How to Understand Restaurant Accounting without Being an Accountant
Does restaurant accounting make you feel like you're 10 years old, sitting at your school desk and it was the first time you were asked to solve for X? Can you remember the feeling? Like, this has got to be a foreign language! For so many, all these years later, they still struggle to speak this language. Restaurant accounting can throw you for the same loop, and like algebra, it can be learned well enough to pass the class, meaning you may not be able to be a restaurant accountant, but you will be able to read your financial statements and use them to run your business. Stay with me, and I’ll break restaurant accounting down into its most simple form so that you'll be able to make accounting work for you.
What if I told you that eight out of 10 restaurant owners don't understand the basics of restaurant accounting? Would you believe me? Heck, if you're one of them, there's no need to bury your head in the sand and hide. You're not alone.
I'm going to simplify restaurant accounting to help you get over any fear you may have. I'm going to break it down into three pieces:
- Balance sheet
- Profit and loss statement
- General ledger
Let's start with the balance sheet. On one side you have assets and on the other side you have liabilities. For instance, you may own the building, but really, the bank owns it. When your broadband distributor drops off food and you haven’t paid for it, you now have food, but the purveyor owns it until you pay for it. You have assets and liabilities. Who owns what? Going back to the building, as you pay down your balance on your building at some point in time, you own a portion of your building and that's something called owner's equity. Again, the thing about a balance sheet is the stuff and who owns the stuff should balance. They should be the exact same amount of money. And that's what a balance sheet is. I often compare the balance sheet to a polaroid picture. You take a picture, wave it in the air until it develops, and you have a picture of the health of your business. It's the health of your business.
Taking that metaphor a little further, your profit and loss statement is the in between. You have your picture at the end of last month and one at the end of the current month. What happened in between is the profit and loss statement. It is how much money you made or lost. Now it's important to understand it doesn't always tie to your cash flow. You have things like amortization, depreciation, interest expense, all of which are not true cash flow items. For instance, if you buy a piece of equipment, the government says, “Hey, you spent $20,000 on it, but you are going to write off equal monthly amounts of that over the next five years for the use of that that item.” This means you may be out $20,000, but you've got this $1,000 payment that goes in and that's all you show for expenses. So don't tie your profit and loss to how much money you should have in the bank. It is truly how much money you made or lost to pay your taxes.
But again, to simplify things, if we look at this and say, here's a picture in time, the balance sheet, and here's a picture in time another balance sheet, the profit and loss statement in between, that's the moving picture. That's the movie showing what happened every single day from broad line distributors dropping off product and your team putting it in the kitchen, prepping it and selling it to customers walking in the door, giving you money, people clocking in, clocking out. It’s literally step by step by step, everything that happens. You can see what happened in between those two pictures in time, as if you were watching a movie. That's what a profit loss statement is.
The general ledger is the next step. If the balance sheet is a picture in time, and the profit and loss statement is a movie, then guess what your general ledger is . It’s the script, the line by line by line. As I mentioned, we had the broad line distributor show up and drop off $3,000 in product, but $2,500 was food. Other items could be paper, janitorial, small wares, or equipment on that same truck. And so that has to be put in the right bucket. You may have payroll, but we had servers and busters and hosts and prep cooks and dishwashers and line cooks and barbacks and bartenders, managers, salaried and hourly. You get the picture. It makes sure that line by line by line, what was said, what happened, when you watched the movie?
When you really think about, this accounting thing, it's a pretty simple picture in time. It’s the health of your business from one picture to the next, the movie of what happened in between and the line by line script that was followed.
I'm going to tell you one last piece about this. If you truly want to understand that, you've got to have the right script, meaning the right way to put that script together. That's your chart of accounts.
To further your knowledge of restaurant accounting, I want you to watch this YouTube clip, entitled Restaurant Accounting Chart of Accounts. It is important because I walk you through the step by step on where your chart of accounts should look like. While there is no such thing as a wrong chart of accounts, they can be laid out in a very specific way that when you read your financials, they mean something to you so you don't have to call your account and say, “I don't understand what this number is.” If you tell your accountant exactly what goes in each one of those line by line items, you always know what the numbers reflect.
Now, if you want to deep dive into what the most successful restaurant owners know about their accounting, I've got one more resource for you. Watch or listen to episode 22 of my podcast, Restaurant Prosperity Formula. This one is titled “Restaurant Accounting to Know to Run a Successful Restaurant,” where my good friend and founder of The Largo Group, a restaurant accounting firm, Anne Gannon, and I pull back the curtain and reveal what you need to know to succeed.
If you would like to learn how to own a restaurant that doesn't depend on you being in it to be successful, watch this free video course that teaches you three key principles to running a successful restaurant. If you're ready right now to make some serious changes in your restaurant, you can also book a 60-minute call with me where we talk about your challenges and figure out exactly what is holding you back from having a restaurant that doesn’t depend on you being in it to be successful.
Be sure to visit my YouTube channel for more helpful restaurant management video tips.
