Someone should really write a tell-all book for business success that includes a money-back guarantee. There's no doubt that we'd buy that book. But since it doesn't exist (yet), the next-best alternative is to research and learn how to avoid the biggest mistakes and pain points your business might face.
At Botkeeper, we have clients in just about every industry, so we know that it's sometimes harder to run some businesses than it is for others. Take the restaurant industry, for example. According to the US Department of Labor, hospitality businesses have only a 55% five-year survival rate. That number drops pretty sharply through 10 years at only 38% survival rate. Eek!
These numbers are less than inspiring, to say the least. That's why we've pulled together a list of some of the most important accounting pain points for restaurant owners to consider and address as they navigate the industry and grow.
Accounting Challenges for Restaurant Owners:
"It's so hard to find good help these days." Truer words have never been spoken by a restaurant small business owner. In fact, research shows that as of 2018, the restaurant industry had an average turnover rate of 73%, which means that a café with 10 employees will replace seven staff members each year. This leads to inconsistent service, countless hours wasted on new employee training, and a potentially damaging reputation for your establishment (among other effects).
The top reasons for restaurant employee turnover are a shift in career type, different work than what they expected, and disagreements with management/owners. Not far behind that, surveyed employees cited a lack of training and fun as the next two reasons why they quit.
Finding and retaining good employees is a major pain point for restaurant owners for a number of other reasons, too, like scheduling, providing benefits options, pay, opportunities for upward mobility, etc.
Obviously, a restaurant owner can't control or influence all of these things, especially as state and federal minimum wages are impacted by legislation. However, a savvy restaurant owner can help alleviate this major pain point by finding and creating opportunities whenever possible.
One such opportunity to help reduce turnover is to tighten up your finances so you have a bit more flexibility in pay and benefits. Of course this isn't an easy thing to do for any small business owner, but there are options! Automated bookkeeping can help create or identify efficiencies to help increase cash flow.
2. Payroll for tipped employees
Keeping good employees at your restaurant can be a challenge, especially when it comes to paying them. Managing payroll for front- and back-of-house workers can be particularly complex since compensation options differ by position. Your best server might be your most difficult to pay since you have to deal with their hourly wages, taxes, and calculate/account for their earned tips. Automatic gratuities are another complexity, as they're classified as a service charge instead of a tip, meaning your server won't get the gratuities until they're paid. It can definitely be confusing!
The US Department of Labor investigated more than 9,000 restaurants for wage and hour law violations, and it concluded that 84% of them were in violation.
Basically, payroll for tipped employees is no easy task. The Fair Labor Standards Act enables employers to take what’s called a “tip credit,” which enables them to pay tipped employees below the federal minimum wage of $7.25. However, in order to claim that tip credit, the FLSA requires employers to provide the following to their employees:
- Cash wages, which must be at least $2.13 per hour,
- The additional amount the employer will claim as the tip credit, which can’t exceed $5.12 (the difference between $2.13 and the federal minimum wage of $7.25),
- The employer’s tip credit can’t exceed the actual amount of tips earned by the employee,
- And that all tips earned by an employee are retained by the employee, except in cases where tip pools are at play.
And that’s just part of it! It’s complicated, to say the least, and it often leads to wage theft for employees. The US Department of Labor investigated more than 9,000 restaurants for wage and hour law violations, and it concluded that 84% of them were in violation—regardless of whether it was intentional or accidental. Each violation can lead to a $1,000 fine, which would obviously eat into a restaurant’s bottom line, and it hurts their ability to find and retain good talent.
With all that said, it should be pretty obvious why a restaurant needs to have an effective and efficient payroll system in place. Too often restaurant owners or their managers are responsible for creating and analyzing reports that don't accurately capture labor costs, which often leads to costly errors—both in time and money, as we just described.
Outsource and automate your payroll administration to help cut back on errors and inefficiencies that could be costing you money and preventing your restaurant from attracting and retaining the best talent!
3. Poor or unknown cash flow
Imagine this nightmare scenario: your opening staff shows up early in the morning to find that your doors are permanently locked because your restaurant went under overnight. No one knew it was going to happen—not even you. It might sound crazy, but it happens often enough because many restaurants have no idea what the status of their cash flow is.
Obviously, your restaurant shutting down could be related to any number of factors, but the leading cause of any small business’ closure is due to cash flow problems. Paying attention to your cash in and cash out is imperative for your restaurant’s survival.
There are plenty of helpful tips and tricks for monitoring your restaurant’s cash flow, but the key takeaway is to stay on top of it. That means assessing your cash flow on a regular basis—every week you should have a thorough understanding of what income and expenses you can expect. Having an accurate and available cash flow report could make or break your restaurant.
4. High expenses & operating costs
A main objective for any business accountant is to help identify areas where expenses could be reduced. In the restaurant industry, this is a major pain point since there are so many moving parts: occupancy and operating expenses, staffing and turnover, inventory management, health regulations and requirements, and the list goes on.
Toast, a popular point-of-sale (POS) provider, surveyed more than 1,000 restaurateurs from all sorts of markets in the US and found that the top restaurant challenge was high operating and food costs, reported by 52% of those surveyed.
Additional restaurant expenses include credit card fees, uniform rentals, food and labor costs, and everything else you have to pay for to keep the business running. A good benchmark for making sure your expenses aren't out of control is reviewing your food and labor costs which shouldn't be any higher than 70% of gross sales.
The bottom line is to make sure your expenses aren't taking over your restaurant's bottom line. A good bookkeeping solution will not only be vigilant to such indicators of financial health, but will also be able to report on them at anytime. Botkeeper's automated bookkeeping solution does exactly that with beautiful reporting and human oversight.
5. Inventory management
Good ingredients make good food, and good food is hopefully one of the main attractions to your restaurant. But that means you have to stay on top of your inventory for the freshest ingredients at the best prices.
Unprofitable restaurants especially understand how inventory management can impact their bottom line, with 60% of struggling restaurants citing operating and food costs as their top challenge. More profitable restaurants also say that this challenge is their greatest one (49%).
A good policy to follow for restaurant owners is to run inventory on a weekly basis for a number of reasons, mostly to make sure your perishables are refreshed and to keep track of what is and isn't flying off the menu. Seasonality affects each of these factors, so what you order and how much of it will likely change from time to time. But another important consideration is the cost of goods sold (COGS), which should be calculated every week when inventory is taken.
COGS is important to monitor because it impacts your menu pricing—what you're spending on ingredients, how much is being wasted, and what's not selling. As a small business owner, you'll want to keep up with your COGS so you make the right decisions for your restaurant.
There are a lot of inventory management systems out there, but they still require some manual work. And you'd be shocked at how many bookkeepers mis-categorize food and beverage costs in the general ledger! A human-assisted Botkeeper will help by accurately booking inventory adjustments in QBO based on your COGS and ending inventory balances, and reporting on your food sales.
6. Item pricing
Related to inventory management, pricing out items can be a major pain point if you're not sure what's selling or what's in season. For example, the price of strawberries changes with the seasons, so your restaurant's flagship strawberry dessert will cost more during certain parts of the year. As a result, you might want to adjust your menu to accommodate for the increased cost.
But it’s not exactly easy to figure out how much to price an item, and it depends on a number of contributing factors. This process is called menu engineering, and it involves a handful of formulas to help determine exactly how much that strawberry dessert or steak frites should cost. We’ll save your brain some work by skipping the calculations in this post, and instead we’ll provide an example of why accurate item pricing is important, and how it can impact your sales.
Take Mei Mei, a successful restaurant in Boston. They engineer their menu to meet specific goals based on their total revenue, with a target 20% food cost. But even with this, they need their staff’s buy-in in order to really hit their goals. They achieve this through open book management, which emphasizes staff training so they understand the ins-and-outs of the business. Here’s an example from Mei Mei’s chef and co-owner Irene Li:
Some of our own employees, when analyzing our best-selling sandwich, the Double Awesome, started out shrugging their shoulders at the price point ($8.50). “It’s just an egg sandwich,” they remarked, not incorrectly, like so many Yelpers before them. As they saw deeper in to our financials, the price tag began to make a certain amount of sense and staff turned the conversation from reducing the dish’s price to properly communicating its value to guests.
However you decide to price your items, including making select items the same price year-round to attract customers (e.g., a $5 burger special), it’s imperative that you eliminate costly errors through miscalculations. We all know how fat fingers or an overworked brain can lead to incorrect inventory orders or mistaken pricing information!
7. High prime cost as a percentage of sales
Another factor that helps you determine menu item prices is knowing your prime cost and being able to calculate prime cost as a percentage of your total sales. So let’s break it down: prime cost is the cost of your food (COGS) plus your labor costs:
COGS + LABOR = PRIME COST
Your sales report should easily tell you your COGS, then you just have to factor in how much you spent on labor PLUS the cost of taxes, benefits, and comped food.
After you determine your prime cost, you’ll divide it by your total sales and multiply by 100 to determine your prime cost as a percentage of your total sales.
(PRIME COST / TOTAL SALES) x 100 = PRIME COST AS % OF TOTAL SALES
This lets you know how much you have to work with to pay other important things like rent, utilities, and paying yourself. Ideally, your prime cost as a percentage of sales should be under 60%, yet most new restaurants are running on between a 74–76% prime cost percentage. That leaves only around a quarter for every dollar earned to cover those other important things!
It’s easy to let your prime cost percentage creep up as you grow—you might have a ton in sales, but you likely have increased the size of your staff, which drives your percentage up.
On the flip side, you don’t want your prime cost percentage to be too low because that likely indicates you’re not providing the best experience for your customers (overpriced items or cheap ingredients). This could obviously negatively impact your reputation and reduce sales over time.
In order to arrive at a healthy prime percentage, make sure you’re keeping track of your COGS and total sales. It’s helpful to have accurate, real-time, digestible reports on hand at all times to help you determine your prime cost percentage and make adjustments. This is especially important when you’re comparing to your location budget, time period budget, etc.
You should monitor prime cost percentage at least every month, but savvy owners and managers are always checking up on how their prime cost percentage is trending!
Related to item pricing, the success of a restaurant relies heavily on having accurate reports from which owners and managers can make important decisions. Surveyed restaurateurs are becoming increasingly dependent on reporting to help reach their goals, with 50% saying that analytics software is extremely important (up from 47% in 2017).
The problem with traditional reporting methods is that they’re often disparate and pulled from a dozen different sources at different times and displayed in different formats. That makes reviewing business intelligence reports daunting and likely a low-priority item. But having a handle on reporting is one of the most important pieces of running any business—it can make or break you!
9. Using traditional vs 4-4-5 accounting calendar
A major mistake that some restaurant owners and managers make is using calendar months for account review and balancing. This is problematic for a few reasons, the main one being that you won't be able to compare apples to apples down the road. You'll want to be able to compare profit and loss statements to other financial statements, and the months won't match up one-to-one.
Here's why: the restaurant industry sees pits and peaks in sales on a routine basis, with most the biggest sales peaks happening on the weekends. If May of this year has one more Saturday in it than May of last year, your comparison reporting will be off, and your annual projections and planning could be impacted.
Restaurants benefit from a 4-4-5 accounting period, which is four quarters of 13 weeks, split into four-week months, plus one five-week month (see below, and save the image for your own use!). This is the standard method for restaurant accounting and an essential part of running a restaurant.
Inevitably, there will be more pain points for any restaurant owner or manager—that's the challenge with any business! But the issues and solutions we've listed here are a pretty good start, and they should hopefully help get your restaurant past that pivotal five-year mark.
Of course the last—and probably biggest—pain point for any business is how to attract and retain customers, but that's an item for another post...we're still conducting some research on the matter!