remit taxes accurately and on time. This is where hiring an accounting firm for restaurants comes in the most handy.
Payroll is often one of the largest expenses for a restaurant. Inadequate payroll management can lead to issues such as overpayment, underpayment, and compliance violations.
Solution: Implement a robust payroll system that accurately tracks hours worked, overtime, and benefits. Ensure compliance with labor laws and regulations. Regularly review payroll reports for accuracy and make adjustments as necessary. Make sure you are separating back of house and front of house when analyzing payroll. Kitchen cost versus food income is a very important metric that needs to be performed throughout the year.
Without a proper budget and financial plan, restaurant owners can struggle to manage expenses and anticipate future financial needs. This can lead to overspending and financial instability.
Solution: Budgets are extremely helpful for making decisions and evaluating success. Creating a detailed budget that includes all expected income and expenses sets a goal for yourself to judge yourself on. Regularly review and adjust the budget based on actual performance. Develop a long-term financial plan that aligns with your business goals and objectives.
Accurate financial reporting is essential for understanding the financial health of your restaurant. Many restaurant owners fail to produce regular financial statements, leading to a lack of insight into profitability and performance.
Solution: Generate and review financial statements regularly, including income statements, balance sheets, and cash flow statements. These accounting reports can also be used to obtain loans which may be needed if you have large hopes for the future of the business. Use these reports to identify trends, track performance, and make informed business decisions.
Many restaurant owners try to manage their accounting without professional help, leading to errors and missed opportunities for financial optimization.
Solution: As a heavily biased solution, Blue Heron CPAs helps you with all of the above. We help our clients better than they can help themselves and we strive to inform customers on all of their restaurant accounting needs. Even with a professional, we see many mistakes that professionals make and that allows us to fix and create large profits for our customers. Blue Heron CPAs has spent years studying and researching how to best help restaurants with their accounting process.
Effective restaurant accounting is vital for the success and longevity of your business. By avoiding these common mistakes and implementing best practices, you can create accurate financial management, maintain profitability, and achieve your business goals. Remember, investing in the right tools, systems, and professional guidance can make a significant difference in the financial health of your restaurant.
Embrace these strategies to avoid common pitfalls in restaurant accounting, and you'll be well on your way to a thriving, financially sound restaurant business.
