We all rolled our eyes at our middle school math teachers when they said we’d “need to know this stuff” later on in life. And to some extent, we were right. When was the last time any of us had to use the quadratic formula? Or calculate at which stop Johnny should disembark if he wants to make his connection with another train traveling south at 200 MPH? For most of us, it’s been a good long while.
But mathematics has a surprisingly significant place among the day-to-day responsibilities across many industries – not the least of which is the bar and restaurant business. There are a plethora of variabilities in food service which draw a thin line between success and failure. And knowing the basics of restaurant accounting can help you to move that line in your favor.
Here’s what you need to know about restaurant accounting 101.
Restaurant Accounting:Fixed vs. variable costs
To properly budget, and understand your expenditure from month to month, it is critical to become familiar with the concepts of fixed costs and variable costs, and how that applies to your establishment.
Fixed costs are those which do not change from month to month, except under very unusual circumstances. Most restaurant fixed costs include fees and expenses largely outside of your realm of control, such as rent, insurance, wages (if you have a consistent staff), etc.
Variable costs are those which you can control, and are able to cut or expand depending on what you can afford as time goes on. The largest of these is your edible inventory, which includes both food and beverages.
You can adjust this expense to better meet your budget by changing the amount you buy, as well as the quality of the product. For example, if you had a hard winter, you might consider pausing on the craft beer order to save yourself some money.
Restaurant Accounting 101: Accounts chart
Charting your restaurant accounts is important because it allows you to keep track of your financials and make adjustments where necessary. Most businesses will break down their overall costs into categories to better understand how and why money is being spent. This also helps you to define your business expenses when tax season rolls around.
A basic restaurant accounts spreadsheet or restaurant financial basics pdf should include at minimum categories for marketing, supplies, and sales.
Marketing will include all expenses going towards advertisement, brand awareness, and identity expenses including trademarking, and print materials for in-house use.
Supplies are your consumables, edibles, and other materials required for service such as dishware, cook ware, and other expenses. You can break this section down further, if you prefer, as a restaurant food cost chart, beverage chart, and consumables chart separately.
Sales marks your revenue and may be measured over different time periods. This is ultimately what will determine your bar or restaurant’s budget, as well as general inventory.
Cost of goods sold (COGS)
Understanding your COGS is the first step to take when determining menu pricing or if you’re taking a closer look at how your expenditures breakdown.
COGS literally means how much something you’re selling is costing you up front. How much did you pay for the 4 ounces of linguine, ¼ cup of heavy cream, and ½ cup of grated parmesan cheese that went into the Linguine Alfredo on your menu?
COGS can be calculated per item sold or on a weekly basis by measuring your current inventory value against your prior inventory value.
Here’s a handy formula:
Beginning inventory - ending inventory = cost of goods sold.
Labor, occupancy, and operating expenses
Here we’ll dive a little deeper into some of those fixed costs.
Your labor costs involve payment required for those individuals who help you keep your establishment running. This means back of house people, front of house people, as well as behind the scenes individuals – for example, an expert accountant if you’d rather not read any more of this article. It includes both payroll and employee benefits.
Your occupancy expenses include rent or mortgage, taxes, utilities, and property insurance. These might not always represent a stagnant amount, however they are still considered fixed because they cannot be adjusted by you.
Your operating expenses represent quite literally everything else, excluding your food and beverage expenses. It means inventory costs, delivery fees, and more.
Prime cost
Your prime represents the combination of your two greatest expenses rolled into one. This is your total COGS or restaurant food cost and your total labor expenses represented as a single sum, and includes all expenses associated with each: food, drink ingredients, wages, and benefits.
As the largest proportion of your expenses, knowing your prime cost allows you to get a very broad sense of how much money you spend each month. And because COGS and labor expenses are both technically variable, this is where you can make the most change through budgetary adjustments and spending cuts.
Cost-to-sales ratio
Now comes the fun part.
You won’t be able to understand how your restaurant or bar is doing by looking at any of the above numbers on their own. These are only critical steps in providing you with the data you need for a final expository formula.
Your cost-to-sales ratio allows you to see whether you’re overspending, breaking even, or turning a profit. And depending on which condition is revealed, you will be able to shift your budget, make critical inventory decisions, and help your establishment to continue to function smoothly.
Here’s how to figure your cost to sales ratio as a percentage:
(Total expenses / total sales)x100 = cost to sales ratio.
You can also choose to break this down categorically. A restaurant food cost percentage formula functions similarly to the above. Let’s say you spent $2,000 this month on edible inventory, and made $2,700 in sales. As a formula that would look like:
(2,000)/2,700)x100 = 74%
Industry standard for restaurant food cost percentage is between 26 and 36%, so if you have a cost to sales ratio of 74%, you’re doing marvelously.
Provi is here to help
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Can’t wait to begin your accounting journey? Download our free Bar Inventory Spreadsheet and restaurant financials template to get started.
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