Adam Garfield, CPA

I recently began doing some work for a new restaurant client.  Despite the newness of the work, I was first introduced to this person last summer, about four months after the business opened for operations.  They were in need of some outsourced financial oversight, and I pitched my services.  While obviously interested, this client put off pulling the trigger on the decision until this year.

My first caution to them when I found out they were paying their employees as contract labor was to immediately halt this and treat them like the employees they were, whether they used my payroll services, did it themselves, or hired it out elsewhere.  While hell may hath no fury like a woman scorned (or in my house, a woman whose dirty dishes remain unloaded by her lazy-butt husband), a business hath no fury quite like the IRS’s view of misclassified employees.

Now, this may seem like DUH territory here.  I mean, if you’ve got employees, pay ‘em like they’re employees.  Withhold payroll taxes, remit them to the IRS and other tax authorities when you’re supposed to, and file all federal, state, and local payroll tax returns when required.  Having said that, I’ve seen this movie before.  And it can be much uglier than that dude without a nose from “Harry Potter v. Predator” (or whatever that show is called).

The IRS doesn’t dink around when it comes to stuff like this.  If you have people who show up to your place of business to cook chicken, bus tables, pour drinks, seat patrons, blend smoothies, or even occasionally break dishes, and they are under your control and direction, then by gosh they are EMPLOYEES, not independent contractors.  This is true no matter what your uncle or best friend or food provider or even your employee himself says.

There are all kinds of ways that tax authorities can a) find out that you’re doing this b) reclassify these people as employees instead of contract labor and c) pretty much make you cough up a boatload of cash to not only cover the taxes you never withheld, but ding you with penalty and interest as well.  Filing the income tax return with a big g00$e egg on the salaries/wages line but an amount for contact labor is one.  Issuing 1099s instead of W-2s is another.  And third, but perhaps most likely, is that an employee will gripe after receiving a 1099 instead of a W-2.  And that gripe could very well go in the direction of the IRS.

This is not a whirlwind of trouble that you want any part of.  Do right by your business, your employees, your ethical side, and your ability to put your head on the pillow at night.  For tax purposes, treat your employees as just that - employees.

By the way, I think Predator would win.  Even though he’s one ugly, er, Hollywood monster.

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Is there such thing as too much of a good thing?  Krispy Kremes?  Might as well be crack cocaine.  The NFL?  Give me a bag of Doritos, cold sodas and a bathroom, and call me next week.  U2?  U bet.  Leno?  Well, I’m actually a Letterman guy.  Have you ever seen Jay not ask a question to a guest that includes the phrase “Now lemme ask you something”.

Labor is both a good and necessary thing for a successful restaurant.  But including what I call fixed labor costs when looking at the overall labor component of the profit and loss statement is misleading.  Most restaurants have staff on hand who are salaried.  Back-of-house managers, the general managers, perhaps even some shift staff, and others may be paid a fixed rate for their work. 

When measuring labor cost as a percentage of sales for the period, it is important to separate out hourly labor, which should vary depending on sales volume, from fixed labor.  A $50,000 per year GM is still a $50,000 per year GM whether sales are $800,000 or three million plus dollars.  Including her salary gives a skewed perception of real labor cost, because her wages are in that expense category whether you’re hearing crickets when you walk in or can’t hear your companion above the crowd buzz.

As an example, let’s say your business raked in $1,200,000 in sales last year.  All non-management labor (hourly employees) comprised $240,000, which is twenty percent of total sales.  Management labor added another $80,000, or about 6.7%.  You might think that total labor as a percent of sales was 26.7%.  And you’d be right.  Now we look at 2008.  The recession hit you as well, my friend, despite your introduction of the ‘Really Really Awesome Blossom’ appetizer.  Sales fell to $900,000.  Non-management labor was $198,000, or 22%.  You still paid your managers $80,000, or 8.9%.  Total labor cost:  thirty point nine percent.  The ‘but’ at the end of all of this is that labor didn’t really go up 4.2%.  It went up two percent.  Fixed labor costs are just that - fixed.

So, when preparing your financial statement, keep fixed labor costs separated from variable ones.  It’ll help you keep a more realistic sense of how your labor costs are holding up.

 Now if only the ‘Really Really Awesome Blossom’ was made out of Krispy Kremes.  Lard-o-licious!

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Freebies.  Giveaways.  Two-for-ones.  Ten percent off.  Good neighbor breaks.  Corporate favors.  Air Supply medleys.  Employee discounts.  All of these financial elements (okay, all but one of them, which just creates a pool of barf) and others create a couple of things: 1) less money in your pocket as the restaurant owner and 2) the chance to include some useful accounting detail on your eatery’s profit and loss statement.

 Whether you’ve got a $200 Staples cash register or a state-of-the-art POS system in place, take advantage of the opportunity to separately identify and account for all the different discounts you provide to your customers and employees.  Create multiple buttons on your registers to key in all of these items as they occur.  They’ll give you a wealth of information on your income statement.

When you cash out your registers at day’s end, the inexpensive register or pricey POS system should be able to separately identify and account for all of these items.  Why bother with all that, you ask?  Well, because I want to create more mindless work for you, that’s why.

Actually, this detail can help you track what kind of response you’re getting from that mailer you recently sent off.  It’ll let you know if you are giving away too many free employee meals.  It could also tell you if your employees who operate the registers are accurately keying in these items.  It’ll tell you if you need to go stumping for your business a bit more at “Teen Angst Threads” in the adjacent strip mall. 

So don’t lump all of your discounts into one button on the register.  You’ll find out considerably more by slotting each item into its own category, and including them all on your restaurant’s financial statements.

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Okay, so perhaps that one never enters the gray matter. But, maybe it should, at least at some point, because restaurants make purchases like this all the time. A $300 meat slicer, here, a four-hundred dollar laptop there, and even an $89 cordless phone. All of these items are designed to last the business more than one year (that’s the theory, anyway). And because they are designed this way, tax geeks like me have to decide if they should be put on the profit and loss statement as an expense, or put on the balance sheet as what’s called a fixed asset. This is usually designated for big-ticket purchases of kitchen equipment like walk-in freezers, ovens, dishwashers, and other similar items.

Many restaurants like to show as much net income (income after all expenses) on their financial statements. As such, they would rather have any item, even relatively inexpensive ones like the phone, not show up on the profit and loss statement. Its cost digs directly in to the bottom line. And the phone will probably get you by until at least 2010 (unless you drop it in the fryer - ‘Mmmm, deep-fried phone’). That arguably meets the book and tax definition of a fixed asset.

So, whaddya gonna do? I usually advise my clients to pick a dollar amount over which questionable items will be booked as fixed assets, and under which they will be booked as small equipment purchases. As small equipment items, those costs go on the income statement instead of the balance sheet. They serve multiple purposes there: they allow your tax person to decide if they will remain as an expense on the income tax return or get put as a fixed asset, they provide a definitive cut-off point (perhaps $500 is the threshold) for the income statement versus balance sheet argument, and in some states where items such as this are subject to property taxes, they can be easily identified when preparing those statements for the city or county requiring them. For my clients, I use a category we call ‘smallwares’ so we know these are small-ticket pieces of equipment.

Now, back to reality. Go with the red Nano. From what the kids tell me, chicks dig the red ones.

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So your restaurant manager is rocking the place, as the kids like to say.  Food costs are down, labor costs are in check, the rats are mostly at bay, and the customers are fat, tipping, and happy.  Then comes the request:  “Uh, boss, can you show me the financial statements so I can get a sense of how ‘Pig Feet - Who Knew They Were Delicious?!’ is doing this period?”

The sweat beads are forming on your temple.  You don’t want to show Mr./Ms. General Manager, despite your overwhelming trust, to look at all aspects of the profit and loss statement.  You don’t particularly want him to know how much you pay in rent, what your utility costs are, let alone how many bags of Sour Patch Skittles you bought and hid in the ‘back room supplies’ accounting category (just kidding - especially if you’re an IRS agent reading this).

There are a lot of reasons to not show a non-equity individual, even one as involved as the operations manager, all financial aspects of your restaurant.  Most pointedly, it’s none of their business.  As the owner, you are the one who took the risk to open your doors.  You are under no obligation to share a significant component of your financial doings with the manager.  Would you show him your income tax return?  Your 401K statement?  Of course not.  So there is no need to feel you owe him a complete glimpse of the restaurant’s operational activities.  It fosters envy and perhaps even an effort by the manager to think she can go out and duplicate your efforts at a new location of her making.

So how to handle the reasonable request to let them know if they are hitting their numbers in the important categories?  Why a tailor-made profit and loss statement, of course.  In my world of restaurant accounting, it’s usually called a ‘controllable profit and loss statement’.  Which is just a fancy-schmancy way of including only those categories  over which the manager has control.  Food and labor costs are the main two items.  You could also include repair costs, office supplies, uniforms and laundry, and even utilities, where the manager has significant say over how long a gas-powered grill is run, for instance.

Prepare one every accounting period for him.  Review it together.  It’ll be a bonding moment (-”Hey, why the he$# is the ‘latex gloves’ expense up $225 this period?”-  -‘;Um, balloon night?’-).  It’s the carrot to help motivate the manager to keep costs under control.  And that’s just another way to bring more profit to the bottom line.

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I was down in southern Utah this past week for a family reunion.  The phrase ‘family reunion’ is actually Latin:  the word ‘family’ means ‘periodic gathering’, and ‘reunion’ means ‘of people you could barely tolerate when you were a kid, let alone an adult’.  Actually, we had a very good time with a number of extended relatives who I admire and whose company I enjoy.  And by a number I mean two.  Again, just kidding.  Great folks who I am happy to know and with whom I enjoy reminiscing.

While we were there, I took my immediate family to a restaurant called Texas Roadhouse Steakhouse.  You may be familiar with it.  Texas-themed joint (I aint no Texan, but I done figured that one out by the name), stainless steel tubs of unshelled peanuts at every table, lots of knotty alder, cartoon-drawing, oversized head pictures of country celebrities (Willy Nelson, Faith Hill [mmm . . . Faith-a-licious], that dude whose dad pitched for the Phillies), and plenty of yee-hawness to go around.

Our server was a guy who looked the part of a roadie for ZZ-Top.  Big-ol seventies ‘do, long sideburns that connected to a mustache (just like the bass player from the movie ‘This is Spinal Tap’), long-sleeve tee shirt underneath a short-sleeved one.  Now, I’m no Zagat wannabe, but he was about the best server I’ve ever had.  I had my four monsters in tow, who range in age from sixteen to 7 (actually, sometimes the sixteen-year-old acts like he’s seven - or more like 3), and he went out of his way to make sure all their food and beverage needs were more than accommodated.

I had a meat-a-saurus hankerin’ (this is, after all, a Texas steak place so the word ‘hankerin” seems appropos), so I got steak, pulled pork, and ribs, and he made sure I had all the sauce coverage I could handle.  He refilled drinks before they were empty, was willing to change out a cooked steak that wasn’t quite done the way one of my boys liked (we passed, but the offer was nice), and he kept things hopping.  He wasn’t stingy with the to-go containers, and checked back more than he probably needed to on how things were going.  He explained the way their meat was cooked and cut, how their sirloin steaks were a tender cut above the rest.  He made Jeeves look like Homer Simpson in comparison.

He received a well-deserved tip that was notably higher than normal.  I thought about this when I tallied up the cost of the additional items he brought to our table, including extra rolls, honey butter, and the other aforementioned items.  Probably no comparison, his tip being considerably higher.

He brought in additional tip income for himself and the other wait staff, and an eventual return trip from a very satisfied customer.

My point?  Pretty simple.  Good customer service is nearly priceless in its impact on a restaurant in goodwill, good word-of-mouth, and revenue.  Props to the guy at Texas Roadhouse who admirably served our needs.  And props to all of you restaurant owners who make sure your wait staff do the same things.

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Thirty days hath September.  April, June, and . . . Morgan Spurlock (google it).  Or those dudes from the band Humble Pie (likely even a more obscure reference).  While those Romans were pretty brilliant in coming up with a calendar, they failed to think through its usefulness to restaurants.

Their utter thoughtlessness aside, setting up your accounting periods on a monthly basis is, in a word, stupid.  Well, not really stupid, more like, uh, dumb.  Okay, that’s too harsh.  But there’s some really good reasons to go to a four-week period over a monthly period.  Comparability is the biggest one.

October has thirty-one days to it.  Always has, always will, unless somebody comes up with a better plan.  So why go to a twenty-eight day accounting period, when October 2008 has thirty one days, and so will October 2009 (hey, optimism in keeping your doors open - nice!)?  November always has thirty days.  The only weird one is February, and that only happens every time we elect a new president.  Pretty thoughtful of the Romans to help remind us about that, because otherwise we’d never know.  You can compare months nearly as easily as anything else, right?

Well, sort of.  October 2008 has four Sundays, Mondays, Tuesdays, Saturdays, and five Wednesdays, Thursdays, and Fridays.  That’s important because rare is the establishment whose sales do not fluctuate based on what day of the week it is.  My local Fuddruckers, a customize-your-own-burger place, has a Tuesday kids-eat-free special.  It’s not because they’re generous.  It’s because they want to get more business. Tuesdays are slow.  Looking ahead to October 2009, there are only four Wednesdays and a fifth Saturday.

So when you compare your October 2009 sales with October 2008, and sales are eleven percent higher next October from this one, part of it may be due to that extra Saturday, when foot traffic is usually greater.

Using a four-week accounting period solves this problem.  Each of the seven days gets included four times.  Every year, every period.  So when you’re comparing, let’s say, Sunday October 5 2008 through Saturday November 1, 2008 against Sunday October 4, 2009 through Saturday October 31, 2009, you’re comparing the same seven days times four inclusions for each period.  And it takes the fluctuation of sales over the course of each week out of the mix.

With four weeks to each accounting period, you’ll want to have thirteen of them each year to create a semblance of a calendar year.  Of course, all you calculus majors are going, “yeah but 28 days times 13 periods equals 364, and there are three-hundred sixty five days each year.”  Don’t worry, Uncle Adam’s got you covered.  That one day shortage every year (adding an additional day every fourth or leap year) gets factored in as a fifth week at your discretion every six years.  To keep comparisons the same, you can multiply the single five-week period that occurs in that sixth year by 80% (4 weeks/five weeks), to effectively pro-rate that period.  It then approximates a four-week accounting period.

So, the next time you’re looking at that ‘Puppies & Kitties in Love’ calendar and you see thirty or thirty-one days staring back at you, you can smile knowing that, in your world, in ways that really matter, there are only twenty-eight of them.

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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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