Accounting is just as important to restaurants as to any other type of business. Should a restaurant’s accounting processes not be up to snuff, business-critical controls and information will be lacking.
There are a handful of accounting concepts that are particularly important to restaurants. A quick look at five of the most fundamental will reveal that coming up to speed with the basics is not difficult at all.
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Cost of Goods Sold
Accountants who work with many kinds of businesses regularly talk about the “cost of goods sold,” or “COGS.” This is an especially important metric in the field of restaurant accounting because it summarizes an establishment’s basic level of financial viability more succinctly than any other.
While the specifics vary from industry to industry, COGS can be calculated for restaurants by adding up the prices of the ingredients used in each dish. An even simpler way to obtain a COGS figure at regular intervals is to generate it every time inventory is taken.
Keeping a close eye on COGS at all times is one of the best ways to make sure a restaurant’s pricing strategy is sound. When COGS jumps quickly or rises too high over time, a rethinking of the contributing factors will often be in order.
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Prime Cost
COGS details the relationship between the dishes a restaurant serves and the prices of the ingredients that go into them. It takes more than raw ingredients, of course, to produce drinks, appetizers, main courses, and desserts that diners will love.
A restaurant’s prime cost for particular dishes adds to the associated COGS the price of all the labor required to prepare and serve them. It will always be important to be aware of both COGS and the prime cost to judge where any cost-cutting effort should be targeted.
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Fixed Costs
Costs tied to consumable items like ingredients or ongoing needs like the services of workers can be adjusted over time. However, every restaurant also has certain fixed costs that do not vary with volume, vendor pricing, or other factors.
Adding up all of a restaurant’s fixed costs into a lump sum will almost always be helpful. The resulting figure will need to be paid over the relevant term regardless of what else happens at or to a restaurant.
Because fixed costs are inherently inflexible, it can seem to novices as if paying too much attention to them would be pointless. Failing to account for fixed costs can easily make certain proposals seem overly appealing or unattractive. In addition, many fixed costs actually become subject to adjustment at certain intervals, as with leases that can be renegotiated when they run out.
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Chart of Accounts
Of the various documents that accountants at restaurants create and maintain, the chart of accounts (COA) is likely the most important and telling. A comprehensive COA will list and categorize every active account for a restaurant, from those associated with vendors to lines of credit at banks.
An accurate, up-to-date COA will make it easy to trace transactions and to focus in on the issues that are impacting a restaurant the most. Whenever a new account gets opened or an existing one closes, a restaurant’s COA will need to be updated.
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Profit and Loss Statement
Many restaurants have investors who need to be kept apprised of the latest developments. Restaurant owners, operators, and managers will also wish to be informed about how an establishment is faring financially.
A profit and loss statement, or P&L, summarizes all the most important information. No other report can provide as much insight into how a restaurant is performing.
Familiarity With Accounting Basics Pays Off
These five accounting concepts are particularly important to restaurants of all kinds. Being familiar and comfortable with these ideas will make it much easier to assess any restaurant’s financial condition.
