Adam Garfield, CPA

So go tell the missus that your love for her is about the same now as it was nine years ago when you blurted out your “I Do”s at the Elvis-O-Rama Love Chapel and Sushi Bar.  Peek down your nose at that boiler blocking the view between your neck and your tootsies and convince yourself that you now clock in at about the same weight as you did when you were popping zits in high school.  Get out the crowbar, painfully pry open your latest 401K statement and convince yourself that your nest egg value is about the same this quarter (month/week/day/minute??) as it was the last time you looked.  If you’re prudent, you see your dentist a couple of times a year.  “How goes everything,” he asks cheerfully, with a tool the size of a landscaping rake in your pie hole.  “Crqzzthppptbb,” you reply.  Which is French for “about the same.”

 Well - the reality is, not only have things changed tremendously for you in your life during the past six months, they also have the tendency to also be fluid in the world of restaurant inventory.  I am pained to admit that I have restaurant clients who DON’T COUNT THEIR INVENTORY.  Ever.  And you know what their response is when I call them on it?  When I ask them what their food costs are?  ‘Oh, it’s always about the same.’

 Oh really?  Well, let’s do the math.  An eatery did $95,000 of business during a four-week period (see my next blog on accounting periods - it’s a wing-dinger).  The place bought $28,000 of food product during the period.  Food costs are 29.5%.  Not bad, right?  Yes, but . . . what was their inventory count at both the beginning and end of the period?  About the same?  Let’s translate that phrase into English.  If their actual beginning and ending counts were $6,000 and $7,800, respectively (not a noteworthy difference, one might argue), their true cost of goods sold for the period was 27.6% ($6,000 inventory on hand at beginning plus $28,000 purchased during the period minus $7,800 still on hand at end of period).  Arguably pretty good.

 Now let’s flip things.  Beginning inventory is $7,800 and ending is $6,000.  Food costs then go to 31.4%.  That’s nearly a four-point swing, folks.  And when the bottom line for a restaurant can so often be razor-thin, four points can be nearly fatal, especially if you don’t really know the actual, reality-based dollar amount of your food costs that take into consideration all the necessary accounting elements of the term ‘cost of goods sold’.

 Counting inventory becomes such an important component of operations to be disciplined about and consistent in doing.  It’s a pain.  I acknowledge that.  And it makes watching soccer explosively entertaining in comparison (uh, sorry soccer fans - well, not really).  But you’ll never get a handle on your business’s profitability if you don’t do it, because you’ll never know what the real percentage is for food costs.

 So go count your frozen chickens.  Count the string beans.  Count the mashed potato flakes.  Count the straws.  Count Chocula.  Count it!

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I have prepared a number of income tax returns for restaurant clients.  For those who are new to me as their CPA and haven’t used my services before, I’ll too often see them show me a set of financial statements that includes one or maybe two lines items comprising food costs (grocery and beverage, canned and dry, entrée and dessert, Count and Chocula, Beavis and Butthead, you get the idea).

 It’s a real head-scratcher to me.  When restaurant owners have so much accounting technology at their disposal that gives them the ability to break out their food costs by an infinite array of categories and don’t use it, they hurt their ability to make informed decisions about the food cost element of their operations.

 I’m a big proponent of using more food-related accounts to give an as-accurate-and-complete-as-possible picture of this component of their financial environment.  It’s so easy to do, whether they use their point-of-sale system to help generate their financial statements, an off-the-shelf software package such as Peachtree or QuickBooks, or outsource this function to an accounting firm or individual (extremely un-subtle plug coming — hmmm . . . I wonder if I could recommend anyone? - Oh yeah, rhymes with Schmarfield).

 Look at what you’re serving your customers and what goes into it.  Dairy, fruit, canned items, paper products (including take-out containers), meat, juice, sodas, dry items, seafood, vegetables, beer, condiments, tortillas, liquor.  This list is a fairly representative sampling of some of the items your restaurant might purchase.  Everything that gets into your customers hands to be consumed or taken away should be included.  And the more you break out the cost of each food invoice into its appropriate category, the better you’ll be at tracking each category’s impact on sales.  You’ll also be able to compare, from period to period, percentage or dollar movements in each of those categories.

So make use of more categories.  Err on the side of too much detail.  You’re much more likely to be able to drill down to a key food cost component whose cost has spiked to an eyebrow-raising level and find out why when you’re breaking your costs out this way rather than lumping everything into “food.”  And reacting to it by being able to shave off an extra ½ point because you know why the ‘canned’ category went up, when sales were $50,000 for the period will save you $250, which is more than just dinner and a movie (even more than a Hummer fill-up).  More is better.  Maybe even $250 more.

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So maybe you’ve got a chance to purchase a fledgling restaurant franchise.  “Sales are okay,” the current owner tells you, “I just can’t give it the operational attention it needs.  I bought this as an investment, not to be an operator.  In the right hands, sales will go up and profitability will follow.”  Or some sort of similar quote.  Those words should act as a warning siren, giving you a migraine by now.

 Sales - adequate sales - are the lifeblood of a restaurant, absolutely crucial to its success.  Insufficient sales, amongst a myriad of other problems, lead to higher labor costs.  That skeleton crew that you absolutely must have to keep your doors open becomes prohibitively costly when your sales aren’t high enough.  X hours open per day times $Y per hour average wage times minimum number of employees required to help your customers times Z days per week open for business becomes a lot more costly when sales are paltry.  At $15,000 in sales per week, assuming minimum staffing requirements are $1,800, this cost of labor is about twelve percent.  When sales are $10,000 in that same week, this cost jumps to eighteen percent.  Six points.  Because bottom-line profitability for a restaurant is often so razor-thin, this sole example reflects the reason that you absolutely have to have high enough sales.

 There are a number of fixed costs that restaurants incur, including: rent for the premises (or a monthly loan payment for a purchased location), salary for your can’t-live-without general manager, fees for accounting and payroll costs (assuming you outsource this service, which, in my extremely biased but knowledgeable opinion, is one of the smartest things you can do for your business), insurance, some utilities.  All of these costs are there whether you’re pulling in $80,000 per month or $53,000.  That’s $27K less to pay for all of these there-every-month costs that painfully stare at you.

 Looking to get in to the restaurant arena?  You’d better have a plan in place to pull in enough Benjamins, as the kids like to say.

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Sales.  Everybody wants ‘em.  Unfortunately, sometimes restaurant owners (although not the only guilty parties) inflate them.  They do it to makes their financial statements look better, to please the bank, to please the investors, to please the missus (or the mister, because heaven forbid I get accused of being sexist).  Please, please, Puh-LEASE!  And perhaps they do it because they don’t know how sales are defined.  So let’s define them.  Wikipedia’s got nothing on me, besides eight million more eyeballs.  Stupid popularity.

It’s appropriate to first identify what sales is not.  Sales is not sales tax.  It is not coupons/discounts/freebies/giveaways.  It isn’t the value of those forty-three extra combo meals you would have sold if only that catering job had come through.  Laugh if you want (and I’m right there with you), but I’ve seen it done.  All of it.   And on the flip side, sales is that catering job for which the customer happened to pay you in cash.  Or made a check out to your name instead of “Gyros-R-Us”. 

Sales, for appropriate financial statement reporting purposes, not to mention sales tax or income tax reporting purposes, not to mention the right way to do things purposes, is the amount of cash a customer pays you for your oh-so-tasty vittles.  It does not include sales or other taxes charged.  And while a profit and loss statement (one of those snore-inducing accounting documents which shows a business’s income and expenses for a period) can appropriately include the amount of discounts given, the expenses are measured as a percentage against cash/credit card/check sales only. 

Defining sales as what you received in cash/CC/check means that that 30,000 unit, two-for-one coupon mailer you blasted out, which resulted in let’s say $1,300 worth of food/beverage that you basically gave away, doesn’t get counted as sales income.  I know what you might be thinking: “Yeah but blogger dude, I just gave away $1,300 of my product that would/should have been sales revenue had I charged them.  My lender wants to see SALES.  Plus now my food costs, as a percentage of sales, are going to spike up.”  Yep, that’s right.  And that is exactly how it should be.  Pull the customers in with the coupon-carrot, get them to try your newest creation, don’t charge them full price for it, and hope they come back in droves.  And meanwhile, your food costs jump in exchange for this.  And you don’t count what you gave away as sales.

So, sales = cost a customer pays you (not Uncle Sam or Aunt South Dakota) for your food.  Nothing more or less.  In the words of master orator Jeff Spicoli: “Learn it, know it, live it.”

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