Are you conducting a proper restaurant financial analysis?
A financial analysis of your organization will reveal areas of strength and weakness, allowing you to make proactive decisions that will improve the overall health of the business.
Restauranteurs often get caught up in the many hats they have to wear, and organized books fall to the bottom of the priority list. Below, find three components of a financial analysis and discover how it can improve your operation.
It sounds simple, but reviewing your budget is a quick and easy way to see if your business is on track. Your budget should not only keep you focused on day-to-day operations, but also should help you plan for the years ahead.
What changes will you make to your business this year? What about 5 years from now? Do you have a store that needs updating? Are you planning a remodel or scrape and rebuild? These plans should be reflected in your budget.
How does your operation compare to the rest of the industry? Comparing specific financial metrics and relationships to trends in the industry will help to uncover strengths and weaknesses in your operation.
Monitor these metrics:
- Labor as a percentage of revenue
- Food costs as a percentage of food revenue
- Bar costs as a percentage of bar revenue
- Consider breaking down further into beer, liquor, and wine
- Gross profit percentage after labor and advertising
- Vendor costs
- Rent as a percentage of revenue
Reviewing your income statement period over period will help you measure the health of your operation. Simple practices like using consistent accounts for similar expenses each period and having the right amount of detail in your financial statements contribute to having comparable financial statements.
By analyzing the relationship of revenues, costs, and expenses to each other and over time, you can begin to optimize cash management, improve cash flow, and better scrutinize operating costs. Plus, if you want to apply for a loan in the near future, showing P&Ls that go back as far as three years will be important. Accurate and timely financial statements are necessities to complete a proper financial analysis.
Closing a period’s financial statements within two weeks of period end allows for proactive resolutions to problem areas.
Below are specific factors that impact financial statement accuracy:
Reconcile your cash accounts within a week of period end. Knowing where your cash balance stands is imperative to decision making.
Credit Card Expenses
What kinds of charges are you placing on your credit cards? Do you have personal expenses charged on your business credit cards? Separating work from personal is an important first step to ensuring your financial statements accurately reflect your operation. Also, ensure that credit card charges are included in the proper period. Consider using your credit cards for predictable, recurring expenses.
The timing of cash receipt and food sales is unpredictable when gift cards are utilized. Properly accounting for outstanding gift card balances will help to predict cash flow and properly state liabilities.
How often do you take inventory? Studies show that restaurant managers don’t reconcile inventory as often as they should. Mismanaging inventory can be a costly mistake and lead to inaccurate cost of goods sold. Try to take inventory once a period or more.
If you have employees who make more than $20 a period in tips, it’s your job to collect their earnings in a written report. The IRS outlines the employer’s responsibilities in terms of reporting tips and the importance in doing so.
What is your debt-to-equity ratio? Are you properly accounting for the interest portion of your debt payments? Make sure you’re actively monitoring the loan principal portion and interest portion of your debt payments.
The treatment of leases differs depending on characteristics of the lease. Some leases should be expensed as paid and accounted for on an organization’s financial statements while others are treated similar to debt and are included on the balance sheet. Misclassifying leases can have a substantial effect on an organization’s financial statements.