Understand Important Concepts in the Food Service Industry
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.