How to Manage Restaurant Finances

Before you can open the doors to your restaurant, you need a plan in place for how to manage restaurant finances. It’s far less romantic than writing a restaurant menu or designing your space, but it’s just as crucial as having great food. And restaurant finances can be complicated—there are lots of things to consider so you don’t cut into your margin or overorder.

We’ll review how to manage restaurant finances, including understanding your cost of goods, margins, and other important formulas. We’ll also review tools and tactics for managing finances for a restaurant effectively.

Understand Your Costs

You can’t successfully open a restaurant without a clear idea of how much money it’ll take. Knowing your costs is key to managing your restaurant finances. This particularly applies to your cost of raw materials and your cost of labor. There are other costs to factor in, too, such as overhead (rent, utilities, equipment rental payments, etc.).  All of these costs will go into the equations you use and the budget you create to effectively manage your restaurant finances.

Fixed Costs vs. Variable Costs

Remember, too, that some costs are always changing. There are two different kinds of costs to be aware of—fixed and variable costs.

• Fixed costs are expenses and costs that will not change as you do business. Fixed costs include overhead (for instance, your rent doesn’t change no matter how much food you’re serving) and payroll (you have to pay your staff the same amount, no matter how many customers you do or don’t have).
• Variable costs are costs that you have the power to control. Your food cost is a variable cost, since you can choose to order more or less of it, and choose to order it from one supplier or another. And your own salary could even be a variable cost if you choose to make it flexible based on your earnings.

Overall, you want to have a sense of your startup costs as well as your monthly costs. These estimates will change, but they’ll provide a good basis to begin.

Know the Financial Basics

As you’re building the plan to manage your restaurant finances, you want to have a sense of some of the most important equations and concepts in financial management. You don’t have to be an accounting whiz to do these calculations and get a sense of where you stand. Of course, if you feel completely out of your element, consider hiring a bookkeeper or accountant to help you manage your books.

Cash Flow

Cash flow is one of the most important—if not the most important—metrics to pay attention to while you’re managing restaurant finances. That’s because cash flow is the best indicator of the health of your business. It shows how money is flowing into and out of your business. In order to remain solvent, you’ll need more cash flowing in than out.

You’ll want to fill out a cash flow statement to help you get a sense of your cash flow. And remember that knowing your cash flow isn’t just for your own edification—it’s a very important metric for small business lenders if you’re going to be seeking financing.

Cost of Goods Sold (COGS)

Your cost of goods sold, or COGS, is hugely important to get a sense of what everything actually costs to produce and serve to your customers. Your COGS includes every element it takes to get a dish to your customers—both the food and the labor.

It’s important to know how to calculate COGS because you won’t be able to have a real sense of your profit margin for each dish without it. COGS is also very important in learning how to price your restaurant menu, since what you’re going to charge your customer is generally at least 20% to 30% more than your COGS.

Profit Margin

Your profit margin shows you how much more you make for every dollar you invest in your business. Profit margin can be looked at with regard to your business as a whole to see how well you’re operating, but may be most useful when looking at your dishes on an individual level to make sure you’re both pricing them right and that it’s not too expensive to create a certain dish relative to what customers want to pay.

For instance, if you’re making an extra $0.50 for every dollar you make, that’s a 50% profit margin. 

Gross Profit

Your gross profit is how much you make after you take out the cost of producing your menu items. This is important to see how you’re pricing your menu and how much money your restaurant is making from your food.

Net Income

Net income is the amount you make after you’ve deducted all of your expenses. This is generally measured monthly. It reflects how much income you have after you’ve paid for things like utilities, payroll, food costs, etc. You’ll want to make sure you’re tracking this month over month to make sure your income is going the direction you want it to go. You’ll use the gross profit number to calculate this.

Understand Where Your Financing Is Coming From

Now that you have a sense of what’s important in handling your money, you want to make sure you know where your financing is coming from to pay for these costs. Hopefully, your restaurant will soon start generating a profit. But, in the beginning, you’ll likely need some investment or loan capital to get you off the ground.

Here are some things to consider:

• Investments: If you have an investor in your restaurant, make sure you’re clear about how much money is coming in, and whether it’s coming in a lump sum or in installments. Also, make sure you know the terms: Are they taking an equity stake, or is there an interest payment they’re expecting if you have to return the money?
• Small business loans: Many restaurants opt for small business loans to help with a variety of costs, such as equipment or payroll. Popular restaurant loans include working capital loans, lines of credit, and equipment financing. If you go for a small business loan, make sure you know your terms well, including when payment is due and how much it will be.

The last piece of the puzzle is knowing how much your investment or loan will cover of your startup costs and monthly costs so you don’t get caught flat-footed without enough capital to cover your operations.

Choose Your Management Platforms

A key piece of successfully managing your restaurant finances is choosing the right software to make that as easy as possible. Three important pieces of that are your point of sale system, business accounting software as well as your payroll software.

Point of Sale System

A point of sale (POS) system is crucial to process your customers’ payments. It includes both hardware to complete the transaction as well as the software that processes the payment. The best POS platforms also keep metrics and analytics for you that can help you track payment trends, inventory, which dishes are most (and least) popular, when you have the highest volume of sales, and more.

You’ll make your decision on a POS system depending on how many features you need as well as what you’d like your hardware to look like (for instance, some POS hardware enables customers to pay in a handheld device right at the table).

Popular POS systems include:

• Toast (a favorite for restaurants)
• Clover
• Square
• Intuit QuickBooks POS

Accounting Software

Great business accounting software is the cornerstone of managing your restaurant finances well. Accounting software helps you track your income, expenses, and manage taxes too. By tracking all of your financial information in one place and having the option to automate many of your tasks, you can be sure nothing falls through the cracks.

You’ll decide on your accounting platform based on your needs, including whether or not you want to be able to send invoices directly from the platform, track mileage, and even if you want your software to integrate directly with your POS.

Popular business accounting software includes:

• QuickBooks Online
• Xero
• FreshBooks 

Payroll and HR Platform

Even if you start your restaurant with only a few employees, a payroll platform can save you major time and lots of headaches. A good payroll platform will automate your payroll, enable direct deposit, and automate processes come tax time.

Many payroll platforms will also include some basic HR tasks such as onboarding and benefits too, so consider your needs as you pick your platform. Another important piece to note is that some payroll platforms calculate their monthly fee by how many employees you have, so take your growth into consideration.

Popular payroll platforms include:

• Gusto
• Zenefits
• ADP
• QuickBooks Payroll

4 Essential Restaurant Financial Management Tips

Now that you have a sense of what’s involved in how to manage restaurant finances, here are some tips to optimize your implementation of the process.

1. Manage Your Costs

The amount you’re spending on things including overhead, supplies, equipment, and more are the foundation of whether or not your restaurant will succeed. Get a very good sense of what’s fixed and what’s variable, and keep a keen eye on those variable costs to make sure they’re as low as possible. If one goes up, do your best to offset it by lowering another cost so you can stay within your budget. Also, try to get the best price possible for fixed expenses, like negotiating your restaurant lease. The fastest way for your restaurant finances to get away from you is if you stop paying granular attention to how much cash is leaving your business on a daily basis.

2. Keep a Daily Watch

Every day, you should be in the weeds with your finances. This means doing inventory at the end of every day so you don’t over-order—and so you can determine opportunities to order in bulk and save money. Keeping a daily eye on things, such as which dishes sell best and when, can also help you adjust prices quickly to keep your margins high and your net income higher.

3. Stick to Your Budget

There’s always a temptation to spend beyond a budget. And although there are certain situations in which going beyond your budget is a good idea—for instance, investing in something with a very high probability of return—do your best to consider your budget a strict guideline for what you can and can’t spend. That’s especially true in the beginning when you’re not totally familiar with the patterns of your daily, weekly, or monthly finances.

4. Have a Contingency Plan

Finally, be prepared if things don’t go exactly to plan. You might have emergency costs (say, your boiler dies) to take care of, or a crucial raw supply skyrockets due to global shortages. Any number of things can happen, so have a strong sense of the kind of wiggle room you have in your current financials to steel against major issues. You can work with a financial professional, such as an accountant, to help you figure out these things.

Additionally, you might want to have a business credit card or business line of credit waiting in the wings to help you pay for unforeseen expenses—and even help you seize opportunities.

The Bottom Line

Once you have all of your elements in place, including your financial management platforms, your costs, and your sources of funding, you’ll want to come up with a plan for how to manage your finances on a daily, monthly, quarterly, and yearly basis. This includes putting together a comprehensive business budget and figuring out who will be responsible for what. Consider bringing a bookkeeper in if your strength isn’t in accounting—or so you can focus your attention on making your restaurant the best it can be.

Ultimately, managing restaurant finances doesn’t have to be hard if you have a good handle on your costs and a good system in place to execute on your plans.