Understand the Crucial Concepts to Bolster Your Business
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.