Adam Garfield, CPA

I met recently with a restaurant client and four of his managers to review the latest set of financial statements for each of their locations.  One of them was a bit newer than the others.  He had a very good handle on food costs, but he had been working to get his labor costs down and more in line with those of the other stores.

The owner has a bonus program in place which rewards the manager who attains the lowest percentage of combined food and labor costs over a certain time frame.  Competition between the managers is pretty keen.  It’s no ‘Glengarry Glen Ross’ or anything (”First prize is a Cadillac Eldorado.  Second prize is a set of steak knives.  Third place is you’re fired”), but the owner dangles a fairly lucrative carrot.  As a result, you might expect them to guard their cost-control and cost-cutting methods like rabid ninjas.

Actually, they do anything but.  All freely offer their ideas.

Is it Altruism?  I think that partly explains it.  They’re all good people who want to see each other succeed.  Stroking the boss?  Maybe a bit.  Selfish?  That likely plays a part, too.  Better performance from store A means more money in owner’s pocket, and an increased likelihood of a spillover effect into stores B, C, and D.  Regardless of the reasons, it pushes the notion of the benefits from sharing your knowledge.  Too many individuals in organizations, be they a local restaurant or a mega-conglomerate, protect their intellectual capital turf.  Share the knowledge.  Help your colleague.  Reap the perks.  Increase shareholder wealth being only one of them.

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Before I lay out the post-Schmiceberg customer service debacle (although I think debacle is a better suited term when your college alma mater gridiron team gets pasted 54-28 by a non-ranked opponent, thereby ruining any BSC hopes and kicking them right out of that seven-spot ranking), let me tell you about another eatery experience I had.

I’m at this fast food place in Green River, Utah, about 180 miles from home, returning from a trip to Colorado.  I won’t name this restaurant either, but Elaine’s boyfriend Puddy from ‘Seinfeld’ loved to eat there.  High five.  I’ve got a hankering (aren’t people from Texas the only ones to get hankerings?) for a shake.  And not just any cheap-A, glop-O-sugary-syrup-and-some-fake-flavoring shake either.  One word (three, if you’re that 2007 Miss Teen South Carolina contestant answering the question about maps):  Ja-MO-cha.  Makes a slurpee seem cheap in comparison.  Come to me you malty, vanilla-ish, hint of coffee, chocolatey goodness.

Well, I should have listened to Leo Getz.  He’s the smartest accountant/hostage/key witness ever to help Danny Glover and Mel Gibson out of a ‘Lethal Weapon’ mess.  After accompanying Riggs and Murtaugh through a food drive-through and getting his order screwed up, Leo utters a short, expletive-laden phrase that best sums up the importance of checking your contents before leaving when you dine.  Rent it if you need to.

So a couple thousand feet on I-15 later, I realize, to my ‘Saw VI’-like horror, that the place forgot to add the delicious jamocha flavoring to my shake, making it taste pretty much like wallpaper paste.  I’m committed to the highway home at this point, so I sulk, the stinging swallows of jamocha-less shake like edible, salt-laced bactine on my wounds of what might have been.

What’s a dissed consumer to do?  Gripe, of course.  Contact us links of web sites have never felt so arm-open beckoning.  I lay out my complaints to each entity and wait.

Schmiceberg responded first.  A full-tilt apology by the district manager, a complete understanding of its grand injustice, a promise to make it right, and a request get me to come back in the form of gift certificates.  When they arrived by mail, the amount was more than generous, and the letter reiterated the invite back in the e-mail response.

Puddy’s place, you ask?  I received a voice message on my work phone from a very nice-sounding female store manager, acknowledging the shake machine problem the day I dined with them, and a kindly invitation to come in for a free shake the next time I came through their town.  Great, because that’s a little more than a stone’s throw from my house.  If you throw it 6,336 times.  Fortunately for me, though, I do go through Green River about every four years.  Me plus Green River, Utah jamocha shake = LOVE in 2013.  Can’t wait.

The lesson is, overcorrect your screw-ups to your customers.  Some of them may be jerks about it (quit looking at me).   It may drive your food costs up next time they come in and unload $10-$20 of gift certificates on you.  But they’ll come back.  And they’ll probably spend more when they do, putting money in your pockets.  And they’ll likely come back again after that.  Again, more dollars for you, more goodwill, and less stories floating around about how this restaurant had the audacity to offer a dissatisfied customer one free item good at their location only which was nowhere near that person’s home.  ‘I’m thinking Schmarby’s’??  I’m thinking not.

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You know that feeling when the hottie you’ve been eyeing from a distance gets close enough to check out from HD-quality length?  And she’s got some gnarly mole the size of Pluto on her apple-like cheek?   And a lazy eye that’s always looking at Cleveland?  And lime green eyelashes?  And one pointy ear?  Well, getting hosed at your favorite restaurant is exactly like that.  Except restaurants don’t have big ol’ face blotches.  And they aren’t female.  And they can’t really see.  Or hear.  Although they do cause men of all ages to make Homer Simpson drool noises (if they have onion loaf appetizers, that is, and you know EXACTLY what I’m talking about, Tony Roma’s fans).

I was coming back from California with my family and we decided to stop to get some food.  Since I had all four of my boys with me, we logically had to stop at four different restaurants.  Grrr (and another blog altogether).  My second-oldest wanted a burger and shake from his favorite place.  I won’t name it, but it rhymes with Schmiceberg Drive-Inn.  There’s no one at the counter, only a ‘ring bell’ sign.  We ding ding ding away, and an employee shows to take my kid’s order.  Then we wait.  And wait.  And wait.  And . . . so there’s nothing like fast food that’s NOT FAST.  It seems that counter girl was pulling all duties, including cook.  And not a person in line ahead of us, or behind us.

My kid’s picky, and ordered his hamburger with ketchup only (or catsup, if you don’t know how to spell).  The employee, in an very thoughtful effort to expand my son’s eating horizons, threw some cheese and mustard on his burger to be nice.  It might as well have been ricin and anthrax to my kid.  So back we went for a new one.

This time things got good.  And by good I mean nose-hair-pulling painful.  Line of customers eight deep, the girl was still flying solo, and I’m starting to get, shall we say, bent.  However, being the courteous and respectful person that I am, I march right to the front of the line, clamp down hard on my tongue to keep the rage from seething through, and tell counter/cook/dishwasher/complaint manager girl that the burger was cooked wrong, could she please cook another, and could she please, please do it quick since we were still three hours from home and I had a van full of sons and in-laws.  And you all know how painful that can be.  Of course the sons aren’t always pleasant either. 

Well bless her heart, she was, in fact, quick.  And by quick I mean seventeen minutes forty-three seconds quick.  Seriously, we’re talking Mr. Tudball speed (see Carol Burnett Show for hilarious comedic reference).

She finally emerged from the grill area, brown paper bag in hand, exasperated but triumphant in her appearance.  I expected an apology, an excuse, pretty much any sound to come from her mouth.  Instead I got bupkis.  A blank stare as she handed it to me.  An even more blank one as I, once again very courteously pointed out to her that the 100-year war was faster than her, or and while we’re at it that watching an entire episode of those two Disney twin blond boy morons who live in a hotel with their mommy seemed quicker.

The payoff came when we get to the van and Casey opens the wrapper, finally taking a luscious bite of his ketchup-only hamburger.  It was deliciously laced with pickles.  A condiment middle finger.

How did I react, and how did the good people of Schmiceberg respond?  I’ll tell you next time.  Until then, pass the Carolina Honey sauce (cue gargle-like drool noises).

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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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