It can be tough to launch a restaurant and keep it afloat. Owners must maintain a thorough understanding of the restaurant finances in order to grow their business. The first step in obtaining this understanding is to implement a sensible accounting system. If you’re concerned that your accounting information isn’t accurate or that you aren’t correctly allocating costs, reach out to a local CPA firm for a consultation.
It's critical for restaurants to hit a sweet spot on inventory levels. Unlike other businesses, restaurant owners have to worry about food spoilage or diminished food quality if their inventory sits for too long. Inventory reports can help owners track prices and profitability of their food items. A balance sheet style inventory report shows owners a snapshot of inventory stock and value at any moment in time. Restaurant owners can also use sales figures and inventory levels over time to calculate their inventory turnover rate. Both options help managers plan out what food items to purchase and in what quantity.
Restaurants often operate on a fairly thin profit margin. If owners don't have a good handle on their costs, profit margins can easily plummet. Some expenses, like rent, insurance and property taxes, are hard to control. However, managers have more options to play with variable expenses like food and labor costs. An income statement reports profit over a predetermined period of time. Restaurant owners should scrutinize their income statement on a regular basis to ensure operating expenses aren't exceeding sales revenues.
Profitable restaurants can go out of business due cash flow problems. This is a serious problem for restaurants that experience feast or famine revenue streams due to seasonal tourism and dining. Income statements can be misleading in regards to cash because most are prepared on an accrual basis. However, just because you've earned revenue doesn't mean you've received the cash. Likewise, you may have recorded an expense but haven't bothered to pay it yet. The statement of cash flows report corrects for these factors and helps managers understand how much actual cash is going in and out of the business every month.
Brick and mortar businesses like restaurants require a large capital investment. Most restaurant owners have to borrow tens or hundreds of thousands of dollars just to get ready for opening day. High loan payments can hinder a restaurant's options to invest in new growth. The best way to evaluate a restaurant's ability to pay off debt is to evaluate the current ratio based on the company balance sheet. To calculate the current ratio, divide total liabilities by total assets. The higher the ratio, the better the company's financial position in regards to long term debt obligations.
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Writer Bio
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.
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