Adam Garfield, CPA

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!

Bookmark to:

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.

Bookmark to:

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.

Bookmark to: