Many of us often dream of owning and running our own restaurant. Where would it be located? What would we make as our signature dish? What new concepts might we bring to the market? Those who have actively follow this dream, however, are quick to point out that it is not as glamorous as it sounds.
The restaurant industry is one of the toughest and most competitive industries to build and scale a profitable business. Margins on food sales can be so tight that restaurant owners must constantly maintain a hawk-eye view over their finances if they want their business to succeed. Mickael Cardoso, founder and CEO of CloudCfo Inc., an outsourced cloud accounting and finance service provider in the Philippines, says the most important method for managing finances, particularly in the restaurant industry, is through processes.
“There really are a lot of moving parts and any deviations in daily operations can have a significant impact on a restaurant’s finances,” says Cardoso. “All restaurants should put in place—and stick to—robust financial processes and controls. Otherwise, management can quickly lose visibility over the profitability of the business”
So given that assessment, what key financial controls are recommended to ensure proper management across a business’ financial activities?
Point of sale system
Whether you are a small family-owned restaurant, bar or an established food group, strategic use of the point of ale (POS) system is essential to daily business operations. A POS system is a modern-day cash register that records goods sold and payments made by a business.
A POS system can, however, also generate data on key business metrics such as best-selling products, daily sales reports, stock level warnings, and employee performance. It can also help reduce human error and fraud. If optimized correctly by management, a POS system can send key financial data directly to the company accountant, reducing the overall workload for staff. “All restaurant owners and food retailers should understand the capabilities of their POS system so they can optimize it to work for their specific business model,” says Cardoso.
A POS system can, however, also generate data on key business metrics such as best-selling products, daily sales reports, stock level warnings, and employee performance. It can also help reduce human error and fraud. If optimized correctly by management, a POS system can send key financial data directly to the company accountant, reducing the overall workload for staff.
Food cost planning
A restaurant must be vigilant when calculating food costs to be able to forecast margins and profits across its range of products. Any change in the cost of raw materials can have real implications on a restaurant’s profitability. It is crucial for a restaurant to carefully plan its food costs and identify precisely what profit (or loss) it is making on each product.
Execution is even more important. Poor portion control, unanticipated wastage, stock substitution or volatile food prices are all factors specific to the restaurant industry that can negatively impact a food cost plan.
The three-way matching system
Purchasing is always a cost-sensitive activity for a restaurant. Poor purchasing practices can lead to cashflow issues, wastage, inaccurate stock levels and balance sheet errors. Cardoso believes that “the optimum approach is to use a system that generates a validated paper trail for every purchase while also reducing the potential for error and fraud—the three-way matching system ticks both of these boxes”.
Purchasing is always a cost-sensitive activity for a restaurant. Poor purchasing practices can lead to cashflow issues, wastage, inaccurate stock levels and balance sheet errors.
The system helps a restaurant maintain control over its food and beverage costs, purchasing processes, and accounts payable. It is a “checks and balances” system that requires three purchase-related documents for every transaction—the restaurant’s purchasing order (formal order authorization), the vendor’s receiving report (payment/delivery proof), and the vendor’s invoice (the bill). The information contained on these documents, which can include goods description, quantities, and prices among others, must “match” before a transaction can be entered into the books of accounts. It also makes it simpler for businesses to comply with their financial reporting and audit obligations each year.
Inventory management
Inventory management is having the right product, at the right time, in the right place, at the right cost and in the right quantity. It is a critical activity across any business or industry that involves buying or selling goods. However, the importance of inventory management increases in the restaurant business due to the perishable nature of goods (i.e. food products) being bought and sold. Excess inventory can lead to food wastage, storage issues, and disposal costs. A restaurant should be rigorous in checking that its purchase and inventory prices align with its recipe costs. This is the only way to maintain steady gross profit margins. Frequent inventory counts will also ensure that food wastage is kept to a minimum and that tight controls are maintained across the range of food costs.
A restaurant must have in place a process that enables reconciliation of all payments received at the time they are received. Otherwise, payments might be overlooked, incorrectly recorded or misattributed.
Payment reconciliations
Restaurants receive various forms of payment from customers each day—cash, credit card, debit card, authorized vouchers, money-off coupons or payments through affiliates. A restaurant must have in place a process that enables reconciliation of all payments received at the time they are received. Otherwise, payments might be overlooked, incorrectly recorded or misattributed. A knock-on benefit of having such a process in place is that it will help ensure that the follow-on bank reconciliation process (i.e. the exercise of reconciling the difference between accounting records and the bank in any given period) is fed accurate information. This results in two value-added accounting processes for the “price” of one.
Subscribe to our weekly newsletter to receive all the tools and solutions entrepreneurs need to stay updated on the latest news in the industry