Financial Red Alerts Restaurant Owner Should Be Aware Of

Financial problems can quickly lead an unexperienced restaurant owner to closure and bankruptcy. The industry profit margins are often very tight, so it can be difficult to overcome some of the financial issues if they’re not taken care of in time.

A few of the red flags that new and seasoned restaurant owners must be aware of are:

1. Poor or No Accounting System

Many owners know how to run a kitchen, but they have no idea how the accounting side of the restaurant business operates.

The right accounting system ensures that the owner has a better grasp of the establishment’s financials and puts financial controls in order to better manage their business. If a restaurant does not have the right accounting system in place, a lot can go wrong with no means of being able to track key financial issues.

Owners should work with an accountant and get professional accounting help as needed.

2. Outdated Menu Profit Margin Analysis

Update item costs on a menu regularly. You won’t get an idea of your true expense percentages until the cost of all food items on the menu is updated.

Restaurant cost percentages are one of the biggest accounting red flags you’ll come across.

Software can help you maintain a complete restaurant operating expenses list.

3. Not Tracked Operating Expenses

When operating expenses exceed gross sales, it’s one of the biggest red flags in financial statement analysis. There are occupancy costs for restaurants and general percentages of cost that owners can follow.

Around 62% to 68% of every dollar goes towards:

• Food / beverage purchases
• Labor expenses

You’ll consider these “Prime Costs.” If the Prime Costs exceed 68%, it is going to be very difficult for an eatery to stay in business. When you have control over all of these costs, it’s easier to make key adjustments to stay in business.

4. Excessive Inventory

Too much inventory leads to excess food waste. And there’s an even bigger issue: lower cash flow.

If you’re buying too much food, you’re causing your cash flow to suffer. The general rule of thumb in a restaurant finance outlook is to keep seven days of inventory in stock. You can keep even less inventory in certain niches, but you don’t want to keep more than a week’s worth of inventory.

5. Lack of Inventory Accountability

Inventory accountability is a major part of a business’ operations. It’s difficult to know if your inventory is being stolen or discarded if you don’t have a firm control of the inventory. Restaurants should conduct the following at the end of each week:

• Count
• Cost

A lot of establishments will do this on a monthly basis or before stocking up on inventory. You can use this data to:

• Reduce excess spending
• Detect food theft
• Detect food waste

You need to have restaurant profit systems in place, but you need to also be able to interpret all of the data coming in and out of your restaurant. When you can properly read all of your financial statements and understand them, you’ll be much better positioned to manage a successful business.

Source: https://mcdonaldpaper.com/blog/restaurant-financial-mistakes