Ah, accounting — one of the best things about running a restaurant!
Just kidding — we know it sucks.
But effective accounting is essential to restaurant success. It ensures you’re on top of your financial performance, and that you’re storing all the information you need to comply with local laws and regulations.
If you’re struggling to wrap your head around the bookkeeping basics, don’t work. In this article, we cover everything you need to know about restaurant bookkeeping. We outline the different types of financial information you need to track and the reports you need to complete to ensure you have a solid understanding of your company’s financial health.
So let’s get started.
What do you need to track for seamless restaurant bookkeeping?
Before we get to the different types of financial reports, let’s walk through some of the key costs you should track to ensure your restaurant bookkeeping is up to scratch.
Cost of goods sold
A restaurant’s cost of goods sold (or COGS) is the total cost of all the ingredients and materials you use to make a menu item. This includes everything that goes into producing the item, like the cost of ingredients, packaging, and other materials used to prepare the food — but it doesn’t include indirect costs (such as labour costs and overhead expenses). Understanding COGS is crucial for effective bookkeeping for restaurants, as it helps you assess profitability and make informed financial decisions.
Here’s how it works:
Beginning inventory + purchased inventory – ending inventory = COGS
Let’s say the cost of your current inventory is £1000 — this is your beginning inventory. You purchase more ingredients for the upcoming week, which costs another £1000 (purchased inventory).
At the end of the week, you have £500 of inventory left on your shelves. This means that your total COGS is £500.
Tracking COGS is essential for your restaurant bookkeeping because gives you an accurate picture of how much you spend on each menu item. This means you have better control of your restaurant’s costs, allowing you to make informed decisions about menu pricing, vendor selection, and overall inventory management.
It’s also crucial for calculating your gross profit. Why? Because to determine your gross profit when doing your restaurant bookkeeping, the COGS is taken away from your sales revenue. To calculate your net profit, you then deduct payroll, rent, bills, and equipment costs.
Gross profits
A restaurant’s gross profit (GP) margin indicates the profitability of a dish or your overall menu before accounting for operational costs, labour costs, taxes, and other expenses.
It’s the difference between net sales (gross revenue minus returns, allowances, and discounts) and the COGS and multiplied by 100 to get a percentage.
Imagine that your total sales revenue is £50,000, and your COGS is £20,000. This means that your total gross profit is £30,000 (sales revenue minus your COGS).
Now, here’s how to calculate the GP margin:
(£30,000 / £50,000) × 100 = 0.6 × 100 = 60%
Your GP margin is a key indicator of your restaurant’s financial health and efficiency in managing its food costs. The ideal GP margins vary depending on different factors, like outgoing costs, restaurant location, and so on.
To find your ideal gross profit margin, you need to:
- Review your current margins to get a baseline
- Figure out what the ideal margins look like and whether they’re achievable.
The higher your GP margins, the better your business is performing. So how do you increase your GP margins?
Using integrated restaurant technology is a good place to start.
With Nory, for example, you can integrate POS systems like Toast and Vita Mojo to streamline operations, track sales in real-time, reduce waste, and improve forecasting accuracy. This helps you make better purchasing decisions, improve stock control, and ultimately increase your GP margins.
Inventory costs
These are the costs you pay to buy inventory, including raw materials and supplies. It also covers the expense of storing, handling, and managing the inventory, as well as potential losses from spoilage or waste.
Here are some of the common restaurant inventory costing techniques:
First-in, first-out (FIFO)
FIFO assumes that items purchased first are the first to be sold or used in production, making it a useful technique for perishable goods like fruits, vegetables, and dairy products.
Here’s how it works:
- You mark inventory with the date it arrives and store it behind your existing stock.
- Chefs then use the older items at the front that are likely to perish sooner.
- It minimises food waste and ensures that you use fresh ingredients before they expire.
Last-in, first-out (LIFO)
LIFO assumes that your most recent inventory items are used first. It’s less common in the restaurant industry because of the amount of perishable goods, where using FIFO makes more sense.
However, it can be helpful during periods of inflation, as it reflects higher current costs — although this isn’t always good. It can distort inventory figures on your balance sheet when inflation is high.
This is why it’s banned in some areas under the International Financial Reporting Standards (IFRS) and restricted under Generally Accepted Accounting Principles (GAAP).
Weighted average costing (WAC)
WAC calculates the average cost of all your inventory, regardless of when it was purchased or how much it cost. It’s a simple approach to inventory costing, and it can be useful if you have items with similar characteristics and costs that are difficult to differentiate (like herbs and spices).
But the WAC method can make it hard to get an accurate estimate of your finances. For example, when you have large price variations, the WAC method overlooks them.
Nory success story 🥳 Discover how CUPP improved its inventory management and reduced food waste by 60% with Nory!
“Nory CPU has streamlined how our franchisees and stores order to us and how we get information back to them. If things are out of stock or if we need to update something, it’s quick and easy to do it.” – Paul Tanner, Managing Director at CUPP
Labour costs and payroll
Restaurant labour costs are the wages, salaries, overtime pay benefits, and payroll taxes paid to all your restaurant staff — from chefs and waiters to kitchen staff and management. Payroll also includes bonuses, overtime pay, and other compensation-related expenses.
Accurately tracking and managing payroll is essential for restaurant success. Not only does it keep employee morale high (which is crucial for retention), but it also ensures that you comply with laws and regulations around taxes, payment dates, salaries, and so on.
If you’re looking for a simple and streamlined way to handle restaurant payroll, take a look at Nory Pay. Our new payroll feature allows restaurant operators to:
- Approve shifts in the app in a matter of clicks
- Automate the entire payroll process, ensuring staff get paid the right amount on time
- Issue payroll slips to staff for their records (and your own)
- Streamline employee registration in a single system
- Handle tricky payroll deductions, like pension contributions
Find out more about using Nory Pay!
Nory success story 🥳 Find out how Roasting Plant Coffee reduced labour costs by 18% in just two months of working with Nory.
“I can see where our general managers are saving a huge amount of time making their rotas. It frees up their time to focus on other crucial aspects of their role.” – Kallie Kocourek, Vice President of the UK Market at Roasting Plant Coffee.
Operational costs
Operational costs (also known as overhead costs) are the expenses necessary to keep your restaurant running on a day-to-day basis. It includes:
- Rent/mortgage payments
- Equipment costs
- Utility bills
- Maintenance and repair costs
- Insurance
- Marketing costs
- Any other non-labor expenses that are not directly tied to food production.
Proper management of these costs ensures that you have enough cash flow to cover your day-to-day expenses and avoid cash shortages. It also helps you create accurate forecasts and budgets for your restaurant.
Think about it — when you know exactly what your operational costs are and when they’re due, you can create accurate forecasts to track your revenue, sales, and profits.
Some food for thought 🤔 Use a restaurant operating system like Nory to track all your outgoing costs to create accurate forecasts in real-time!
Sales and revenue
This might seem like an obvious point to make, but it’s important to include sales and revenue in this list for your restaurant bookkeeping. Why? Because you must track these metrics to measure your financial performance.
Understanding your sales and revenue figures shows you exactly how much food you’re selling to customers. Without this information, you’ll struggle to accurately calculate your COGS, GP margins, and so on.
The real challenge with tracking restaurant sales and revenue is doing it in real-time. You need instant access to this information to make fast and informed decisions to boost your bottom line.
This is where Nory can help. Our AI-powered business intelligence features track live performance so you can forecast sales, plan labour schedules and optimise your inventory to increase profit margins.
3 essential financial reports for successful restaurant bookkeeping
When it comes to restaurant bookkeeping, there are certain reports you must have on your radar. Let’s take a look at what they are.
1. Balance sheet
A restaurant balance sheet provides a snapshot of your financial position at a specific point in time. It shows:
- What your restaurant owns (assets like equipment, inventory, or cash)
- What you owe (liabilities, like debt, outstanding wages, or mortgages)
- Your equity (the net worth of the business after all liabilities are deducted from the assets)
Hot tip 🔥 Take a look at Toast’s balance sheet template to see how best to structure this information.
All of this information helps you understand the financial stability of your restaurant, painting a clear picture of your liquidity and ability to meet your obligations.
It’s also useful if trying to secure investment from lenders or investors to assess. You can present the balance sheet to demonstrate the financial health of the restaurant, which can boost your chances of securing an investment (provided it’s in good financial health, of course!).
Side note💡If you’re looking to secure funding or investments for your restaurant, take a look at Nory Capital. Get funding approval in 24 hours, access flexible repayment plans, and manage your funding applications from a central location.
2. Profit and loss statement
A profit and loss statement (also known as a P&L report or income statement) outlines your revenue, expenses, profit, and losses. It shows how profitable you’ve been during a specific period, like your financial quarter or fiscal year. If your profits aren’t where they should be, you can use the P&L to identify where and how to make changes to get back on track.
The structure of a P&L varies, but a simple statement (known as a flash P&L) has the total revenue on the top line. Then, it subtracts all your restaurant’s running costs (like rent and bills), plus other operating expenses like staff wages, cost of ingredients, and so on. The bottom line shows your net income (your earnings after subtracting all these outgoing costs).
P&L reports can also include the following information:
- Operating expenses
- Gross profit (the amount you make after the cost of making and selling your food)
- Gross profit margins
- Cost of goods sold (COGS)
- Interest payments
- Depreciation values
- Insurance costs
- Income types (dine-in/takeaway)
- Taxes
- Accounting and legal expenses
- Advertising and marketing costs
Creating and managing P&L reports can be overwhelming. With fluctuating costs and a wide variety of expenses, it’s not always easy to ensure accurate P&L reporting as a restaurant operator.
To make it manageable, use a platform like Nory to manage all your P&L reporting. 😎
With our restaurant management system, you can see live P&L data, line by line. You don’t need to wait until next month to see your performance, so you can make quick and informed decisions about how to improve your bottom line.
Find out more about the power of linking your restaurant’s P&L statement to in-store operations!
3. Cash flow statement
A cash flow statement outlines all the money that comes in and out of your restaurant. It covers:
- Your cash inflow. This includes sales revenue from food, drink, merchandise, and any financial assets.
- Your cash outflow. Operating costs, employee wages, unexpected expenses (like equipment repairs), and payments to your vendors and suppliers are a few examples.
- The beginning and ending balance for the given period. This is usually an accounting period, like a financial quarter.
The statement shows if you’re making more money than you’re spending. In other words, it highlights if your restaurant is profitable, which is crucial to understand for your restaurant bookkeeping. For example, if you’re spending too much on inventory and not selling enough, a cash flow statement brings this to light. Then, you can step in and make improvements.
It also shows how much cash is available at any given time. If you need to replace a key piece of equipment, a cash flow statement will tell you how much money you currently have to spend.
Cash flow statements are another valuable document for potential investors. It’s another insight into your financial health, showing the strength and longevity of your restaurants. Investors need this information to decide whether to invest.
Similar to the other reports, managing cash flow effectively requires live insights. Without real-time updates, you’re using out-of-date information to make important decisions about your bottom line. But with real-time insights? You can make informed, smart, and strategic decisions about spending to boost profits.
This is where Nory can help.
Our restaurant management software provides real-time visibility for tracking and analysing cash flow across multiple venues. Access sales data, key financial metrics, and predictive analytics to make informed and profitable decisions!
Hot tip 🔥 Use Toast’s free template to create an effective cash flow statement.
Get on top of your restaurant bookkeeping with Nory
Curious to find out more about how Nory can enhance your bookkeeping efforts?
Let’s take a look:
- Record daily sales in real-time. Track sales through your POS and link this information seamlessly with Nory. This means you can keep a close eye on performance, gross profit margins, and COGS. If things aren’t going to plan, you can immediately step in and make changes.
- Streamline accounts payable. Manage all outgoing costs and invoices in Nory. Build better relationships with suppliers by ensuring everything is paid correctly and on time.
- Handle employee payroll. Use Nory Pay to increase accuracy in payroll calculations and control payment processing. Improve the employee experience by speeding up the payroll management process.
- Access live P&L reporting. Nory provides a live P&L for each venue. No need to wait until next month to see your true financial performance. Your teams now have complete confidence in the operational decisions and the financial impact they are having in real-time.
Want to give it a try? Book a chat with the team today to get things in motion.
FAQs about restaurant bookkeeping
Should a restaurant use cash or accrual accounting?
For your restaurant bookkeeping, you can use either, but the best option depends on its size and financial complexity. Cash accounting involves recording transactions when money changes hands, making it easier for smaller restaurants to track cash flow and performance. Accrual accounting records income and expenses when they’re earned, providing a more accurate financial picture. It’s often better for larger restaurants that require a more detailed financial analysis.
What is the biggest expense in a restaurant?
Labour costs are typically the biggest restaurant expense when it comes to bookkeeping for restaurants. They can account for around 30-35% of total revenue, which is why it’s so important to manage labour schedules effectively. If you over-schedule staff, you’re taking a big chunk out of your profits.
Use a system like Nory to create optimised labour schedules, ensuring you have enough staff to meet demand without overscheduling and spending too much on wages.
