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Using Restaurant Financial Statements to Improve Operations

Few jobs are as stressful as running your own restaurant. Financial statements can inform profit-based decisions that put more money in your pocket. Accounting services for restaurants can help make sure that financial statements capture the information you need and are simple to understand.

Which Financial Reports Should Restaurant Owners be Reviewing?

Profit & Loss Statement

This statement displays your revenue and expenses throughout a given period of time.

Why It Matters

The profit & loss statement shows your sales, costs of goods sold, overhead, and bottom line. This tells you your restaurant margins and impacts how much you or the company will pay in taxes.

What Makes It Tricky For Restaurants

Restaurants have a lot going on, both at the front and back of the house, and the profit & loss statement can quickly become unreadable with hundreds or thousands of line items. Add in multiple locations and the numbers will bury you.

What To Look For

The key is to focus your chart of accounts and profit and loss line items around your core revenue streams, overhead categories, and locations.

How It Can Improve Operations

Focus your profit and loss line items around your core revenue streams. You don’t want one line item for revenue if you sell in multiple streams, such as food and liquor, and you don’t want a separate line item for every possible sales transaction. What are the biggest streams you can establish that support separate decisions?

Restaurants traditionally have tight margins, made even tighter these days by delivery service fees. Think big picture: Gross revenue, gross profit, and net income. Overhead costs take you from gross profit to net income. Your food, liquor, and other items have already been accounted for. What decisions do you make regarding staffing, supplies, marketing, etc? These are the categories you need to establish to make informed decisions.

Multiple locations require a consolidated P&L and location-specific P&L’s. This may require a complete restructuring of your accounting architecture and chart of accounts. Without it, you’ll never know whether one location is pulling all the weight while the others lose money, whether certain revenue streams or costs are out of proportion at a given location, and more. Accounting services for restaurants can help make sure that your accounting architecture and chart of accounts are working in your best interest.

Balance Sheet

Displaying assets, liabilities, and equity, the balance sheet tells you where your business stands at a given point in time.

Why It Matters

The balance sheet shows the health of your business. Appearances can be deceiving, especially new restaurants with great press, but the balance sheet tells the true story. Banks won’t extend you credit with a bad balance sheet.

What Makes It Tricky For Restaurants

Restaurants often take on large amounts of debt when they start or expand. Debt service puts a strain on cash flow, as the principal is not deductible, and IRS depreciation rules limit how much can be expensed. Add in payroll demands and cash flow immediately becomes stretched during economic downturns as people cut spending eating out.

What To Look For

Current assets should equal or exceed current liabilities. If not, you’re in trouble. Without a cash infusion you’re on track to run out of money in 12 months.

Compare cash to fixed assets and long-term debt. Have you taken special depreciation in prior years, and face cash flow issues as you continue to pay down the debt without any depreciation expense left? Is there an opportunity for special depreciation or, if you own the building, a cost segregation study?

What does the equity section look like? Are you making money? Have you been able to take distributions, or have you continued to pump funds in to survive?

How It Can Improve Operations

Monitoring, protecting, and building your balance sheet can only lead to good things for you, including friendlier banking relationships, financial security, and the ability to expand when opportunities arise. Accounting services for restaurants help keep your balance sheet in order.

Cash flow statement 

The cash flow statement answers the most common small business question: “If my business made so much money, where did all of the cash go?” This statement categorizes cash inflows and outflows amongst three activities: operating, investing, and financing.

Why It Matters

As mentioned above, you need cash to pay your staff, meet your debt obligations, and pay taxes, not to mention paying yourself.

What Makes It Tricky For Restaurants

With tight margins and changing tastes, restaurants ride a rollercoaster of highs and lows. A business model that supports X amount of debt and payroll can change overnight. You can let go of staff and downsize in the worst of times, but that debt doesn’t go away without a formal restructuring.

What To Look For

Cash is king. Look for extended payment terms and discounts when possible, and monitor opportunities across the industry. Analyze every operational detail from open-close, staff shifts, ordering innovations, and more.

How It Can Improve Operations

Understanding your cash flow needs should lead to immediate decisions. You should know how much you need to make each day/week/month based on your preference, which day you tend to reach break even each month, and how you’re going to cover bad months (such as drawing on an open line of credit established when times were good).

For example, wouldn’t you like to know you need to do $30k in sales every month, that everything after the 26th of the month is straight profit for you, and that you have a $50k backup plan ready to get you through a few payrolls if times get tough? Accounting services for restaurants can help you find those answers.

Working with Haworth & Company, Ltd.

There’s a lot to learn from your financial statements, but we know they often fall to the bottom of your to-do list. We work with Minneapolis area restaurants of all sizes, from single location cafes to larger multi-location and multi-state operations, and have helped them by both doing the work and explaining the results. If you have too much on your plate please give us a call and see how we can help. As a one-stop-shop for small businesses, we can help with accounting, taxes, payroll, consulting, or all of the above.

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