Adam Garfield, CPA

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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