A restaurant’s sustainability and growth potential are highly driven by its capitalization and the amount of liquid assets (like cash) that it retains. If a restaurant is not properly capitalized, its operations will be strained, vendors will not extend terms, and it will be unable to take advantage of growth opportunities. If a restaurant is
Every restaurant has controllable and non-controllable expenses. Controllable profit measures the amount left over after deducting controllable expenses from your sales. A seasoned and effective general manager will maximize controllable profit by monitoring and managing the controllable expenses. In this article, you’ll learn how to calculate controllable profit and why it’s an important measure of
Just as different restaurants serve different cuisines, different restaurant owners and operators have different financial goals. You might be trying to go with the flow and only need a bookkeeper to help you with invoices, or you might be ready to rock the boat and drastically scale your operations with a CPA and CFO by
Labor cost as a percentage of sales indicates whether or not labor should be adjusted in a restaurant. However, actually controlling and managing labor cost requires more analysis. Labor cost can be controlled through effective scheduling and improving employee productivity, but only if you have access to actionable data and reliable reports and have the
The ideal labor cost in a restaurant differs for every concept because it depends on the overall prime costs as a percentage of sales. Prime costs, which is the cost of goods (COGS) plus labor, should never exceed 65% for full-service restaurants and 60% for quick-service restaurants. Therefore, the ideal labor cost is the amount
This is not another article telling you to order shredded carrots instead of shredding them in-house. Instead, we will show you how to use your financial data to achieve the ideal cost of goods sold (COGS) that will guarantee profitability in three steps if your other KPIs are in order. First, we’ll show you the
When interviewing prospective clients, I ask, “Are your financials on a full accrual basis?” This question allows me to quickly understand whether they have access to valuable and actionable financial information. Unfortunately, most restaurateurs cannot answer this question because they don’t know the difference between accrual basis and cash basis financials and the impact it
If your bill payment process involves tracking invoices by hand and lots of manual data entry, you would benefit by implementing electronic data interchange (EDI) between your inventory/POS system, your accounting system, and your vendor’s billing. This setup, such as EDI with Fintech, helps you optimize your invoice line-item data input, improve the accuracy of
In Part 1, we outlined how to assess the viability and value of a new restaurant project using the sales-to-investment ratio. In this article, we walk you through valuing an existing restaurant and how these valuations are determined by thinking like an investor, and describe common pitfalls and factors that could affect a restaurant’s valuation.
Building a new restaurant, expanding or selling an existing restaurant, or admitting a new partner require an accurate valuation so that you will know how to structure the terms of a deal. Whether you are a single-unit or multi-unit concept, the value of your restaurant is mostly driven by profitability and cash flow at the
You shouldn't run personal expenses through your restaurant for multiple reasons, but here are the top 5:
You cannot analyze and assess labor costs and profit without paying or accruing a market-based wage.
If owner-operators are not paid a market-based wage, then the net income/profit and labor costs lie to you; better yet, you're lying to yourself. Until the owner's compensation is reflected in the financials at a market rate, the financial data we're working with is nearly useless.
This is extremely important because net profit and labor cost as a % of sales drive many of our analyses and concepts in this guide.
Without reflecting a market rate owner's comp on the books, you will never know if you have a profitable restaurant.
You could easily claim zero owner's salary and 20% net profit (which is extremely high), but that will not mean anything because if someone were to buy your business and hire someone to do what you do (paying market wages) it could be a losing business.
That is important if you want to eventually transition out of your business either fully or partially, raise money for your business, or sell your business at a high valuation that doesn't require an earn-out payment. If all of the value of the business is tied to you, then you don't have a business, just a stressful job.
Refer to How Much Should Restaurant Owners Be Paid to determine how to set a market-based wage and why it's important.
You must ensure that revenue and expenses are reported in the period they relate to; otherwise, your financials will not tell you anything besides cash flow performance.
Refer to the Importance of Accrual Basis Accounting in a Restaurant to understand the importance of Accrual Basis accounting and how to implement it.
Non-finance people frequently overlook the balance sheet. The balance sheet is equally, if not more important, than the P&L. If the balance sheet is off, then the P&L will certainly be off.
The balance sheet shows a snapshot of a restaurant's health and financial position at a point in time. Imagine knowing all your annual expenses and income but not how much money you have in your bank account. That's what the balance sheet tells you: what you own and owe.
Many important ratios and formulas used to analyze financials and a restaurant's health require an accurate balance sheet.Besides the simple reference to cash balance above, another example of balance sheet accuracy is ensuring loans are represented accurately. You need to remove any loans from the balance sheet that are not truly loans.
This refers to amounts owed to/from affiliates and partners or shareholders that are not loans or have no intention of being paid back. This will be necessary for calculating your ROE (Return on Equity), one of the most important ratios investors use to assess the value and viability of a restaurant investment.
For example, assume investors contribute $500k to open a restaurant, then another $150k loan because the $500k is not enough, and the restaurant generates $150k in profit.
$150,000 Profit / $650k Total Net Equity =Return on Equity=23% ROE
$150,000 Profit / $500k Total Net Equity =Return on Equity=30% ROE
In restaurants, the cash and working capital you keep on hand are determined by liquidity ratios, such as the current ratio, which measures the ratio of your current assets to current liabilities.
If your balance sheet is inaccurate, one of the most important financial measures of your restaurant's viability and health will be thrown off.
For restaurants, the chart of accounts must match the restaurant uniform COA provided by the National Restaurant Association.
For example, the paper cost in a quick-service restaurant is coded to the Cost of Goods Sold account, but in a full-service restaurant, they are coded to Direct Operating Expenses. This can affect COGS as a % of sales by 2-4%. Another example is bar consumables/supplies, which should be bifurcated and coded to liquor cost, not food cost.
If transactions are not coded according to the restaurant uniform COA, you cannot assess your performance compared to industry standards.