Adam Garfield, CPA

There’s a scene from the movie “Toy Story” (1? 2??  Woody and Bo Peep Finally Make Out???) where Mr. Potato Head is packing for some sort of adventure.  Mrs. P helps him or, as most husbands might say, once again tries to micromanage him.   Part of that um, help includes grabbing an extra set of eyes for him, what she calls his “angry eyes.”

There’s tremendous benefit from sharing your financial statements with a select group of people, those who have an interest in the operation of your restaurant or business.  There can also be an advantage to show them to someone not involved in the operation.  While it needs to be someone who can be trusted with the financial data, giving it to a person like this might point out some issues you or another principal may have overlooked.  That extra set of eyes could find a new and useful expense category, for instance.  They could make you rethink the relevance of a component of your balance sheet.  Their questions and comments just might help you find a better way to explain the financial aspect of the restaurant to other pertinent parties that regularly review them.

So don’t be afraid to, on occasion, get some unfamiliar eyeballs taking a look at your profit and loss statement.  You may just find some unexpected but useful help.  Your significant other, perhaps.  A trusted colleague.  The guy at the bank who helped secure your build-out loan.  Your insurance agent.  The 7-11 employee who looked the other way when you sucked the top off of the slurpee and then refilled it.  Okay, maybe not that last guy, but you get the idea.  Take advantage of a second set of eyes.

As for me, I’m still rooting for Hamm and Sally (the freak-O doll that Sid morphed) to get together in the next version.

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So here’s the deal with one of my clients who is impacted by the minimum wage increase.  First, the big story on the news was that not very many businesses in Utah would be impacted by the change.  The argument was that most businesses were already paying most of their employees above the $7.25/hour rate.  Valid point.  Restaurant owners might beg to differ, however.

My client brings home an income in the low six-figure range from operating these restaurant locations.  His earnings are well above the national average.  But the lion’s share of his employees are either paid close to or at the minimum wage level.  That happens to be the going rate in this market and economy.  He’s competitive.  So giving his newer employees who are making minimum wage an extra $0.70 per hour makes all of his more experienced employees clamor for a similar kick up in pay.  “If Ernie’s value to this location is now 11% higher, than my worth certainly should go up,” is the likely thinking of the higher-paid employees.  They’ve got a valid claim.  As a result, they push the owner for more money as well.  And to compete, he’s inclined to meet their request.

The flat-out reality for him is that, based on his 2008 profit and loss statement, his labor costs (not including increasing the pay of each store’s general manager) would increase by $55,000.  Fifty-five K.  That just blew his take-home below six figures.  And since most of us live our lives by spending more when we get more, the whistling noise you just heard is his disposable spending power jettisoning downward.

Will he still make a good living from his restaurants?  Yes, relative to his new employees.  But determining what to cut out in his spending life to accommodate that $55,000 take-home decrease is like swallowing a doorknob.  He has options, and we’ll go over them next time.  However, none of them are palatable or realistic.  So here’s one vote for the wage increase causing problems despite the ones it is trying to fix.

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So in addition to Mr. Obama’s §179 increase through the American Recovery and Reinvestment Act of 2009, he also brought back what is called bonus depreciation. The great thing about it for many new restaurant owners is that it allows you to take all those build-out costs and pick up potentially half of them or more the year you open your restaurant.

Let’s say that you decide to go for it and plunk down $25K for your McArnold’s (not to be confused with, ahem, that one place whose name rhymes with McSchonald’s) burger joint. You find and lease a great spot in a strip mall that is (important tax fact requirement to follow) at least three years old. Under normal tax depreciation circumstances, all of the build-out costs are typically spread out over either fifteen or thirty-nine years. Yikes. But with the Senate’s plan, you can take half of those costs and expense them on the first-year tax return for the business. That could emerge as a very large dollar amount. If you spend $175K for these costs and open your restaurant mid-year, you would be able to pick up over $90,000 in deprecation expense. Terrific tax savings for either 2009 or 2010.

Keep in mind that the initial year tax savings you enjoy will be offset by less deprecation expense, and hence, less tax savings in future years. But from my perspective, this is much like winning the lottery. Take the $115 million now instead of $198 million over twenty years. After all, who know what the future brings? That is, unless you ask Nostradamus.

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So how’s that walk-in freezer treating you? Or rather, your food. Are the frozen peas mushy? Is it confusing 18° Celsius with 18° Fahrenheit? More cheap-o-personal-fan-like than freezer-like? So the sucky part is you’ve got to pony up for a new freezer. The good part is that the American Recovery and Reinvestment Act has a provision that’s right up your tax-saving ally.

So here’s the deal: Pretty much any piece of equipment you buy for your shaved ice kiosk (it is, after all, summer) can be fully expensed for income tax purposes. Even if you cough up $250,000 to buy the 8 gazillion BTU stove for the back of the house, you’re covered. You can offset this cost against the net income for your restaurant to the extent your business has earnings.

If you happen to be opening a restaurant in 2009 and are worried that you’ll report a net loss even without the equipment expense, not to worry. You can still make the election to expense your equipment, and carry the unused amount forward to offset all that gnarly net income you’ll be showing in 2010 and beyond, just as soon as your Cheez Whiz ‘n Spam casserole concept catches on nationwide.

As always, please consult with a competent tax advisor to make sure it works for you. Hey, wait a minute. I’m one of those guys. Well then, consult with me if you’d like. Until then, however, pass the ketchup (catsup??). I got me a hankerin’ for some o’ that thar Cheez-am-erole. Good eatins’. And more tax savings ideas next blog.

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What’s a point worth? Ask the ‘98 Utah Jazz after MJ hit his hold-the-pose jumper over Bryon go-ahead-and-push-off-me Russell. How about half a point? Well, the sports analogies don’t work so well. Except maybe for soccer, which is, arguably, the stupidest spectator sport ever. And could probably come up with some insidious way to have team A beat team B by half a point.

How about a point on your profit/loss statement? If your restaurant is pulling in what might be argued a paltry $30K/month, that’s a great deal of money. In fact, it approaches paying my fees if you want your financial oversight needs outsourced.

I helped a restaurant client switch over from one credit card processor to another. Saved him about a point in costs. During his best months, that pushes $1,000. That’s a great deal of money. And the thing about it was that he wasn’t even paying an exorbitant rate. We were just able to find a company who processed his credit cards for a notably more reasonable rate than the one he was paying. And he’s now been with the new company long enough for us to confirm that there wasn’t a bait-and-switch teaser rate that got upped after a certain period. It’s the real deal.

I’m not writing this to stump for a particular merchant card processor. But it is possible to cut costs in a wide array of areas of an income statement and both favorably and materially increase the bottom line.

Look around. Are your cleaning supplies too costly? How about the guys who clean out your grease trap? Is your main food vendor still stinging you with ‘energy surcharges’ (which is French for gas-prices-are-through-the roof) even though fuel costs are much lower than they were last summer? Are those banners too pricey? Take a little time to examine, make calls, do your homework, and price shop. While it’s not always the end-all, beat-all determinant for an expense, it certainly should be closely monitored.

Now, let me get back to the game. Last I checked USA was up on España two-nil. Uh, wait a minute.

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Lots of things can kill a location for a restaurant venture. From something as seemingly innocuous as ingress/egress (which are fancy/schmancy words for the ease and ability to enter and exit, by vehicle, the area where the place is located), to the proximity to other retail establishments, the ways by which a restaurant’s location can hurt it are varied.

I once had a client who came to me after he chose to build up, from footings to rooftop, a new building to house his Mexican food fare. It was a costly error in itself, but from my perspective it was greatly exacerbated by the fact that it was tucked away and nearly invisible from the main street. As a new concept, it needed to be seen. And it wasn’t. This helped spell its doom. While the restaurant was built near a theater chain, the theaters were of the dollar movie variety. And because its menu prices, which despite being fairly reasonable, weren’t in line with the customer base for the center, it failed. Kids and families went to the movies there and paid a buck and change. They weren’t willing to spend the kind of money this full-service place was looking to draw. And the primary draw was the movie theater, rather than the restaurant itself.

I saw another client choose an end cap location in a well-established strip mall. The problem was that nothing had ever succeeded at this particular end of the mall. I watched 3-4 restaurants and other retail outlets over a number of years try their luck at this unit number, and all were finite and fairly short-lived. It was a very tough left-hand turn to make into this end of the strip mall. To make matters worse, cars were not supposed to use this same end to exit onto the main road. As a result, cars had to go all the way to the other end to get out. It was a long, narrow strip, making it inconvenient to leave. I think this hurt his chances as well.

There are other things that hurt a restaurant’s chances due to location, such as perception of the center as an appealing place to be, age and upkeep of the center itself, and the product/service makeup of other tenants in the center. The waters are teeming with hazardous ways a restaurant can fail. Treading carefully in the location decision is a crucial element to its success - or failure.

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I watch “Breaking Bad”. It is stunningly brilliant. Emmys to all involved on this show. To nutshell the plot: Walter White, a middle-aged high school chemistry teacher is diagnosed with lung cancer. To fund its treatment cost and provide for his family since he thinks his illness is terminal, he decides to cook and sell, with the help of a former student-turned-junkie, a chemically pure form of meth. It’s a heartbreaking, surprising, truthful, wincing, dark, at times funny, and unflinching moral play on choice and its ramifications. Season two’s finale catapults this concept, dramatically and unexpectedly, to the law of unintended consequences.

“Well that’s nice,” you’re saying to yourself, “I’m glad you like shows about people who make disgusting decisions, Mr. Restaurant Accounting Guy, but how does this help me increase my bottom line?” While I’m pretty sure that a TV program with fictional characters won’t do that, I’ve thought about it from a number of angles, a stand out one being location (x3). You know the adage.

I’ve had a couple of clients who, in my blog-advice-is-free opinion, made the fatal mistake of choosing the wrong locale for their new restaurant concepts. Arguably, there were other factors that contributed to their downfalls (both of which were spectacular - and sad). But where the real estate footprint was went far in causing their doors to eventually close.

I’ll flesh out the details in my next blog. Meanwhile, I’ve got an awesome recommendation for your business based on this show about a cuddly purple dinosaur named Barney who sings about love.

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So, long time no write/muse/blog/ramble.  I can use tax season as an excuse, and it was, in fact, very busy, but having said that, it’s been mostly over for a month plus now.  So that excuse is a bit lame-A.

I have missed this.  Writing is usually pretty cathartic for me, even something as snore-inducing (I’m sure some people see it this way) as restaurant accounting.  Nice outlet, change of pace from my regular work, all that stuff.  But I apparently haven’t missed it enough to do something about it, which is put fingers to keyboard and start banging away.

Before I dive back into the blog focus at hand, I’ll share a few random thoughts with you that I’ve been mulling over.  First is my favorite tax season story. I have this real estate agent client.  Great guy, funny, very generous (he let me and my buddy stay at an investment home of his for a baseball tournament that both of our kids played in last year in St George, Utah).  Amongst other things, he’s really into muscle cars.  He has a couple of Corvettes, a Mustang, and I’m sure if his funds were unlimited the collection would be greatly expanded.  I suggested that he get himself a Datsun B-210 “Honey Bee”.  He said no.  Am I the only one who digs those things?

Anyway, he’s constantly looking for deductions for his business.  He wanted to deduct the cost for his muscle cars.  I explained to him that sure, we could do that - to the extent of their business use. He responded by informing me that of course they were legitimate business vehicles, because every time he cruised around in them he’d get stares from everyone and was convinced that this somehow translated into business income.  I had to let him know that unless a conversation similar to, “Hey, bitchin’ ‘vette man, will you sell my house now?” had taken place, he didn’t really have an argument that the cars were used for his real estate business.  And for you hard-core tax guys or girls who may be reading this and thinking, “Yeah, but if he puts miles on the cars while he is showing houses, he can deduct the cost”, rest assured, he doesn’t.

On a related note, I have a buddy whose wife makes those vinyl letters and designs that are popular right now.  People usually put them in their houses or on their cars. I have a good friend - actually one of the finest people I know - whose home interior is nearly covered with these things.  Inspiring phrases and words everywhere.  It’s like “Chicken Soup for the Soul” threw up on every wall.

Beyond the home use, while I don’t know if this particular application has made its way out of the state of Utah, you see here a lot of mini vans that have the back windows plastered with vinyl cutouts of stick-figure people representing members of the family that owns the van.  You know, typically a larger male and female figure for the parents, then smaller ones, identifiable by gender, representing each of the children, often in correspondingly smaller size for each child’s age or height.  In Utah, that often means a minimum of five to twelve kiddies.  Then they’ll throw in a kitty or doggie cutout for their pet Snowball or Rover, or even a fish shape for Nemo.  I’m sure there’s a contingent of folks that pleasantly sigh at the sight of these things. Makes me want to ralph.

Anyway, back to my point.  My buddy told me that as long as you have at least three sides of your vehicle advertising your business with these vinyl items, then you can ‘write off’ the vehicle’s costs for your business.  Hmmm, interesting take.

So, I’m back writing.  Will it last?  I hope so.  I plan on it.  Thanks for staying with me.

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