7 Timely Terms That Can Make or Break Your Business
Not every restaurateur is an experienced accountant. This is especially true if you’re a chef or bartender trying to get your first establishment off the ground on your own terms. You’ve spent years cultivating the menu and concept of your dreams. Now, you now must learn key restaurant accounting numbers so you can better run a successful business.
With any luck, you’ve found an excellent accountant to help you manage the books, but you also realize the importance of understanding those figures and terms yourself. We suggest learning a few key concepts driving the financial side of the restaurant world. You should be able to decode the reports you receive from your bookkeeper and make good decisions for your business.
#1 Total Sales
This one is a no-brainer. It represents everything you’ve sold to your customers. We recommend reviewing sales from a range of perspectives, including various time frames and types of items sold. Investigating your sales will help you better understand what your customers want and gives insight into the overall trends in your accounting numbers.
#2 Cost of Goods Sold
Known by the acronym COGS, this number represents how much it cost you to create the items you sold. As in, a customer purchased a dish for $10, but you spent $3 on it in terms of food, labor, and related costs. To calculate COGS, add up your Beginning Costs and Purchased Inventory and then subtract your Final Inventory.
#3 Food Cost-to-Sales Ratio
Also known as “Food Cost Percentage,” this gives you a clear metric you can point to regarding your expenses. Recent research states that a healthy restaurant keeps this number around 28 to 35%. You can derive it by dividing your Food Costs by your Total Sales.
#4 Gross Profit
Thanks to a commonly used worksheet called a “Profit and Loss Statement,” it’s easy to see this number in action. It’s simply the result of subtracting Costs from Revenue. It’s also one of the best top-line restaurant accounting numbers to keep in mind at all times.
#5 Prime Costs
Now, we’re getting into the weeds a bit, but this number is a crucial indicator of your financial condition. Prime Costs represent the big items that you regularly spend money on, the stuff you need in any sort of restaurant.
How you manage these expenses compared to your revenue goes a long way toward building a successful establishment. To get this number, simply add together Labor and COGS. And if you want a healthy restaurant, keep prime costs under 60% of your revenue.
#6 Operating Expenses
This broad number considers everything not directly related to what you actually sell in your establishment. It can be grouped into three categories.
- Labor – Typically the largest expense. It combines payroll, payroll taxes, tips, employee benefits, and anything else involved in paying your entire staff.
- Overhead – This includes fixed costs like Rent, Insurance, and Property Taxes, but it also includes variable costs like Utilities.
- Other – An obvious catchall term. It includes nearly everything else that can’t grouped into labor or overhead: forks, spoons, napkins, advertising, and beyond.
As important as your menu is (Why else are people coming to your restaurant, bar, or food truck?), you must keep these costs in mind when creating and maintaining your budget.
#7 Break-Even Point
Finally, we’re at the big one – the number that tells you how much you need to make to cover all your various expenses before you actually make money. That calculation looks like this:
Total Fixed Costs / [(Total Sales – Total Variable Costs) / Total Sales)] = Break-Even
You can use this number in a variety of ways – a benchmark of overall health, a metric toward paying off an investor, a goal you want to reach before making a new investment or purchase, and so much more.
At Tabulate, we understand that not everyone understands these leading restaurant accounting numbers, much less has the experience at navigating them successfully. With our all-in-one back-office solution, you’ll gain access to software where you can view all your reports and financial data on your terms. We also deliver bookkeeping and payroll services from experts with decades of experience working exclusively in the food service industry.
We have plans to meet every budget and business size, from franchises and regional chains to dive bars, food trucks, coffee shops, and everything in between.