What are the Key Restaurant Accounting Terms I Should Know? Part 2

Understand Important Concepts in the Food Service Industry

What are the Key Restaurant Accounting Terms I Should Know? Part 2

Starting a new restaurant or bar from scratch can be fraught with complications. The issues you face range from securing the necessary capital and employees to completing the build-out of your space in anything close to your original time frame and budget. This is especially true if you’re a newly minted restauranteur without any prior experience in the food service industry. It’s crucial that you learn the appropriate accounting terms so you can set yourself and your establishment up for success – and so you better understand the reports you receive from your bookkeeper and accountant.

 

Deepen Your Glossary of Restaurant Accounting Terms

 

Amortize – Similar to paying off a substantial loan over an extended period of time, this term comes into play specifically in reference to large pieces of equipment that can decrease in value over time.

 

Breakeven – This is the point where your total costs and total revenue are equal. As in, while you might not yet have profits, your restaurant is also not operating at a loss anymore. This is a good goal to aim for during the first or second year of your new business.

 

Capital Expenditures (Capex) – Fairly self-explanatory, “capex” refers to the money you spend on physical assets for your restaurant: equipment, buildings, etc.

 

Customer Acquisition Cost (CAC) – This number tells you how much you’ll spend to gain one new customer from scratch. It includes several variables – location, current market, competition, and more. You determine it by calculating how much you spent in research, development, sales, and marketing.

 

First-In, First-Out – A key concept for inventory management, the principle dictates that you serve first what you bought first. Not only does this help keep your stock and servings fresh, but it gives you a cleaner understanding of your expenditures on that stock.

 

Fixed Costs – Also known as “Fixed Expenses,” these set-in-stone costs encompass rent, insurance, base salaries, and similar expenditures. Because they rarely change, you can anchor the rest of the budget you have for your establishment around them.

 

Lifetime Customer Value (LCV) – Typically calculated as (Average spend per month × % of Gross Margin) / Churn Rate. This number determines how much an average customer is worth to your establishment by factoring out the differences between unique customers.

 

LCV to CAC Ratio – The difference between how much a customer is worth and how much you spent to acquire that customer. In even simpler terms, if your CAC is higher than your LCV, your restaurant might be in trouble.

 

Margin – Often referred to as “Gross Margin,” this is number is simply Sales – COGS. As in, if you brought in $100 in sales and it cost you $90 in products to make those sales, your gross margin was $10 (or 10%). Recent studies have shown that average restaurant margins are currently range from 3 to 6%.

 

Markup – Related to, but definitely note equivalent to margin. This concept measures how much you increase the price of what you sold over what you spent to make the product. Think of is as Cost – COGS. As in, you sold a dish for $10 on your menu, but since you spent only $5.00 assembling the component parts of that dish, your markup was $5 (or 50%).

 

Overhead – This is a catch-all expense that includes utilities, paper goods, office supplies, and the other seemingly minor costs unrelated to your actual menu items that all go into operating a successful bar or restaurant.

 

Revenue per Available Seat-Hour (RevPASH) – It’s usually calculated with the formula Total Net Food & Beverage Revenue / Number of available seats in a certain time period. This number reflects the health of your establishment by how much sales you bring in (minus taxes, discounts, etc) against the number of seats you have. It can fluctuate depending upon how many seats in your establishment you choose to fill at any given time period. You could determine not to use specific sections of your restaurant or bar because lower traffic time periods means you need a smaller staff to provide coverage.

 

Variable Costs – The inverse of “Fixed Costs” from earlier, these are the expenses that can change will every billing cycle. They include overtime, tip share, utilities, food costs, and more. It is imperative you manage these costs effectively because wide swings can directly impact your bottom line on a month-over-month basis.

 

Even the most experienced restaurateur can get overwhelmed by the nuances of the accounting and bookkeeping terminology necessary to become successful in the food service industry. With over 50 years of working exclusively with bars, restaurants, and other food-related businesses across Texas, Tabulate has the experience and expertise to take care of your books and set them on the path to profitability.

What are the Key Restaurant Accounting Terms I Should Know? Part 1

Understand the Crucial Concepts to Bolster Your Business

What are the Key Restaurant Accounting Terms I Should Know? Part 1

You got into the restaurant business because you love food, not because you wanted to spend all of your time pouring over spreadsheets and learning about restaurant accounting practices. But you also know how vital it is to have your books and numbers in tip-top shape at all times. Your strong concept and winning recipes won’t matter if you can’t afford to keep the doors open.

So, whether you enter your own numbers into a third-party software program or you want to understand the reports you receive from an outsourced service like Tabulate, there are simply some concepts you really should understand if you want to set your establishment on a path to success.

A Short Glossary of Accounting Terms for Restaurants and Bars

Accounts Payable – Money you owe to others. As in, you bought some produce from a regional provider, and you need to pay them for those fruits and vegetables.

Accounts Receivable – Money owed to you by others. As in, that produce company has an accounts receivable file on you for the stuff they sell your restaurant.

Assets – A physical resource with a tangible economic value. Think of it like the kitchen equipment or tables and chairs you own – it’s stuff you could resell at a later date, if needed.

Cash Flow – Directly related to liquidity as a measure of business health, this is the amount of money moving into and out of the company.

Chart of Accounts – Simply put, this is the complete list of every single item of interest in your financial records, including assets, liabilities, equity, revenues, expenses, and more.

Cost of Goods Sold (COGS) – The amount of money it took to make the products your customers purchase. In other words, COGS tells you how much it cost to create that plate of food you sold to the customer, not how much you sold it for to that customer.

Gross Profit – We like this equation: Gross Profit = Sales – COGS. In other words, it’s the profit your restaurant or bar is making after you subtract what it cost you to make that money.

Gross Profit Margin – It’s a measure of your overall business health directly related to your food costs. You calculate it thusly: (Gross Profit / Revenue) x 100. The higher your gross profit margin, the better off you are, and you really want it to exceed 60%.

Liabilities – The inverse of assets. As in, until you own your stove, chairs, tables, and freezers outright, they are considered liabilities against your bottom line.

Net Profit – The final step in analyzing the profits for your restaurant. Otherwise known as the bottom line, you derive this number using the following equation: Net Profit = Operating Profit – Taxes and Fees.

Operating Expenses – A general catch-all terms for expenses unrelated to your COGS, including rents, utilities, payroll, and more.

Operating Profit – A step beyond gross profit, this measure takes into account items like overhead and labor. You can calculate it as follows: Operating Profit = Gross Profit – Operating Expenses.

Prime Cost – The next step past COGS. Prime costs includes the price of the materials and the labor required to create any given dish or beverage.

Profit and Loss Statement – Often referred to as an “Income Statement.” This document compares your expenses against your revenues to provide a baseline assessment of your restaurant’s success.

Revenue – This is one step beyond sales, as it includes income from sponsorships, investment, vendor comps, and other non-sales factors.

Total Sales – Literally, it’s the amount of money brought in via sales before you subtract COGS, labor, or anything else.

Interested in learning more about these restaurant accounting terms without needing an advanced accounting degree? Talk to Tabulate! The experts at Tabulate have over 50 years experience doing bookkeeping exclusively for the food service industry. We pride ourselves on working closely with all our clients so they understand exactly what’s happening with their numbers.