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Restaurant Accounting Guide

Donna Fuscaldo
Donna Fuscaldo
Senior Finance Writer
business.com Staff
Updated Jul 01, 2022

Accounting software, POS systems and inventory trackers can all help with your restaurant's accounting processes.


The pandemic wreaked havoc on restaurant owners, who had no choice but to pivot to takeout, delivery and online ordering to survive. It was a tall order, given that the United States lost 10.2% of all restaurants by the end of March 2021 because of the COVID-19 pandemic. 

The ones that survived adapted to the new normal, which meant overhauling their accounting, from how they tracked inventory to the way they staffed. It is still a work in progress as COVID-19 cases continue, labor shortages intensify, and business costs increase. In an uncertain environment, keeping accurate financial books is even more important. Preserving cash is essential, which is where restaurant accounting comes in. 

What is restaurant accounting?

With restaurant accounting, small business owners track and analyze sales, cash flow, inventory and the expenses associated with running a restaurant. With restaurant accounting, you document all the financial transactions to help you track performance, stay on top of expenses and forecast for the future. Without restaurant accounting, it’s harder to predict the supplies you need or the staff you require. It can even tell you if a menu item is priced appropriately. All this has a direct impact on your bottom line. Restaurant accounting is a necessary ingredient for success.

Editor’s note: Looking for the right accounting software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

Why is restaurant accounting important? 

Restaurant accounting has many benefits. From improving financial management to enhancing planning and forecasting, here are all the reasons why restaurant accounting is so important: 

It improves financial management. 

To be a successful restaurant owner, you need to have a clear picture of all the money coming in and going out. You have staff to pay, rent to make, supplies to purchase and a host of other expenses. Without restaurant accounting, you’re apt to make mistakes or, even worse, run out of cash. Accounting gives you a bird’s-eye view of all the financial information you need to run your operations as efficiently as possible. 

It creates better cash flow. 

Cash flow is extremely important to restaurant owners and needs to be protected at all costs.The last thing you want to do is not make payroll because of cash flow mistakes. With restaurant accounting, you track how much cash the business is bringing in and how much is going back out in a given period. Armed with that information, you can make smarter decisions for your restaurant, which helps preserve cash flow. 

It streamlines inventory. 

Without restaurant accounting, it can be difficult to accurately track inventory and costs of goods sold. But with it, you’ll know how much you’re paying for inventory down to the ingredient level, how much you are currently spending, and current and past purchase orders. If you use accounting software, it can be integrated with your restaurant’s POS system, which makes it even easier to track how much menu items cost. The better you track inventory, the less food waste you’ll have, not to mention fewer frustrated customers because you’ve run out of menu items.

It helps you set smart prices.

To run a profitable restaurant, you have to set your menu prices above the cost to make the dish. Without restaurant accounting, you won’t know the exact dollar amount and thus how to price it accurately. Through accounting, you can come up with the cost of goods sold, which can help you set the price and determine your profit margin per dish. 

It enhances forecasting and planning.

To plan for the future, it’s often helpful to look at the past. You can’t do that without accounting. Through restaurant accounting, you’ll see the results of your operations and your financial position. You can look at how sales fared in weeks, months and even years past. 

“As we head into winter months and seasonal periods for the hospitality industry, there are several tactics you can consider for your restaurant,” Ben Richmond, country manager at Xero, told business.com. “Are you optimizing the seating in your outdoor dining space? Can you improve your table turnover? … By taking a look at these aspects of your restaurant operations, you might consider setting up online reservation systems, 90-minute table bookings, hiring more staff or introducing loyalty programs.”

Bottom LineBottom line: In the current business environment, restaurant owners can’t afford to overlook proper accounting. Without it, you won’t have an accurate view of your profitability, nor will you be able to set adequate prices and protect your cash flow.

What are the accounting specifics to track for restaurants? 

Every type of small business should use accounting methods to stay on top of operations, but some are specific to restaurants. 

  • Cash flow statements: Knowing what cash is coming in and out is vital to your business’s health. By tracking your cash flow weekly, you’ll be able to take action before you run into a money crunch. “Cash flow should always be top of mind for your restaurant operations,” Richmond said. “Forecasting different scenarios can help your restaurant think about seasonality and managing through both busy and low periods. Knowing where your cash flow ebbs and flows … will help you make sure you can make any changes to have the cash flow on hand to support you through these different periods.”

  • Tips: To maintain accurate payroll taxes and balance sheets, restaurant owners have to track the amount employees are tipped and whether they are cash- or paycheck-based. Accounting for tips can also save you money. “There is a very substantive tax benefit, called the FICA tip credit, which can be claimed on the state tax return,” said Joseph Needelman, senior tax advisor at 1-800Accountant. “It could be $50,000 to $100,000, depending on the size of the restaurant.”
  • Vendor credits: If a vendor doesn’t deliver everything in your order or food is spoiled or fails a quality control review, the vendor should give you a credit. You need to account for these vendor credits to avoid overpaying for goods and services. Keep any paperwork documenting the vendor credit to avoid supplier conflicts.



  • Food costs: This is another important aspect of a restaurant business to track. If you are not on top of your food costs, it could hurt your profit margins. That is particularly true in the current environment, where inflation is high and rising. To calculate your food costs for any given item, divide the cost of preparing the food item by the total sales from it. 
  • Prime costs: This is the total cost associated with your labor and costs of goods sold. It includes paying waitstaff, hosts, chefs, dishwashers, managers and everyone else. The prime costs also include payroll taxes, benefits, materials and supplies.
    • Labor + Costs of goods sold = Prime costs 
  • Overhead costs: From rent to insurance, overhead costs are the fixed expenses necessary to run your business. 

“The key to success in a restaurant business is keeping control of your costs,” Needelman said. “You want to keep your payroll at certain levels typically 28% to 30% of sales revenue. If you can’t control your costs, you won’t have a profitable business. It’s pretty much as simple as that.” 

FYIFYI: There are tons of restaurant-specific third-party apps that you can sync with most accounting software. There are apps to manage invoices, food costs, labor and more. In our review of Xero, we found that it offers hundreds of integrations.

What are the accounting methods to consider for your restaurant? 

When it comes to accounting methods, restaurant owners have two choices: They can adopt the cash-basis or accrual accounting method. The size of your business and the amount of inventory you need will dictate which one is right for you. 

Cash-basis accounting 

With cash-basis accounting, revenue and expenses are recognized only after money is exchanged. It records the sale when the cash is in hand and the expense when it is paid. The cash-basis method is popular among smaller restaurants with little inventory. It isn’t suited for restaurants that have a lot of inventory or pay vendors weeks after receiving supplies. This accounting method doesn’t account for any deferred payments to vendors, which means you won’t have an accurate view of your financial position. 

Accrual-basis accounting 

With accrual accounting, you record the revenue and expenses at the time the transaction takes place. Money does not have to change hands. Costs of goods sold are recorded when the inventory is used, not when the vendor gets paid. This method gives you a more accurate view of your finances. You know how much money is coming in and going out. Since both accounts payable and accounts receivable are recorded with the accrual accounting method, you’ll easily see the restaurant’s profitability. 

Bottom LineBottom line: Accrual accounting gives you a more accurate view of your financial situation than cash-basis accounting. This will help you protect your cash flow and avoid mistakes.

How can accounting software help?

The features of accounting software streamline a lot of the operations restaurant owners spend time entering manually. The popular ones are cloud-based and automate everything from sales to inventory. Restaurant-specific platforms track menu items, staff, costs of goods sold and inventory. Most of the vendors we reviewed use a subscription pricing model. Prices range from $5 to $60 per month. Among our best picks, the following offer a lot of restaurant-specific accounting features. 

Zoho Books

Zoho had restaurants in mind when it made Zoho Creator. The app, which works in Zoho Books, has a host of features and functions restaurant owners will find valuable. Take its menu tool, for example, which lets you analyze your menu performance, breaking it down by time, day and customers. Then there’s the delivery feature, which lets staff track and update the status of each order in real time. When reviewing Zoho Books, we were pleased to learn that you can get notifications when inventory is low or ingredients are expiring. That is a big timesaving feature. 

QuickBooks Online

Intuit’s QuickBooks Online is popular accounting software that offers tools for restaurants. With the software, you can track income and expenses, and collect, report, and pay sales tax quickly. QuickBooks makes it easy to run reports on your profits, analyze performance and forecast. When reviewing QuickBooks Online, we found the ability to automate bill approvals to be a particularly handy feature. 

FreshBooks

FreshBooks is another popular accounting program that has a lot of features geared toward restaurant owners. Take its integration with your business bank account and credit card: Every time you purchase supplies for your restaurant, it will be automatically recorded, making it easier to track your expenses. FreshBooks’ integration with Gusto through the FreshBooks Gusto app simplifies payroll. We found in our review of FreshBooks that it offers robust inventory tracking tools as well. 

Now more than ever, restaurant owners need accurate accounting of their finances. Without it, they could face cash flow problems that destroy their business. Restaurant accounting is a key ingredient in success, and accounting software makes it easier by automating and streamlining many manual tasks. 

Pamela Stevens contributed to the writing and research in this article.

 

Image Credit:

DragonImages / Getty Images

Donna Fuscaldo
Donna Fuscaldo
business.com Staff
Donna Fuscaldo is a senior finance writer at business.com and has more than two decades of experience writing about business borrowing, funding, and investing for publications including the Wall Street Journal, Dow Jones Newswires, Bankrate, Investopedia, Motley Fool, and Foxbusiness.com. Most recently she was a senior contributor at Forbes covering the intersection of money and technology before joining business.com. Donna has carved out a name for herself in the finance and small business markets, writing hundreds of business articles offering advice, insightful analysis, and groundbreaking coverage. Her areas of focus at business.com include business loans, accounting, and retirement benefits.