How Much Math Is Needed To Become A Business Owner Restaurant Financial Management Issues

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Restaurant Financial Management Issues

Restaurant owners, while aware of the financial management of their businesses, are more likely to be involved in solving day-to-day problems that keep things running smoothly. Unfortunately, a financial counter is a luxury that many small restaurant owners cannot afford. This article will address six major accounting problems that restaurant owners often run into and how to prevent them from occurring or how to solve them once they do occur. Being a small business owner is always challenging and the restaurant business is financially complex.

This article will concentrate on those problems that can be solved with good accounting skills and procedural methods. By teaching restaurant owners to look for financial problems before they arise, an accountant can help the owner correct or improve the financial techniques used to manage profits and reduce preventable losses. The six topics discussed here will focus on:

First problem: absence of an accounting system

Problem Two: When major operating expenses are greater than total sales

Problem three: menu offerings

Problem four – Inventory of food and beverages

Problem Five: Problems that occur when inventory is greater than sales

Problem Six: Using a balance sheet and profit and loss at the end of the month

By researching these issues, which are common problems for restaurant owners, managing these issues and fixing them before the restaurant is financially out of control is doable and can help an owner use accounting methods.

First problem: absence of an accounting system

The first issues a restaurant owner must deal with when trying to avoid accounting problems is investing in good computer software to help keep track of all transactions. Nessel, who is an owner and financial consultant to restaurant owners, recommends QuickBooks for keeping a ledger of all financial transactions that occur in the restaurant. All financial transactions must be recorded in the ledger in order to maintain accurate records. Without attending to this, the owner will not be able to run the restaurant without maintaining responsibility in the ledger. Nessel further states that “My experience is that the way the company is being proactively managed is directly related to the way the owner is managing their ‘books’. So it’s a concern main for the owner to establish an accounting system. in order to ensure that the business runs smoothly financially. Lack of accounting and financial controls is the main reason most businesses fail and if a restaurant is in trouble, this is the first issue to address.The Complete Guide to QuickBooks for Restaurant Operators is recommended by many accountants as a guide to help set up a good accounting system.

Problem Two: When major operating expenses are greater than total sales

The statistics say that “Restaurant food and beverage purchases plus labor expenses (wages plus taxes and benefits paid by the employer) account for 62 to 68 cents of every dollar in restaurant sales.” These are referred to in accounting terms as the “prime cost” of a restaurant and where most restaurants run into their biggest problems. These costs can be controlled unlike utilities and other fixed costs. An owner can control product purchasing and handling, as well as menu selection and pricing. Other controllable exit costs for a restaurant include staffing and staffing in a cost-efficient manner. “If a restaurant’s Prime Cost percentage exceeds 70%, it raises a red flag. Unless the restaurant can offset these higher costs by having, for example, a very favorable rent expense (eg, less of 4% of sales) is very difficult, and perhaps impossible, to be profitable.”

A restaurant’s rental expenses (if you include taxes, insurance, and other expenses that may fall into this category, such as association fees) are the highest expense a restaurant will incur after “Primary Expenses.” Rent is on average around 6-7% of a restaurant’s sales. Since it is in the fixed expense category it can only be converted into a reduced ratio through an increase in sales. If the cost is more than 8%, it is useful to divide the occupancy cost by 7% to find out what level of sales will be required to keep the rent expenses under control so as not to put the restaurant out of business.

Problem three: menu offerings

The owner sets the price of most menu items after visiting other local restaurant competitors, looking at their offerings and menu prices. However, menu pricing should never be done simply by looking at your competitors’ menus. Menu pricing should be done (and redone periodically as supplier costs fluctuate) and documented in the software books. Some math skills will come in handy as a menu is converting shopping product prices to recipe units. A restaurant owner needs to know the cost of making a recipe to know the price. This means knowing what the ingredients are and the amount of ingredients used per recipe. Software is available to help, and Microsoft Excel can be used to customize menu costing while linking to available inventory items.

Some of the things an owner can do to help with accounting that can be controlled through the menu include:

– Fixing menu prices due to increase in minimum wage.

– Use value-added meals to increase profits.

– Re-introduce price increases while maintaining your customer base.

A menu should be updated periodically as provider costs change. This can be positive or negative depending on the provider. Either way, menu items can be adjusted based on supplier costs with math and a little help from inventory tracking software.

Problem four – Inventory of food and beverages

It’s a common mistake for restaurant owners to look at their income statement and assume that what they spent on food can be divided by sales in that period to find the cost of what was sold. This is a mistake. Inventory at the beginning and end of the period must be known in order to accurately calculate food costs. “For a restaurant with food sales of $50,000 per month, a $1,000 difference in inventory between the beginning and the end of the month can translate into a 2% variance. This disparity represents half of total annual profit of a typical full-service restaurant.” Simply put, you can’t manage food costs if you don’t keep records of what they are. Changes in inventory are essential to consider when calculating profit and loss.

Microsoft Excel spreadsheets can be used to track inventory and document prices and know all inventory totals when it comes to food and beverage. Tracking this using Excel will prevent errors.

Problem Five: Problems that occur when inventory is greater than sales

When food inventory is too high, costs will be too high and waste is inevitable. Calculating inventory needs is absolutely a must to prevent food from spoiling, over-portioning recipes, or even being stolen. “A typical full-service restaurant should average no more than 7 days of inventory.”

There is an equation for figuring out how much inventory is needed to keep a restaurant running smoothly. The equation is:

Step 1) Multiply your average monthly food sales by the % of your food cost.

Step 2) Divide this number (your average monthly food usage) by 30 (days/month)

By using this formula and keeping records of all beginning and ending inventory, the problem of losing money due to wasted food costs is reduced or eliminated.

Problem six: Use a balance sheet and a profit and loss account

For a restaurant to be successful it must be run as a big business by the owner as much as possible. A weekly report is required as a minimum. The format of the report must be classified. Inventory, suppliers, labor, and sales should all have a beginning and ending period. Fixed expenses such as rent and electricity should be broken down to fit the report whether it is weekly or daily. It is not advisable to wait until the end of the month to calculate a report as changes occur quickly in the restaurant business.

It is a very important point that a start date and an end date should be included in the reports and that even the fixed expenses should be broken down in order to calculate a weekly net profit. As mentioned above, Microsoft Excel and other tracking programs can be used for inventory and other costs, including profit scheduling. Without proper tracking of inventory, overstock, scheduling, menu pricing, portioning, and everything covered in this study, it can cause a restaurant to fail. A restaurant owner simply needs to take the initiative to implement some simple accounting strategies. It may seem like a restaurant owner has to do it all; however, with good software and a systematic method in place, keeping a restaurant running economically will create financial rewards that will be worth the work.

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