Article

How Prospecting Your Restaurant's General Ledger Can Provide a Wealth of Business Information

In accounting, the general ledger (GL) is used to record all of a company's transactions. Within it, transactional data is organized into assets, liabilities, revenues, expenses and owner's equity. It contains four parts: the chart of accounts, financial transactions, account balances, and accounting periods.

Balancing a general ledger involves subtracting the total debits from the total credits. For a general ledger to be balanced, credits and debits must be equal. This is accounting 101. That said, the importance of this record-keeping system is often lost on businesspeople.

A restaurant's general ledger (GL) can tell management a lot they need to know about their business. Yet many restaurant owners don't look at theirs very often, and even those who do may not be getting everything out of it that they could. And some aren't even sure exactly what it is. (Don't be those restaurateurs.)

"The current POS and software worlds have no real idea of the power of the GL," says consultant Rudy Miick, a 40-year industry veteran and founder of The Miick Companies, LLC in Boulder, Colorado. "Many, in my experience, call me back and ask, 'What is a GL? What do you mean GL?' A lack of good accounting and strong GL and P&L (profit-and-loss statement) formatting and tracking is one reason for the 80%-plus failure rate for our industry, and sadly there is no excuse."

"A general ledger is like a resume," explains James Mallios, a partner in Civetta Hospitality, a New York City-based restaurant company that owns and operates Amali on the Upper East Side of Manhattan, Bar Marseille in the Rockaways, Juniper at The Vanderbilt in Westbury, Long Island, and Calissa in the Hamptons.

"It gives you the facts about a candidate, but you still need to conduct an interview to get the full story. For example, a general ledger will tell you your sales but won't tell you who the customers are, their dining preferences, or how to increase your check average and boost sales. It can identify where to improve, but not how to improve."

If you have been reading this magazine for a while, you know that our editorial staff implores operators to review their P&L no less than weekly. That said, the GL can provide detailed insights your P&L doesn't provide. For example, you might find a sudden increase in expenses during a certain period. In that case, it becomes necessary to review the general ledger and dig into the detail of each recorded transaction to locate the issue. It might be an accounting error. It might be an unexpected increase in inventory. There are a number of possibilities. Sure, it takes some time and effort to review dozens of journal entries, but it is necessary if you hope to have reliable financial statements.

"I am a big fan of telling our team that the numbers tell a story," says Dave Willner, a veteran of Union Square Hospitality Group in New York City who now serves as national director of food and beverage for Sun Communities and Sun Outdoors. "It is up to us as operators and leaders to understand that story, and to respond accordingly. However, it is also up to us to understand that the numbers aren't the only story."

Willner feels it is "far too easy" to look at one's P&L or general ledger "and announce that we are great because of strong numbers, or that we are weak because of poor numbers, and I have found that many restaurant operators tend to start there. That isn't necessarily the case. Numbers have nuance, numbers have volatility, and most importantly, numbers do not solely reflect the people that interact with them."

Tasty Numbers

Restaurateurs naturally feel proud of their food, but not as much about their operating numbers.

"Unfortunately, a lot of people think that making good food is the most important thing in the restaurant industry, and of course the quality of your product is critical," says Ken Heck, the Managing Partner of the family-owned-and-operated Chinglish Cantonese Wine Bar, an upscale kosher restaurant in Las Vegas, Nevada. "But at the same time, many people in business, not just restaurants but business in general, fail to understand where they are in the general ledger, and good accounting is critical."

Heck doesn't feel that a restaurateur necessarily needs to look at his general ledger every day. "You look at it a few times; when you pay your bills, obviously, you have to sure the money is there. But every month you need to be updating your P&L and every week you need to be looking through your books."

One of the reasons Heck checks his books weekly is to protect against theft. "Look, if you do it monthly you will find theft, but that's a month later. No one's going to be able to remember; no one can look that far back down the road. But just last week everyone remembers."

Heck examines his ledger frequently "not necessarily because I expect someone to steal from me," he explains, "but because I like to see that things are happening the way I expect. There's a phrase heard a long time ago, that you have to inspect when you expect. So, if we had a very busy Friday and Saturday, I expect to see that Friday and Saturday's numbers are very good." Heck considers it important that every owner under- stand the usefulness of his general ledger. "I know a lot of people are so busy working their restaurants, especially now with labor shortages, that they don't have the time and they put it on the back burner. I think that's a mistake."

There is nothing worse than making a data-driven decision with inaccurate or incorrect data. Managing the system and reconciling often is very important in order to make intelligent, data-driven decisions. If the data is wrong, out of date, or inconsistent, then a decision could potentially mirror those faults.

Especially now, when operators are facing shortages and just trying to stay in business, it is important that they know which one of their restaurant's activities gives them the highest return on investment, Heck feels. "I have talked to some people who say, 'Well, I am just closing on these four nights of the week because I just don't have enough staff.' Then I talked to another business owner who showed me that even with less revenue on a Tuesday night they have as much profitability as they do on a Friday night."

"GL is important when you need to review each account in detail," notes Emily Zhou, CPA, senior accountant at Fiske & Co., a forensic accounting firm in Ft. Lauderdale, Florida. "Also, when going through the transactions to verify they are classified in the correct account."

In addition to the general ledger, restaurateurs need to keep close tabs on their profit and loss report, says Zhou. "It is less detailed information, but it is a better view to indicate the net income for a period of time." They also need to use their balance sheet "to check if you have enough cash to cover the expenses and liabilities."

Too many restaurant owners expense the costs of equipment and premises improvements when they should be capitalized, says Zhou. (Note, however, repair and maintenance costs incurred to restore the condition of an asset are properly expensed in the period incurred.) Another common mistake is not keeping track of the year-end inventory balance.

Zhou recommends using the "class" function for identifying multiple restaurants under the same owner. "It is easier to review the financial status – net income – for each restaurant. It can be very detailed, enabling the owner or manager to break down the sales into separate categories like food, beverages, wine, service charges, etc. It helps them understand how they did for each category."

The GL Scorecard

When transactions are posted accurately and timely, the general ledger can be used as "a scorecard of how your business is running," says Gary Edelstein, C.P.A., a Bellmore New York-based accountant and partner in Stuart, Edelstein, Linderman & Co., whose areas of specialty include the food and hospitality industry. "It can help estab- lish what areas of your restaurant are working as planned, and which need additional attention." The most important thing a ledger does for a restaurant operator is give him the ability to see how his business is functioning financially in relation to his goals.

"Start with the items that are easiest to work on and will have the greatest impact on the business financially," Edelstein advises his restaurant clients. "Usually that would be your prime costs, costs of goods sold, and labor." A general ledger might be able to detect that something nonfinancial may be af- fecting the business by comparing various categories over time, he suggests. "It may require additional investigation into these nonfinancial items, such as customer satisfaction both in-house and with delivery service, restaurant clean- liness, staff morale, etc."

Aside from the GL, Edelstein has found, a great restaurant needs open communication and feedback from its staff and customers. "A good restaurant must always keep its finger on the pulse of what is and isn't working, often through feedback from those we serve and work with."

To use the general ledger as a tool for running the business effectively, the figures must be posted accurately and timely. "In addition, it needs to be reviewed with the owners and management on a frequent and consistent basis so they can take swift and appropriate action," Edelstein says.

Restaurateurs go wrong, adds Edelstein, when they fail to use their general ledger as a tool. "The figures will tell you what needs more attention." Too many operators "have not taken the time or had the proper guidance as to how to use the figures as a tool to better understand how their businesses are doing."

Edelstein goes further, insisting that it is impossible to overestimate its value, but cautions that a general ledger can sometimes be misinterpreted, "which is why it needs to be reviewed by people who understand what the figures are telling them."

GL Nuggets

A deeper dive reveals specific ways a GL can help a restaurant survive and thrive.

I am a big fan of telling our team that the numbers tell a story, says Dave Willner, a veteran of celebrated restaurateur Danny Meyer's Union Square Hospitality Group in New York City who now serves as national director of food and beverage for Sun Communities and Sun Outdoors. It is up to us as operators and leaders to understand that story, and to respond accordingly. However, it is also up to us to understand that the numbers aren't the only story.

Your GL sheds light on problems that may have escaped a restaurateur's notice. Looking at your ledger can show chronic problems with purchasing and potential theft, says Marilyn Schlossbach, an Asbury, New Jersey-based restaurateur, caterer, chef and chocolatier whose properties include Langosta Lounge, The Sparrow at WCP, and Chinese Fish House. "Looking at a monthly analysis can show shifts due to seasonality and local events. Looking at the numbers regularly provides insight into patterns both positive and negative."

A ledger should also include weather and the effects of Covid on staff, Schlossbach advises. "We are in a new world, and cost analysis and community effect are critical in keeping a handle on your business. Our costs are up 30% to 40% due to Covid's effects on staffing and supply, so every cent counts."

Ledgers also offer an objective view of an operation, something that can sometimes be lacking. "Numbers do not lie," Schlossbach says flatly. "They cannot be manipulated to give you different answers, but they can be studied to help you shift and grow. Looking at your weaknesses is crucial to shifting as the world shifts around you. Looking at your strengths helps you to lead your team and attract new talent."

A GL can show trends, cash flow, or costs against budget. It allows a restaurant to dig into expenses and understand why line items on its P&L are up or down, says Jay Bandy, president of Goliath Consulting Group in Norcross, Georgia. "If you don't understand the components that make up a line item, the GL is where you go. You can't understand what a P&L is telling you without a GL."

As for how to best use the numbers, Willner feels, trend analysis is the most important part. "While we have insight and opinions on all aspects of our business, I always encourage the operators to control what they can control – specifically the food cost, alcohol costs, paper costs, and labor costs."

Restaurateurs must identify and react to trends rather than snapshots of a particular moment in time. "Our business revolves around variable commodities, so a business shouldn't panic when certain numbers are too high, nor should they celebrate when numbers are low," Willner says. Instead, they should look at each of these major categories to see how they are comparing to the months and quarters before.

If a business aims for 30% food cost, says Willner, month one could be 74%, month two at 63%, and month three at 55%. When the quarter ends the business may not have hit its goals, and may not be profitable. "However, as one digs deeper, they can see the story that these numbers are telling us – that we have a team in place that is focused on the numbers and is beginning to understand how to drive the business towards the desired goals. This is what I mean when I preach that the numbers tell a story but aren't the entire story."

Garbage In, Garbage Out

Ken Leetch, senior vice president of operations for Mr. Brews Taphouse in Mesa, Arizona, says it is "imperative" that a restaurant's ledger is kept current, consistent and accurate. "There is nothing worse than making a data-driven decision with inaccurate or incorrect data. Managing the system and reconciling often is very important in order to make intelligent, data-driven decisions. If the data is wrong, out of date, or inconsistent, then a decision could potentially mirror those faults."

Heck's advice is to keep the general ledger close at hand. "Set it up right away and keep it up to date, because once you get behind on your bookkeeping, it becomes this thing that's really difficult to catch up on. Again, the further you get away from it, the harder it is to recall." If time elapses, Heck continues, a restaurateur may see a transaction come through on his GL, bank ac- count, or credit card and have no recollection of what it was, "so you can't account for it. If you really want to know what is going on – if you want to keep your fingers on the pulse of your business – you need an up-to-date general ledger, and you need to be keeping it frequently."

Civetta Hospitality's Mallios agrees, noting that "Timely data entry is critical." Restaurant operators go wrong "when they are not reviewing it on a weekly or monthly basis." Shanny Covey, co-owner and general manager of Robin's Restaurant in Cambria, California, feels that the most important thing a GL can do for an operator is "tell you what accounts you are overspending on so you can make plans to strategize about correcting these expenses." As food and labor are the largest costs, she adds, "those would be the most important, in addition to fixed costs like rent."

Covey considers it important to be knowledgeable about how revenue is spent. "You also want to know the ratio of your assets to liabilities to know the health of your business."

Miick says that "the first thing the GL tells us is this: is this operator disciplined? Is this team disciplined? Is this operator running at a profit, or a loss, or simply driving cash flow in any sort of organized fashion? Is this operator awake to generally accepted accounting principles – and even more so, is the bookkeeper or accounting firm guiding this operator?" Any of these issues, he adds, "tells a potential investor, astute leader, confidant or consultant if this operator is using this GL or the formatting of numbers as an actual tool."

The need for exactitude is great, Miick emphasizes. "If the numbers are not tight or clean, the operation is 90% or more likely to not be being run well. The GL and P&L are great indicators of someone pretending or actually being a pro, and effective as a leader." Operators are also more likely to miss opportunities than take every advantage possible. "What it can tell you is what needs to change; it does not do well at all in how to change."

Reading the Tea Leaves

But can a general ledger tell a restaurant's future, as some believe? Actually, it can, in that it records what has happened up until now. As Heck wisely points out, "It's a matter of those who fail to study history are doomed to repeat it. The general ledger is the history and the current events of your restaurant. If you are not aware of what is going on, you are either going to continue to make mistakes or you are going to miss opportunities."

The ledger can, indeed, tell a restaurant's future, agrees on Covey ominously, "if you don't act on the knowledge it provides." Edelstein believes that what the figures can tell an owner is how his business is trending and what may need further attention. "In that way, perhaps, you can create your own future."

KNOW THE DIFFERENCE BETWEEN BUSY AND PROFITABLE

Being busy isn't always the best indication of a restaurant's success. For example, on Friday and Saturday nights, restaurants that serve alcohol tend to do well. "But at the end of the day," Heck points out, "you have to know where your margins are and what activities translate into profits and productivity."

An illustration of this is St. Valentine's Day, which for a great many restaurants is perennially a bustling night. "But if you look at the general ledger, at the P&L, you may see that the revenue doesn't show it; you have a lot of activity but not a lot of revenue," Heck says. Since the holiday is celebrated by couples, the dining room ends up being nearly all two-tops. "It takes just as much labor to serve a two-top as it does a four- top, and it takes up more space. Most of your tables are set for four, with just a few twos, so since every four-top is now a two-top, you are never efficient."

Heck suggests restaurant owners look at their ledgers immediately after an occasion like Valentine's Day "with what actually happened still fresh in your mind. Your general ledger, if you are looking at it regularly, helps you to translate the activity into productivity."

PEOPLE FIRST

Many are adamant that adherence to the general ledger, while commendable, should never be the primary focus of a restaurateur. "This is a people business," says Dave Willner, a veteran of Union Square Hospitality Group in New York City who now serves as national director of food and beverage for Sun Communities and Sun Outdoors.

"We need to support, engage, and motivate our people to provide caring, honest hospitality. That may not be happening, even with a shining GL, and yet it might be the reality with unimpressive GLs, as well." The numbers "pay our salaries and are incredibly important to our survival," but the business must understand what these numbers are saying, and that they allow the operators to have "other narratives that can color the nuance of the trends, opportunities, and execution of their daily operations."

What a ledger cannot tell an operator about his restaurant, Heck emphasizes, is the morale of his workforce. "To run a good restaurant, you definitely need accounting in place. It tells you when things are missing. It tells you if there is theft. It tells you if you have tipped correctly. It tells you the effectiveness of your marketing. It tells you a lot of very, very important things – but at the end of the day your staff are the pointy end of the spear. These are the people who are interacting with guests, and in this day and age it's not food. People can get incredible food delivered to their houses, or they can make it. You've got to create an experience, and if your staff isn't doing that, to me, that's critical. If you are full service then yes, your staff has to be creating an experience – and your general ledger can't tell you about that."