Restaurant Terms and Definitions
Like any other business environment, the restaurant industry has its own terms and definitions. And the ability to understand common restaurant lingo goes a long way in helping you manage all the ins and outs of a well-run establishment. If you’re up to speed with restaurant terminology and common restaurant terms, you’re more likely to correct course, capitalize on hidden opportunities, and generally comprehend what’s quickly becoming an ever-confusing business landscape.
“Authorization to Debit, part of onboarding paperwork”
Definition: A predetermined amount of time – usually three, four, six or twelve months – that a restaurant uses to report its finances. Tax reporting day (April 15th) is a twelve-month accounting period. Quarterly reports are simply four-month snapshots of a restaurant’s performance.
RASI’s accounting periods offer custom flexibility to align with your reporting schedule, including 13-4 week periods M-S or W-T, 4–4-5 (for each quarter, the first financial period is the first 4 weeks, the second period the next 4 weeks, and the third period the final 5 weeks), or 5-4-4 periods (opposite of 4-4-5).
Definition: This common restaurant term is easy: it’s money owed by your restaurant to your creditors. Payables are amounts for items or services that have not yet been paid – in other words, outstanding bills. They live on the Balance Sheet and are the sum of money owed at a future date. These can include amounts owed to vendors, tax agencies, credit cards, or loan lenders.
Definition: This is the exact opposite of Accounts Payable in restaurant terms and definitions. These are amounts due to your business, but not yet paid for by the customer. In the simplest of terms, Accounts Receivable is “money owed to a company by its debtors.” Examples of this would be Wholesale Accounts or House Accounts.
Definition: What you OWN! An asset is a resource owned by a company that has future economic value and can be measured and expressed in dollars. Assets can include your petty cash, inventory, kitchen equipment, computers, furniture, or any other large purchase that adds value to your business. Assets are typically listed on your balance sheet at cost or lower.
Budget vs Actual
Definition: A Budget vs Actual enables you to see week over week how you’re performing against your goals. Since the budget is your roadmap to success, you need to understand where you’re hitting the mark and where there are opportunities to improve within your 4 walls. Without this tool, it’s difficult to make adjustments for unforeseen circumstances and maintain consistent profitability. Additionally, you’re more apt to run into a cash crunch situation due to a lack of knowledge on when to make larger purchases as well as miscalculating tax payments.
Definition: Think of a restaurant balance sheet as the original “dashboard view” of your entire financial situation. A company’s balance sheet consists of assets, liabilities, and equity. The reason this statement is called a Balance Sheet is that the assets must equal the liabilities plus the equity (Liabilities + Equity = Assets). “What You OWN vs What You OWE, summary for one specific point in time”
Definition: One of the most important parts of owning a restaurant, or any small business for that matter, is understanding your cash flow. Simply put, cash flow is the amount of cash coming in versus the amount of cash going out of your business on a daily, weekly, and period basis. Cash flow indicates actual changes in cash, as opposed to accounting revenues and expenses. It also takes into account what you own. Think of the inventory on your shelf and what you owe – such as bank loans.
Cash Flow Statement
Definition: “Where $ Came From and Where $ Went”.
Chart of Accounts (COA)
Cost of Goods (COGS)
Definition: The COGS acronym stands for Cost Of Goods – or for those of you who call it Cost Of Sales – that works as well, and when you see COGS on your Restaurant P&L.
Formula: (OPENING INVENTORY + PURCHASES – CREDITS – ENDING INVENTORY) / SALES = COGS
Definition: A Declining Budget is used in the restaurant industry to help controllers and operators manage operational costs – more specifically the relationship between sales (revenue) and the amount spent in relation to those sales.
Direct Operating Costs (DOC)
DOC (Direct Operating Costs) is one of the main areas that managers have the most control over on their Semi Variable and Fixed expenses. This will be where you will see all of your supply purchases, Linen, Chemicals, and misc. expenses that you need to be managing along with the rest of your prime costs daily and weekly.
Earnings Before Income Tax, Depreciation, and Amortization (EBITDA)
“Earnings Before Interest, Taxes, Depreciation, Amortization”
General and Administrative- expense category on P&L
Definition: The total amount of restaurant sales, before expenses, taxes and other factors are considered. While helpful in determining revenue, Net Sales provides a clearer picture of any restaurant’s finances.
Definition: These are similar A/R accounts; you can think of them as Norm at Cheers
- Norm never paid his daily bar tab until a later date. However, the bar still needs to keep track of that amount through a House Account
- Only use House Account and A/R Accounts if you will be paid back in the future
House Bank / Petty Cash
Definition: Every restaurant calls this something different (safe, petty, banks, house bank), but unless you are a cashless restaurant, you have some version of this. House bank or petty cash isn’t a major consideration of a restaurant’s day-to-day finances; as this common restaurant term suggests, it’s simply extra cash on hand to correct small billing errors, provide servers with their rightful pay from disputed transactions, and similar situations.
Definition: Inventory is the equivalent of your restaurants’ DNA, and it’s the best way to get an accurate representation of what your true usage is. Inventory is the point where all essential restaurant management begins. Your inventory should be a total of all the food products, nonalcoholic beverages, beer, wine, liquor, (Note: For QSRs we suggest including your packaging in this as well), etc.
Definition: A restaurant liability is something a person or company owes, usually a sum of money. Good examples include: prepaids and accruals, giftcards, credit card tips payable, credit cards, due to/from accounts
Formula: (BI + P – EI)/ S = PC OR COGS
(Beginning Inventory + Purchases – Ending Inventory) / Sales = Pour Cost (or Liquor Cost)
Long Term Debt & Owner’s Equity
“Master Service Agreement, part of onboarding paperwork”
Definition: Menu Engineering is the practice of identifying the relationship between the sales and profitability of each menu item in your restaurant, then making sure you actually use the information to sell more of the right items and make money while you’re at it. The operative word here is relationship. Whether in your personal or professional life or in the simple understanding of whether your Buffalo Chicken Wings make you any money; as the word implies, there’s more than one person, or key metric to keep an eye on. Accurately identifying and understanding these relationships is what makes Engineering your Menu about as difficult as a hole-in-one. Consistently managing this task is the outcome of the system you’re using to obtain your results.
Menu Item Velocity Reporting
Definition: Menu Item Velocity Reporting shows daily operational data that identifies volume of sales per menu item or category. You can then view which items have positive sales and positive contribution margin to optimize profitability within your menu.
Net Operating Income (NOI)
Definition: Net Operating Income or NOI is the profitability or loss after factoring in your revenue, minus expenses. Revenue may not solely be food or beverage sales but can include catering, room rentals, merchandise, and more.
Formula: GROSS OPERATING INCOME – GROSS OPERATING EXPENSES = NOI
Definition: Non-alcoholic beverages
Definition: Note Payables is another word for a loan or debt. These loans are represented on the balance sheet as a liability because you owe this money.
Definition: Operational Payroll is the facet of payroll that operators have the most control over. The areas of payroll that this accounts for are all hourly and tipped positions that make up the FOH (front of house) and BOH (back of house) employees.
Definition: This is where owner investments or draws are recorded. The best practice is to separate this out by investor/owner name.
“Power of Attorney, part of onboarding paperwork”
Period End Review
Definition: Period End Reviews allow operators to review metrics and identify areas of opportunity with audits and benchmarks. Operators who have a true understanding of their fiscal health enable themselves the ability to make proactive business decisions, improve their operational efficiency, and ultimately, their profitability.
Profit and Loss Statement
“Profit & Loss statement, revenue & expenses during a set period of time”
Definition: Your Prime Cost is inclusive of your largest expenses. This includes your cost of goods (food and beverage) and labor expenses (including payroll taxes). These are the first two categories you’ll find on your Profit & Loss Statement.
Formula: Prime Cost = Total COGS + Total Labor
Prime Cost as a Percentage of Sales
Definition: Prime cost as a percentage of your sales is simply your total prime cost divided by your total sales. Knowing this number helps you to determine where your prime cost fits within the industry average. More importantly however, this helps you to compare against your own historical data to ensure you’re making progress over time and maximizing profits.
Formula: Prime Cost as a Percentage of Sales = Prime Cost ÷ Total Sales
Quick-service Restaurant (QSR)
“State Unemployment Insurance, business expense associated with Payroll”