Can Restaurant Owners Increase Profitability by Monitoring and Understanding the Financial Numbers?

The other week I stopped at a restaurant to have a bite to eat only to find that it was about to close its doors. I was somewhat surprised since the restaurant had a terrific menu, good quality food and excellent service. In speaking with the owner I discovered that the restaurant did not have any systems or processes in place for monitoring its financials. The owner never knew where he stood financially on a daily basis, weekly basis or monthly basis.

When we speak with owners of restaurants that failed, we often find this is the case. The restaurant has failed to implement an effective system for monitoring the financials. As with other cases, this owner assumed he was making money because the restaurant was always full.

Critical to the success of any business is the ability of a company to generate cash and make a profit. A restaurant must implement a great sales and marketing plan that fosters customers' loyalty and generates new business. It must also have a system in place to manage the flip side of the profit equation - the expenses. To effectively manage and control expenses a restaurant owner or manager must be able to breakdown and identify expenses in a timely manner so that adjustments can be made rapidly.

The key component to understanding the relationship between sales, expenses and profitability is an effective Management Information System. In this case the system refers to procedures or a process put into place to gather financial data from the registers, journals, ledgers and subsidiary ledgers and compile it into useable reports. Reports can then be used by the manager for monitoring and controlling the facility. A management information system need not be extremely complex or sophisticated; however it does have to be accurate. The reasons for having an effective management information system include:

1. Low margins
Income before taxes for a restaurant is typically between 4 percent and 8 percent. Any minor changes to costs can have a major impact on profitability. For example if the food cost in a full serve restaurant increases by 1 percent of sales, income before taxes is decreased by 25 percent (4 percent to 3 percent). If undetected for any length of time the net result is a significant loss for the restaurant owner.

2. Volume of sales transactions
An effective system is required to summarize the volume of transactions processed by restaurant into a meaningful report.

3. Susceptibility to theft
Because of the significant number of cash transactions that take place on any given day in a restaurant and the inventory that is on-hand at a restaurant, theft can become common place. An effective system allows the owner or manager to monitor high risk areas and quickly identify problems.

When implementing a system the primary objective is to gather and convert the accounting data into useful information for the manager. The following are common key characteristics of an effective system:
- Accuracy
- Timeliness
- Simplicity
- Usefulness

By converting accounting data into meaningful daily reports, weekly reports and monthly financial statements a manager can analyze operations and make adjustments accordingly. Critical to proactively managing a restaurant is to have daily and weekly reports.

Daily Reports
Daily reports need not be complicated but do have to provide the manager with some basic information such as a daily cash report so that the days cash receipts can be reconciled with sales. This allows the manager to monitor any cash shortages or overages by balancing the day's sales to cash deposits. Because most restaurants now have some sort of POS system they can run numerous reports; Breakdown of sales for specific items, sales by server, restaurant sales per hour, etc.

Weekly Reports
Weekly reports provide the manager with some insight into the trend of a restaurant's performance so that adjustments can be made. If negative daily or weekly trends are not identified until monthly reports are available a trend, that can be corrected easily, may result in a major problem due to the large number of daily transactions.

Monthly Financial Reports
Traditional financial statements, at minimum, should include the balance sheet and income statement. They may also include other financial reports such as general ledgers, bank reconciliation statements and earning reports. These reports compiled by a CPA are critical to:
- Monitoring the restaurant's profitability.
- Meet reporting requirements of banks and outside investors.
- Validate the in-house weekly/profit and loss reports.
- Quickly identify possible theft/bookkeeping irregularities.

Implementing these financial processes and reports allows a restaurant to more effectively manage its expenses and make corrections quickly resulting in higher margins for the restaurant.

A little more profitability might even pay for an extra meal out each week.