Accounting for Restaurants (#361)
/Restaurant Inventory Problems
The accounting for restaurants is driven by a few characteristics of the industry. One of these characteristics is inventory spoilage, while another one is liquor theft. Because of the possibility of losses in this area, the accounting for it has to be really tight – which is why restaurants use more accounts to track inventory than the typical business. This includes food inventory, liquor inventory, soft drink inventory, beer inventory, wine inventory, and merchandise inventory. The basic concept is that if you store the cost information in more buckets, it’s easier to monitor.
Restaurant Revenue Tracking
And revenue and expense accounts are divided up in the same way, so for example you’ve got liquor sales and the linked cost of liquor sales, so that you can track the margin on each one of these categories. If there’s an unusual drop in the gross margin for one of them, then there’re a number of possible causes that you can investigate.
So. On top of those basic food and drink classifications, restaurants also track revenues in some other areas, which include banquet room rentals, delivery charges, valet parking, and cover charges – it all depends on the type of restaurant. They have to scrape up revenue from every possible source, because they have a lot of expenses.
Unique Restaurant Expenses
Speaking of which, restaurants have a ton of unique expenses. For example, there’s restaurant fuel. There’s the cost of employee meals. There’s also music licensing fees, in case you’re piping in music. And, there’s the cost of the reservation system, such as Open Table – which charges for each reservation made. And on top of that, there are a bunch of basic operating expenses, such as flowers and decorations, laundry and linen, and even the cost of menus. When you see the full range of expenses, you’ll wonder how any restaurant ever earns a profit.
House Accounts
They also have some accounting processes where you might not think they do. For example, they may maintain house accounts for certain customers, which raises the issue of having to bill those customers, and collect from them, and sometimes having to write off unpaid amounts. All of which requires more accounting time.
Restaurant Inventory Count Problems
Now, getting back to inventory. There are some unique concerns. One is the difficulty of just counting the inventory. In most businesses, you just count the number of units on hand, and you’re done. Not in a restaurant. There are so many units of measure, it’s really easy to mark down the wrong one, which completely throws off your inventory numbers. For example, if you have filet mignon, that’s counted by the case. Or, if you have sour cream on hand, that’s counted by the gallon. Or how about bread rolls? They’re counted by the dozen. While a loaf of bread is simply counted by the loaf, even though it has the same ingredients as a bread roll. Go figure.
And then you have the counting problems associated with liquor. It’s obviously quite expensive, so you want to keep close track of it. There are a couple of ways to do this. One approach is to count by the fraction full, which is just a rough guesstimate, such as 20% full. Another option is to count the fill height with a ruler. More precise, but way slower. And, to be really accurate – and really slow – you can weigh each open bottle, and then subtract out the weight of the empty bottle.
Restaurant Compensation Issues
Compensation also presents some unique challenges, since restaurants also have to deal with tips. For example, a restaurant might use tip pooling, where all tips collected are combined and then distributed among the group. Allocating tips can be a real problem, especially when there are lots of employees working each shift, and especially when their start and stop times carry over across different shifts.
Restaurant Fraud
But the big area that I’m reserving the most space for is restaurant fraud. This is a big side effect of some of the other characteristics of restaurants, which are low pay and lots of employee turnover. When this is the case, it’s not that hard for some questionable people to be hired who are really interested in stealing from the business. And there are lots of ways to do that.
For example, there’s the fake walkout. An employee could keep a customer’s cash payment, and then claim that the customer walked out without paying. Or, a server could take full payment from a customer, and then record the sale with a senior discount, and keep the difference. And, of course, you could always void a sale and then pocket the customer’s payment. Here’s another variation – after the customer pays, record part of the meal as being complimentary, such as a free dessert for someone’s birthday. Or, how about selling a gift card without ever recording it? The employee just hands over the gift card and keeps the cash.
And all of that’s nothing compared to what goes on behind the bar. A bartender could pour an unusually large amount of alcohol into someone’s drink, maybe to get a bigger tip. Or, you could sell a drink and then claim that it was returned by the customer. And here’s one that’s really hard to spot. You add a lower-quality liquor brand to a drink, rather than the more-expensive one ordered by the customer, while charging the customer the full price, and then pocketing the difference. Or, how about the reverse, where you add some water to a drink in order to cover for some alcohol that you’ve already stolen? This works best for drinks that don’t change color when water is added, such as tequila, gin, and vodka.
Here's a clever one. Bring in your own bottle of liquor and then pocket the proceeds from it, rather than selling from bottles owned by the restaurant. A tough one to spot, especially when the bottle you’re bringing in matches the one already being sold to customers by the restaurant. Of course, there’s always the reverse approach, where you just steal alcohol from the bar and take it home with you – either for personal consumption, or to sell it on to someone else. And I haven’t even mentioned the obvious one, which is pocketing the cash paid by a customer and never ringing up the sale.
In short, a really imaginative thief can cause major trouble for a restaurant, especially when they’re working in the bar area. Of course, there are controls for this, but they add to the cost of running the restaurant. For example, there needs to be a point of sale system, so that there’s a sale transaction associated with each customer. Another control is to investigate all complimentary meals granted to customers, and especially monitor whether they’re more common with just one server. Or, see if coupon redemptions are unusually high with one server; this person might be using his own supply of coupons to charge against a guest check, and then pockets the difference. Another obvious control is to track customer walkouts by server. If one server is claiming an unusual number of walkouts, there’s an increased chance that he’s actually pocketing their payments. Here’s another one – compare the amount of tips collected by a server to their sales; if the tip percentage seems high, it’s possible that they’re providing free food or drinks to their customers.
And I haven’t even talked about the controls for cash, or payables, or inventory, or payroll. There are just so many ways for a restaurant to lose money. All of this makes the job of the accountant extremely hard, because you have to not only set up and monitor all of these controls, but you also have to examine the data to spot instances of theft – before it gets so bad that the restaurant is driven out of business.