Accounting Considerations for Restaurants, Cafes and Caterers

Starting Up

Launching your own startup is always an exciting proposition — especially if you’re passionate about food and would love to build a restaurant, open a cafe, start a catering business or even launch a food truck. But, growing a successful business can be one one of the toughest and most costly undertakings you can set for yourself.

This is due to the intricate nature of the variable factors that come along with the territory. Not only are there heavy capital costs, but there is also a huge amount of ongoing overheads to manage. In the foodservice industry, this can include kitchen supplies, kitchen equipment investment and maintenance, food costs, staff and taxes, the list goes on.

Starting any business always involves an intensive planning stage that can make or break your enterprise. You will have to be prepared to invest considerable time and money. To launch a food and beverage business, you will need to map out a plan that takes into account several touch points.

You will also need to be prepared to answer some tough questions.

Am I ready to sacrifice to make my dreams a reality? Do I have the support I need to achieve a successful restaurant or catering business? What does my competition look like? What do I want the overall look and feel of my brand to be, and will that translate into a healthy restaurant profit margin ie. what’s my point of difference? And, do I understand how to improve restaurant sales when times inevitably get tough?

Most importantly, you’ll need to understand all aspects of accountancy and the bottom-line. If starting from scratch isn’t for you, you could always consider buying an established restaurant business.

Statistics

You’ll often hear that around 60 percent of restaurant startups will fail in their first year. How would you know if this is, in fact, true? By conducting industry research on the hospitality sector in your region, of course.

Industry research allows you to collate and analyse data and statistics in order to uncover economic and industry trends in establishing your business and also to keep pace with competition during operation. Within Australia you can search the Australian Bureau of Statistics (ABS) online for relevant data. This will allow you to formulate research methodology in establishing and running your restaurant/catering business.

In this way, you will be able to assess key industry drivers. The might be economic indicators — eg. the fact that price increases for restaurant meals and takeaway/fast foods have moved closer to the Consumer Price Index (CPI) meaning that restaurant and takeaway services have less room to add a markup to inflation.

Or, they could be socioeconomic indicators eg. the fact that consumers live increasingly busy lives demands a desire for convenient food, therefore they choose cafe-style meals and snacks at a higher rate. They could also be cultural eg. a rising food culture representing a trend toward high quality gourmet food as supported by the prevalence of cooking shows, such as Masterchef and My Kitchen Rules.

Business Planning

A solid business plan is crucial for any successful restaurant or catering business. It’s even more important when you’re looking for an investor. A business plan allows you to define your concept, summarise your planned organisation and management, draw on market analysis, and to create your product line and forecast your financial projections.

You’ll want to make sure you tailor the contents of your business plan to suit the specifications of the hospitality industry.

Your business plan should include an executive summary, company description, market analysis, business operation, management and ownership — amongst other facets. It might also include a sample menu, service details, design, marketing and publicity, and other features specifically applicable to restaurants and catering.

The Legal Logistics

Business Registration and Structure

The framework for setting up a business in Australia is regulated at the federal level, and will require you deciding your business structure. This will determine your liability, how much tax you will pay, how much control you have over the business and your ongoing costs and paperwork (among other things). You will have to set up an Australian Business Number (ABN) in order to be able to trade under federal law.

The next necessary step is registering your business name, the exception for this is if you are a sole trader ie. you run your business under your own personal name (which is highly unlikely to be applicable to a food service business). Keep in mind that a business name is the title that governs the entity under which your business will trade — it does not allow you exclusive rights to that name.

To ensure your rights to exclusivity you will need to protect your business name with a trademark. You are required to register your business name with the Australian Securities and Investments Commission (ASIC). This attracts a nominal fee.

Licences, Qualifications and Permits

To set up a business within the food and beverage industries requires compliance with various compulsory licences, qualifications and permits. Different rules and regulations apply to different categories of food business. Food regulations are governed by state law, so each region will have a different approach. You will have to contact your applicable state government authority directly.

You will also need to ensure that you understand and comply fully with food safety regulations. You will need to have at least basic food handling training and work within the strict letter of the law.

The national standard is the Australia New Zealand Food Standards Code, and is adopted by all Australian States and territories in their individual application of the Code. This comprises standards for food safety and hygiene, fit-out of food premises and the labelling, composition and advertising of food.

Always ensure you check with your state government department in order to keep up with code revisions and changes. Also, when opening a new restaurant or any new food service premises you will need to check with local council to find out if building approval is required.

Taxation

The goods and services tax (GST) is a tax of 10 percent on most goods and services sold or consumed in Australia. If you run a restaurant business, are involved in any food service operation and/or catering sales, you will need to know about GST. You will need to register your business for GST only if it has an annual turnover of $75,000 or more. Information to assist you with assessing your turnover, and the ability to register for GST online can be found on the Australian Taxation Office ATO website.

• You need to consider Pay As You Go Installments (PAYG) as an option to keep any yearly tax liability under control. This allows you to set installments rates and intervals so that you have planned and budgeted for your tax payment.
• Pay As You Go Withholding (PAYG) is tax that you need to withhold from certain payments made to others, eg. employees, company directors, labour-hire workers etc.
• If you are a business registered for GST you will also need to complete and lodge a Business Activity Statement (BAS). This is in order to report and pay your GST, PAYG instalments, PAYG withholding tax, and any other taxes. You may lodge BAS online or via traditional methods.

It is important to note that from 1 July 2017, restaurant and cafe owners with a turnover of $10 million or less will be transitioned to Simpler BAS reporting. Small businesses that apply for eligibility have the option to register immediately to use Simpler BAS.

The Bottom Line

Profit and Loss (P&L) Statement

A restaurant Profit and Loss Statement (P&L) shows your business costs and revenue during a set period, or otherwise put – your net profit and loss. In simple terms, P&L is a total of all sources of revenue (profit), minus all expenses (cost) related to the revenue. It’s the best way to keep track of your business’s health.

For a food establishment, it comes down to assessing a measure of your profitability in real terms. It sheds a light on where you could increase your restaurant profit margin and reduce expenses, eg. a big expense might be food cost.

P&Ls can be generated at different set time periods — whether yearly, monthly or weekly. For a busy or growing restaurant it’s recommended that you generate a P&L once a week in order to keep on top of your finances. That way if you need to adjust something you can contain the damage and turn the situation around quickly.

A P&L statement works best when customised to your particular business, however they do follow a certain structure and involve several equations that result in percentage values that serve as key indicators of performance. Make sure your P&L is ‘granular’ when completing your statement — that means including specific items as separate lines and breaking things down as much as possible:

• Revenue – This is the amount gained from selling food and service to your customers. There may be other forms of revenue eg. merchandise. Make sure you list each item separately. Break down your food cost and beverage cost (also known as pour costs) into smaller subsets. Calculate your revenue by adding up sales for the given period.
• Expenses – This covers any type of expense such as inventory purchases, kitchen supplies, catering equipment and employee paychecks. The three main expenditures include the cost of good sold, restaurant labour cost, and restaurant operating expenses. These are usually listed as separate line items on the P&L statement. Calculate your expenses by adding up total costs for a given period.
• Prime costs – Prime cost are ‘controllable costs’ and equal the total cost of sales plus all payroll costs including hourly rates, taxes and benefits. Managing these costs is seen as the best and most direct way to increase your restaurant margins.
• Variable costs – Variable costs are expenses that change with production level. These costs will fluctuate according to the scale of production, eg. packaging costs — if more product is sold, packaging cost will rise in line with this.
• Cost of goods sold (COGS) – In simple terms this is a measure of “the cost of the product used to generate sales.” This is a specific breakdown of your expenses and is a sum of all your variable costs accrued when producing your product ie. food. For example, if you used $600 worth of food, paid hourly wages of $2,000, had electrical/gas expenses of $1000, and had other variable expenses of $300, your COGS would be $3,900.
• Restaurant labour expenses – Costs which are associated with payroll. These costs need to be kept under control, more total restaurant labour costs equals less total profit.
• Restaurant operating expenses – Costs which are related to the operation of a business comprising the cost of equipment and resources used by an enterprise in order to maintain its operation. Associated with day-to-day expenses like rent, repair costs, office supply costs etc. Does not include capital costs (costs incurred to set up a business).
• Gross profit – The difference between total sales and the cost of producing the goods or services you sell (COGS). An indicator of overall production efficiency and a key equation used for setting prices and sales targets. To calculate Gross Profit subtract COGS from your total revenue.
• Operating profit – Equals gross profit minus operating expenses. This is profit generated from core operations. Does not include expenses accrued from interest or tax (usually referred to as ‘earnings before interest and tax’ or EBIT).
• Gross margin – Equals a company’s total sales revenue minus its COGS divided by total sales revenue. This is typically expressed as a percentage and is used as an indicator of efficiency — the higher the percentage, the more the company retains on each dollar of sales, this can be used elsewhere eg. to service its other costs/debts. A greater gross margin percentage is always desirable because it means that a smaller portion of revenues is being used on variable expenses.
• Net profit – This is the final and ultimate ‘bottom line’ for your business’. Listed at the bottom of your P&L statement, it is the total amount earned (or lost) after paying all expenses. Net profit equals gross profit minus labour expenses and operating expenses. Relates to the complete picture of your performance — a negative net profit means a business that is failing in the short-term, and will need to be rectified over the long-term in order to survive.

Chart of Accounts

The chart of accounts is a primary tool used for accountancy purposes. It is a listing of all accounts in an organisation, typically used as part of its general ledger and arranged in alphabetical order. Data from a chart of accounts is implemented in order to form aggregate information as part of a company’s financial statements.

The chart of accounts is mostly commonly linked to accountancy software. In this way, it exists as a tool that allows you to classify your transactions and generate accurate reports. It forms the ‘mainframe’ for keeping accounts in order.

Your Accountancy Option

Hiring an Accountant

Accurate accounting and bookkeeping are the cornerstones of any successful business enterprise. With any restaurant business there are so many things to juggle, so managing the bottom-line can become difficult. Often it’s easier and more cost effective to hire an accountant, than it is to do-it-yourself. This is made even more true depending on the scale of your operation.

Hiring an accountant is a proposal that is often legitimated by the economic principle of opportunity cost. This means that if you are better at overseeing your business, managing your people, or your time is better spent elsewhere in general, you should focus on that rather than diverting your time and energy to balancing the books

In short, it would cost you money not to hire a professional. Some people just don’t have the head (and/or the time) for figures, so hiring an accountant means you ensure that everything is dealt with in the most comprehensive and exacting fashion.

Essentially, you are paying for peace-of-mind, and this becomes more important come audit time. Intricate knowledge of tax laws also goes a long way to save your bottom-line, plus accountants are incredibly handy for financial and cash flow concerns, such as applying for loans/overdrafts. They are also great for business advice and can help you to delegate as your business grows.

Outsourcing Services

You have the option of outsourcing your accounting services. This could mean looking to external providers in order to fulfil aspects of accounting and bookkeeping. It could also mean taking advantage of cheaper offshore labour markets in the same way. Some possible negative connotations might be a decreased response time and level of communication, but it will always depend on the outsourcing company on an individual basis as to what you might experience in terms of service.

There may be some aspects of accounting that you trust to outsource, and some that you would rather manage yourself. For example, you may manage invoices and receipts in house, but outsource accountants to take care of reporting. It depends on the scale of your operation, your skill set (and that of your staff) and your ability to manage all aspects of your business without undue pressure.

Software

Whether you hire an accountant or manage everything on your own, it is just a fact that accounting software has become imperative in business for the purposes of expediency. It’s vital for cashflow management because it automates, tracks, records and reports all processes in the one place. It save time, and time equals money.

Badly managed accounts equal a death-knell for your business, so finely-tuned accounting software solutions take the guesswork out of the equation. You can use accounting software for more than just the ‘nuts and bolts’ eg. to create reports in order to estimate menu costs and menu prices, manage stock and also account for all receipts. It will allow you to streamline your approach and give you the ‘technical handle’ on how to improve restaurant sales overall.

Operational Imperatives

Cash Flow

Cash flow is undoubtedly one of the most important things to take control of when running a restaurant, cafe or catering business. Basically, it’s about the cash that you have coming into your business on an everyday basis minus what’s going out in the way of expenses such as what you owe in rent, bills and loans etc.

Limited cash flow means a limited ability to deal with variable costs and uncontrollable factors or emergency situations that can negatively impact your business. If your deep fryer suddenly needs repairs or replacement, or if there is a bad batch of ingredients, you will need adequate cash flow to recover the situation quickly and easily.

Downtimes as a result of cash flow inadequacy result in unstemmed losses for your company. Essentially, if you don’t have cash flow, you put your company at the risk of hemorrhaging money as soon as the next unexpected thing arises. Advice for keeping cash flow ‘out of the red’ is to keep a tight watch on your restaurant margins, not to rely on credit from suppliers (this has the potential to leave you exposed), to keep an emergency cash stash, and to keep inventory low in comparison to your cash flow levels. In essence, don’t spend what you don’t have.

Other options (particularly applicable when you are experiencing long term losses) is to apply for a business loan and/or restructuring your finances.

Accounts Payable

Managing accounts payable is all about keeping your vendors happy. Automated systems (for example Xero) allow you to take control of restaurant bookkeeping all in the one place. Whether it’s paying your catering supplier or your staff, you can input scheduled payments into an automated system — usually via a credit card.

This will allow you to pay bills in a scheduled manner, and on time. Accounts payable can be outsourced or handled in house. Making a decision in regard to this will depend on the scope of your operation, your resources, your budget and your preference.

Invoices and Receipts

Record keeping is so important for any successful restaurant, and it is also your requirement by law. You need a functional system in order to track invoices (including purchase invoices) and receipts. Restaurants often survive on razor-thin profit margins, so losing just one receipt can mean a major headache in the long-run.

Compiling accurate records is an essential process in allowing you to analyse the performance of your business. You can use a paper ledger, but for full-scale operations taking advantage of accounting software is the most prudent approach. There is less room for error, and you can make use of industry-specific technology to keep track of sales and invoices with peace-of-mind.

Banking Reconciliation

Banking reconciliation must be completed on (at least) a monthly basis to ensure your business runs smoothly. This applies whether you do it yourself, or have an accountant at hand. Reconciliation exists as a safety-net, allowing any human errors to be caught before they persist too far. It also allows you to manage any cheques that have not cleared, and to keep track of any incidental undetected losses.

Your People

Payroll

Your staff are the cogs that make up the ever-spinning wheel of your industry. When it comes to your accounting, making sure your employees are paid on time is always a necessity. You need to ensure your wages are paid in line with relevant industry awards (minimum rates of pay). This is part of Australian government regulation, under the FairWork banner.

It is essential to always check your pay rate is current as elements of awards are subject to change (recently the Federal Court handed down its ruling to change certain penalty rates).

Superannuation

Under the superannuation guarantee, employers have to pay superannuation contributions of 95 percent of an employee’s ordinary time earnings when an employee is paid $450 or more before tax in a month and is: over 18 years, or under 18 years and works over 30 hours a week. Check the ATO website for relevant information regarding your superannuation obligations in regard to your employees.

Tracking Time and Attendance

Tracking time and attendance of your staff is critical for your business. Not only does it help you assess the most efficient roster to keep your operations moving, it also helps manage any misconduct and takes care of leave and time off etc. In short, a win-win. Up-to-date software can deliver complete HR solutions to provide all these facets and more, and help make managing your staff that much easier and much less time-consuming.

Your Equipment

Catering Equipment

Your catering equipment is as vital as your staff. Your business cannot function unless there is perfect suction between the two, so investing in high quality equipment is central to a profitable business.

From cooking equipment and refrigeration to food preparation equipment and chef knives, there are a wide range of products available to ensure you operation runs smoothly and can bring your menu to life.

There is an option to lease the bigger equipment pieces, but always look at reputation of a supplier, logistics (when will the items be delivered), the dimensions (how will they fit) and your commercial kitchen design, the standard of quality and efficiency and the individual cost/availability of maintenance and service (especially when it comes to kitchen machinery).

Information Technology Systems

A restaurant point of sale system (POS) forms the ‘brain’ of your restaurant, cafe or catering business. It’s an electronic hub that allows servers to take orders, to relay these on to the kitchen, and to finalise the payment of all transactions. It also stores valuable data regarding sales — this is used for reporting purposes.

POS systems can also allow you to build and update your menu — including menu prices. These systems are integral for smooth communication and exist as a constant point of reference for operations. Make sure you review and compare restaurant POS software in order to find the best fit for your business.

Technological advances are providing high-tech solutions for the hospitality industry. From apps that allow mobile ordering to iPad order kiosks, IT systems are changing the way we do business. You definitely need to be at the forefront of the game when it comes to gadgets and gizmos in order to run a successful food service business.

Advice From The Field

Remaining Competitive

How to improve restaurant sales? Apart from the figures and books, it does come down to remaining competitive and being aware of trends. With a new outlet opening on every corner, it’s so easy to be left behind. Also, review sites (such as Urbanspoon and TripAdvisor) and social media make it so easy for one bad review to impact your continued success.

Consumers expect more, and there is always a new trend whetting appetites and diverting attention, for example “cronuts”, “mermaid bowls”, “craft beer” etc. There is a general feeling toward fresher, more sustainable and fitness-friendly foods and menus that cater to food intolerances.

Make sure you deliver 100 percent on customer service and keep up employee morale and retainment. Get abreast social media marketing and digital promotion. Practice the best and newest methods in offering customers convenient options, for example allowing them to pay the way that they want (‘cash only’ can be a real hassle) and doing your utmost to limit serving wait-times. Always be future-forward. Constantly working hard to improve any shortcomings in your business will save you money over the long-run.