Successfully closing out a period starts the domino effect for proactively operating a restaurant versus missed opportunities in the following periods. The Period End Financial Close purpose is accuracy verification to highlight where your money is going. This review enables you to make quicker, more educated business decisions.
To close out a period, begin with a review of the financial statements; The Profit & Loss Statement, The Balance Sheet, and The Cash Flow Statement. Within each statement, defined focus areas should pop out to an operator as a must-watch for success. Throughout this article, we will review a few essential items to concentrate on when conducting a Period End Financial Close: Capital Expenditures & Preopening Expenses. As a bonus, we’ll run through some additional restaurant accounting tips to assist with better financial practices for your business.
Closing Out Capital Expenditures:
Capital Expenditures reflect the value of tangible items within your restaurant. Your CPA can depreciate these on your year-end tax return. These will include money spent to buy, maintain, or improve fixed assets such as building, signage, cooking equipment, furniture & fixtures, and POS equipment. Capital Expenditures generate a long-term return and are considered an investment. A clear view of your capital expenditures is important when selling the business or presenting the company worth to potential investors.
What causes Capital Expenditures to reflect an incorrect balance?
- When small restaurant expenses are coded to the asset accounts instead of the expense accounts
- When questions that appear on the bank reconciliation are miscoded
How to correct inaccurate balances in the Capital Account:
If the Capital Account is overstated (more than what you own):
- Review the Trial Balance to determine any incorrect coding or activity. Look specifically for small balances below the asset threshold that should be expensed to the Profit & Loss Statement
- Once the incorrect balances are identified, reach out to your accountant with the needed adjustments
If the Capital Account is understated (less than what you own):
- Review the expenses on the P&L Trial Balance to determine any incorrect activity. If any items are miscoded, determine to which capital asset account they need to be reclassed
- Speak with your account to discuss any needed adjustments
Best Practices within Capital Expenditures:
- Verify accounts payable prior to submission to ensure that all GL Distributed invoices are appropriately coded
- Review the Balance Sheet frequently and monitor the activity coded to the Capital Asset Accounts
WATCH THE FULL VIDEO BELOW!
Closing Out Preopening Expenses:
Preopening Expenses reflect the total startup costs associated with opening your restaurant. These are considered Capital Expenditures, and your CPA can amortize them on your year-end tax return. These expenses can range from training payroll costs to food preparation to utilities. Reflecting expenses on the Balance Sheet will generate a long-term return and show the true business value for potential investors.
What causes Preopening Expense Accounts to reflect an incorrect balance?
- Expenses purchased prior to the first day of sales are coded as expenses instead of preopening expenses
- Questions on the bank reconciliation are miscoded
- Expenses purchased after the first day of sales are entered as preopening expenses instead of expenses on the P&L
How to correct inaccurate balances in a Preopening Expense Account:
If the Preopening Expenses are overstated (more than what you own):
- Review the Trial Balance to determine the incorrect coding or activity. Search the specific date range from the start of bookkeeping to doors open; only expenses incurred in that time frame should be recorded in the Balance Sheet Accounts
- Once the incorrect activity is identified, reach out to your accountant with any adjustments needed to move expenses to the Profit & Loss Statement
If the Preopening Expenses are understated (less than what you own):
- Review the P&L Trial Balance to identify any incorrect coding or activity. Search the specific date range from the start of bookkeeping to doors open; all expenses in that time frame should be coded to the Balance Sheet Accounts
- Once the incorrect activity is identified, speak with your accountant about any adjustments needed to allocate expenses to the Balance Sheet
Best Practices within Preopening Expenses:
- Verify accounts payable prior to submittal and verify that all GL Distributed invoices are correctly coded
- Review the Balance Sheet frequently and monitor the activity coded to the asset accounts
Additional Restaurant Accounting Tips
Understanding Fixed vs. Variable Expenses
Restaurant Expenses come in two flavors: fixed and variable. A fixed expense is steady and does not track your restaurant’s sales levels. Some examples of fixed expenses are your monthly mortgage, rent, and management salaries. Variable expenses depend on the activity in the restaurant, rising with busy days and falling with slow ones. Representative variable expenses include hourly wages and food costs.
You have the most leverage over your variable restaurant expenses as an operator. That’s where you want to trim the fat. The highest variable costs to control are the most prominent— labor and cost of goods (COGS), also known as your Prime Costs.
To better handle your labor costs, compare scheduled shifts over the last period to your sales data. Are you consistently setting the correct number of team members to match demand? If you consistently see you have extra staff on slow nights, that’s an easy place to cut back. Conversely, you might notice that data indicates dishes have been regularly delivered slower on busy nights, an indicator that you may be leaving money on the table by not having more servers who could increase table turns.
To control your COGS, it’s vital that you optimize your purchasing habits and your menu, and manage waste, theft, and portioning. To get the best deals on products, consider joining a Purchasing Program, which leverages the power of bulk orders (based on the consolidated demand of multiple restaurants) to bring down food costs. Once you have purchasing sorted out, optimize your menu through menu engineering to lower dish costs without affecting quality. That will earn you a more comfortable margin on sales. Finally, keep an eye on spoilage and kitchen waste by tracking the food that gets thrown away.
Understand How and Why to Read Your Profit and Loss Statement
Your restaurant profit and loss statement is a snapshot of the financial health of your business. Unless you’re vigilantly reviewing these figures, costs can creep up on you, hurting your profitability and the long-term prospects of success as a business.
The first component of the P&L statement to understand is your sales. Sales can be either gross or net. Gross sales is all the money that comes across your register. Adjusted net sales is gross sales less sales tax, which you’ll eventually pass on to the state. Hence, net sales is the correct figure to measure how much revenue you retain from sales.
On the P&L statement, your sales are broken out into departments such as non-alcoholic beverages, beer, liquor, and food. The exact categories are up to you—make them as specific as necessary to get a clear picture of where your sales are coming from.
After reviewing sales, turn your attention to Cost of Goods. On a P&L statement, food and beverage costs are divided into significant classifications such as produce, dairy, meat, seafood, etc. Tip: You can use a Budget vs. Actual to review each category that showcases your budgeted amount compared to actual usage. For instance, you might see that you budgeted $3,500 for seafood and spent $2,750. Watch for consistent overspending and major underspending, both of which indicate you should take a closer look at the category and determine why your budget was inaccurate.
Next, look closely at labor expenses, which, together with COGS, make up half of your prime cost (the most significant expenses for restaurants). Typically, labor expenses are divided up into operational labor (servers, hosts, cooks) and nonoperational labor (managers). Operational labor can be subdivided into front of house and back of house. For both these categories, check how accurate your budgeting is. Labor that comes in on or under budget shows that your scheduling works as expected.
Integrate Your POS with Your Accounting System
Your Point of Sale system (POS) is a trove of information on sales and employee performance. You must integrate your POS system with your accounting software to get the most out of this valuable data.
POS data should flow automatically into your financial performance reports, allowing you to base operational decisions on accurate, up-to-date information. If you’re using RASI for accounting, you’ll have access to our Forecast Module, enabling you to make predictive decisions to optimize sales and labor.
One of the main benefits of POS integration is simply how much work it eliminates for your managers. Accounting and reporting activities that once required tedious, error-prone data entry are transformed by accurate, automatic data flows between systems. This, in turn, empowers your managers to consult the numbers more frequently and with greater trust, resulting in data-driven restaurant management, which is a reliable recipe for increased profitability.
LISTEN TO THE FULL PODCAST EPISODE BELOW!
RASI assists thousands of restaurants across the nation to realize immediate profitability gains through purpose-built software and expert educational guidance. Request a demo today!