Most people who get into restaurants don’t do it because they love accounting, they do it because they love cooking food, interacting with people, and creating unforgettable dining experiences. But the reality is that no restaurant can succeed without solid financials.
Jeremy Threat is the VP of Sales and Marketing at Vine Solutions, a company that provides accounting and financial consulting services to almost 200 restaurants. His team not only tracks financial information for customers but also unpacks and translates it into action items that keep sales and spend on track.
“I worked for the Thomas Keller Restaurant Group for five years, and the one problem I would hear constantly is that ownership would say, I don’t know if I trust what I’m being told from operators because they work for me and they’re going to tell me what I want to hear,” says Jeremy. “We have this great relationship because we work so closely with the owners and managers that we’re not going to hold back. We’re not paid to tell you what you want to hear; we’re paid to make sure we’re protecting you.”
We asked Jeremy to share some of his best accounting practices for restaurants: controlling costs, budgeting, tracking data and managing systems.
Keep prime costs under 63% of your total costs. For a typical sit-down restaurant concept following industry norms and standards, a very good operation runs between 58-62% prime cost, which is the combination of their total labor (payroll, benefits, insurance, etc.) and total cost of sales (food, wine, beer, merchandise, etc.) If the restaurant is running at average, it’s 60-62%; anything above 63% is running poorly. “If they’re running above that 65 mark, they’re probably not going to be in business very long,” says Jeremy.
Prime cost can be problematic for restaurants because so much money is spent on labor and cost of sales. A slight variance in budget can cost the restaurant a substantial amount in overages.
Maintain controllable expense at 10-12%. Controllable expense is usually comprised of supplies, outside services, repair and maintenance, utilities, travel and entertainment, smallwares and complimentary meals. It’s easy for this expense to spin out of control, typically with comps or supplies. But if prime cost and controllable expense fall in line, Jeremy says, then a business can run very successfully.
Figure out where you’re going to give. If your goal is to be a Michelin-star restaurant, certain aspects of your business may be a bigger priority than they would otherwise, and certain costs might be higher. Thomas Keller, says Jeremy, had extremely high standards for cleanliness and customer service; thus, they spent much more on cleaning supplies and comps than most operations do.
“It’s a give and take,” he says. “If you want these costs to be higher, and you want a higher food cost, then will your wine costs come down? Or will your labor come down? What will you do to offset that expense?”
Be proactive, not reactive. In restaurants, it’s not uncommon to receive January results at the end of February, and it may be March before you actually review them. In many cases, that’s too late. “If there was a major issue, you could lose a ton of money by not having more prompt, accurate information,” says Jeremy. It’s extremely important to distribute timely information to both owners and to the manager who are operating the business on a daily basis.
Seek out an expert to help you budget and forecast. First-time restaurateurs usually put together a pro forma that anticipates their sales for the first few years of business. But Jeremy has found that often those budgets don’t actually make sense, because people overlook certain realities about new restaurants. It helps to have an expert or mentor with plenty of experience in creating a pro forma and budget so you have a more accurate sense of what your business can achieve.
“There’s nothing worse for us than when we get a client that really set up both themselves and their investors for their high expectations that are not very likely to be delivered upon, especially not in the first year.”
Use your budget effectively. Jeremy works with restaurants to develop budgets and use them over time, which also means translating pieces of the budgets into clear action items. For example, if you have $1,500 per week for one specific labor category, then you need to match your scheduling to that budget and come up with a costed schedule. Often, operators make assumptions and tweaks on a whim instead of using historical data and financial information to forecast their scheduling needs.
Account for the honeymoon period. The first three months of business tend to be a “honeymoon period” for restaurants, with inflated sales that won’t necessarily continue. Plus, there’s more turnover in the beginning as you’re trying to find people who are the right fit for your brand; as a result, labor cost may be inflated. Jeremy actually recommends over-staffing in the first few months, so as not to jeopardize losing business because you didn’t provide good service.
Consider different meal periods. Most restaurants only open for one meal period, even if they plan on serving two. They’ll open for dinner, work out the kinks, and then open for lunch afterwards. From a budget perspective that can be tricky, because the sales mix you see for one period will be different from the next one. Similarly, it’s difficult to understand how your check average truly breaks down. Make sure as you project a budget for your first few months of business that you’ve adjusted your sales mix to the appropriate meal periods. According to Jeremy, the problem is that restaurants don’t provide enough leeway. They almost always begin the second meal period at least a month later than they anticipated, which can throw off the budget for the quarter and even the year.
“They’re a little aggressive because they want to put together something that’s going to be appealing as a business model, but it really doesn’t necessarily give a true, accurate statement of what’s going to be there,” he says.
Data & Systems
Pay attention to trends. It’s not enough to look at income statements; you also need to study specific trends in your sales. In addition to average weekly covers, you should be looking at the bar average check, lunch average check and dinner average check from week to week. You should also be looking at the food average component within dinner, as well as wine and beer. “This data is crucial because it can help you identify things you might not normally see,” says Jeremy.
When working with one client, he saw that their wine component had fallen 50 cents for every single period over the past few months, while other similar restaurants in the area had stayed steady. After talking to the team, the wine director revealed that he’d recently changed the wine list from a paper sheet to a book. Together, they realized the book had had an inverse effect on wine sales because it was too formal and imposing. They changed back to the paper version, and wine sales climbed back up.
Have a process for invoices. It seems simple, but a lot of budget discrepancies arise because of invoice control; restaurants don’t have a system in place for receiving invoices, so they get lost and are unaccounted for. Every invoice must get to your accounting department. If not, you’ll see costs that are out of line — not because there’s a real problem, but because you don’t have a clean, tight system in place to track the information.
Keep accurate and consistent inventory. Similarly, many restaurant see errors in their cost of sales because they don’t understand how to do inventory correctly. Inventory may be mis-dated, either the beginning or ending period, and that will cause fluctuation in food cost.
“If it’s a see-saw effect, that always indicates that there’s poor management of the inventory and the invoices,” says Jeremy. “If it’s consistently high, then you probably have a mis-management of portion control, waste, things like that. We are looking for patterns that look odd.”