Glossary
Explore essential restaurant industry and accounting terms, along with key formulas, to enhance your understanding of common terminology and build your foundation of financial management.
A set period of time that a restaurant utilizes to report its finances; this period is often three, four, six, or twelve months. A twelve-month accounting period begins on April 15th, which is tax reporting day. Simply said, quarterly reports are four-monthly summaries of a restaurant’s operations.
The straightforward restaurant term in question refers to the financial obligations your restaurant has towards its creditors. Payables encompass the outstanding amounts for goods or services that remain unpaid, essentially representing pending bills. These financial obligations are recorded on the Balance Sheet and denote the total sum owed at a later date. Examples of accounts payables encompass amounts owed to suppliers, tax authorities, credit card companies, or loan providers.
In restaurant terminology, this stands in stark contrast to Accounts Payable. Accounts Receivable refers to sums owed to your business that have not yet been settled by the customer. Put simply, it represents ‘money owed to a company by its debtors.’ Instances of this include Wholesale Accounts or House Accounts.
What belongs to you! An asset refers to a resource owned by a company with future economic value, quantifiable and expressible in dollars. Assets encompass various items such as petty cash, inventory, kitchen equipment, computers, furniture, and other significant acquisitions that contribute value to your business. These assets are generally recorded on your balance sheet at their cost or a lower valuation.
You may monitor your progress toward your goals week over week with a Budget vs. Actual. As the budget serves as your guide to success, it’s crucial to identify areas where you’re meeting expectations and where improvements can be made within your operational scope. The absence of this tool makes it challenging to adapt to unforeseen circumstances and sustain a consistently profitable business. Without it, there’s a higher likelihood of encountering cash flow challenges, stemming from uncertainties about the timing of significant purchases and potential miscalculations in tax payments.
Consider a restaurant’s balance sheet as the primary “dashboard view” providing a comprehensive overview of your financial status. Comprising assets, liabilities, and equity, a company’s balance sheet is aptly named because the sum of assets must equal the combination of liabilities and equity.
Liabilities + Equity = Assets
Essentially, it serves as a snapshot of “What You OWN vs What You OWE” at a specific point in time.
Reading Your Restaurant Balance Sheet: A Guide for Operators
One of the most important parts of owning a restaurant, or any small business for that matter, is understanding your cash flow. Simply put, cash flow is the amount of cash coming in versus the amount of cash going out of your business on a daily, weekly, and period basis. Cash flow indicates actual changes in cash, as opposed to accounting revenues and expenses. It also takes into account what you own. Think of the inventory on your shelf and what you owe – such as bank loans.
The cash inflows and outflows of your company. Where your money came from and where your money went.
In the context of a restaurant, a Chart of Accounts is a systematic listing of all the financial accounts used to categorize and track transactions related to the restaurant’s income, expenses, assets, and liabilities. It provides a structured framework for organizing financial information, making it easier to manage and analyze the restaurant’s financial activities.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for a restaurant is a measure of its operating performance and profitability. It represents the restaurant’s earnings before accounting for interest expenses, taxes, depreciation of assets, and amortization of intangible assets.
In the context of a restaurant, EBITDA provides a snapshot of how well the core business operations are generating profit, excluding certain non-operating expenses. It is often used as a key financial metric to assess operational efficiency and profitability, making it easier to compare the financial performance of different restaurants or the same restaurant over different periods.
In a restaurant context, equity refers to the ownership interest or residual interest in the restaurant’s assets after deducting its liabilities. It represents the portion of the restaurant’s value that belongs to its owners, whether they are individuals, partners, or shareholders. Equity is a key component of the restaurant’s financial structure and is calculated as the difference between total assets and total liabilities on the balance sheet.
Federal Employer Identification Number (FEIN), or Employer Identification Number (EIN) is a unique nine-digit identifier assigned by the U.S. Internal Revenue Service (IRS) to businesses and other entities for tax purposes. It is used to identify a business entity when filing tax returns, handling payroll, and engaging in various financial transactions with the government. The FEIN/EIN is similar to a social security number but is specifically designed for businesses and organizations.
Federal Unemployment Insurance, business expense associated with Payroll. Federal Unemployment Insurance (FUTA) is a payroll tax expense that employers in the United States incur to fund the federal unemployment benefits program. It is a business expense associated with payroll and is separate from state unemployment taxes. The funds collected through FUTA contribute to the funding of unemployment benefits for workers who lose their jobs.
Food cost management (also commonly referred to as Operations Management) is the process of controlling and optimizing the expenses associated with acquiring, preparing, and serving food and beverages in a food service or restaurant business. The primary objective is to maximize profits by minimizing costs while maintaining the quality of menu items.
Food cost percentage is a financial metric used in the food service and restaurant industry to assess the profitability and cost efficiency of menu items. It represents the proportion of total revenue that is spent on the cost of food ingredients and is calculated using the following formula:
Food Cost Percentage Formula:
Beginning Inventory + Purchases – Ending Inventory / Total Food Sales
The General Ledger (GL) is a comprehensive accounting record that provides a complete summary of all financial transactions of the business. It serves as the primary accounting record where various transactions are categorized and recorded, providing a detailed and organized overview of the restaurant’s financial activities.
General ledger coding involves assigning specific codes or identifiers to financial transactions, such as expenses and revenues, before recording them in the general ledger. This systematic coding facilitates organized categorization for various aspects like food costs, labor, and utilities. General ledger export refers to the process of exporting this coded financial data, often done through accounting software, for further analysis, reporting, and overall financial management. This ensures accurate record-keeping and aids in decision-making for restaurant operations.
Restaurant GL Coding & Export - Say Goodbye to Stacks of Paper Invoices
The total sales amount of a restaurant, excluding taxes, expenditures, and other factors. Net Sales, while useful in estimating income, gives a more accurate view of a restaurant’s financial situation.
Gross Profit After Prime Costs refers to the amount of money left over after deducting prime costs from the total revenue. Prime costs typically include the direct costs associated with producing and serving food, such as the cost of ingredients (food and beverages) and direct labor costs (wages for kitchen staff involved in food preparation).
Gross Profit After Prime Costs = Total Revenue − Prime Costs
A Group Purchasing Organization (GPO) is an entity that leverages the collective buying power of multiple businesses within the industry to negotiate discounted prices and favorable terms with suppliers. By aggregating the buying needs of its members, a GPO helps businesses, such as restaurants or hotels, access cost savings on various goods and services, including food, beverages, equipment, and other supplies. This collaborative approach allows smaller businesses to benefit from the economies of scale typically enjoyed by larger enterprises.
Dining Alliance: Independent Restaurant Group Purchasing Organization
Consolidated Concepts: Multi-Unit Restaurant Group Purchasing Organization
A Human Resources Information System (HRIS) is a software solution that streamlines HR tasks and processes. It manages employee data, payroll, scheduling, and other HR functions, helping restaurant businesses efficiently handle workforce-related activities and improve overall HR management.
The greatest way to obtain a real picture of your restaurant’s true usage is through inventory management, which is similar to the DNA of your establishment. The first step in every crucial restaurant management process is inventory. The amount of all the food items, nonalcoholic drinks, beer, wine, liquor, etc. should be included in your inventory.
A restaurant liability is an obligation a person or business has, typically financial in nature. Prepaids and accruals, gift cards, credit card tips payable, credit cards, and due to/from accounts are a few good examples.
Long-term debt in a restaurant represents the amount of money borrowed for an extended period, usually more than one year, to finance business operations. Owner’s equity, on the other hand, is the residual interest in the restaurant’s assets after deducting liabilities. It reflects the owner’s investment in the business and accumulated profits. Both metrics contribute to the overall financial structure and stability of the restaurant.
The profitability or loss following the deductibility of expenses from revenue is known as net operating income, or NOI. Sales of food and beverages may not be the only source of income; other sources include catering, lodging rents, retail, and more.
Net Operating Income Formula:
NOI = Gross Operating Income – Gross Operating Expenses
Net sales in a restaurant refer to the total revenue generated from food and beverage sales after deducting discounts, returns, and allowances. It represents the actual income derived from the primary business activities, excluding factors that reduce the total sales amount.
The aspect of payroll that operators have the most control over is operational payroll. The hourly and tipped positions that comprise the front of house (FOH) and back of house (BOH) staff are the payroll categories that this covers.
Owner draws or investments are documented here. Sorting this according to the name of the investor or owner is the best approach.
Your restaurant payroll percentage is a measure of the portion of your revenue that funds labor cost. Regardless of job code (cooks, managers, servers, etc.) all hourly wages and salaries go into your cost of labor; when that labor cost is divided by your revenue, you’ve calculated your payroll percentage.
Restaurant Payroll Percentage = Total Payroll Costs / Total Revenue
Power of attorney in a restaurant grants someone the legal authority to make decisions and take actions on behalf of the restaurant owner or business entity. It could include tasks such as signing contracts, managing finances, or handling legal matters. It’s a part of onboarding paperwork.
Operators can evaluate metrics and pinpoint areas of opportunity using audits and benchmarks using Period End Reviews. A true grasp of one’s financial situation empowers operators to make proactive business decisions, increase operational effectiveness, and eventually boost profitability.
Boost Financial Accuracy and Clarity with Back Office Bookkeeping - Period-End Financial Close
A Profit & Loss Statement (P&L) in a restaurant is a financial report that summarizes the revenues, costs, and expenses incurred during a specific period, typically monthly or annually. It shows the restaurant’s net profit or loss by subtracting total expenses from total revenue, providing a snapshot of financial performance.
Your biggest out-of-pocket costs are included in your restaurant prime cost. This covers your personnel costs (payroll taxes included) as well as your cost of goods (food and drink). The first two categories on your profit and loss statement are these ones.
Prime Costs = Total COGS + Total Labor
What is Prime Cost, and How Will it Keep My Restaurant Profitable?
To calculate your prime cost as a percentage of sales, just divide your entire prime cost by the total amount of sales. Understanding this figure enables you to ascertain the position of your prime cost relative to the industry average. But more significantly, this enables you to make comparisons with your own past data to make sure you’re improving over time and optimizing earnings.
Prime Cost as a Percentage of Sales = Prime Cost ÷ Total Sales
POS stands for Point of Sale in a restaurant. It refers to the system or software used to process transactions, including sales and payments, at the moment and location where a customer makes a purchase, typically the checkout counter or cashier area.
Revenue in a restaurant refers to the total income generated from its primary business activities, such as food and beverage sales, catering services, and other sources of income related to the restaurant’s operations.
Recipe costing in a restaurant is the process of calculating the total cost of ingredients and other resources required to prepare a specific menu item. It helps determine the actual cost of producing each dish, aiding in pricing decisions, profit analysis, and overall cost control. In simple terms, it is calculating the cost of a single item on the menu.
Keep Plate Costs Up to Date with Back Office Recipe Costing Software
