Article

How the Road to Effective Financial Management is Paved with an Accurate General Ledger

It's oft-repeated that the "devil is in the details". It's one of those sayings that's certainly true if you're running a business, particularly an independent restaurant operation. And one of the details of running any business, including your restaurant, is having a working general ledger (GL). And the road to accurate and effective financial management is paved with the GL and a properly set up "chart of accounts" (COA). The COA is a financial organizational tool that provides a complete listing of every account in the general ledger of a company, broken down into subcategories.

The Devil is in the details. Your income (profit-and-loss or P&L) statement and balance sheet provide you, your partners, and lenders important information on a weekly and quarterly basis. Yet regardless of your good intentions, if general ledger (GL) entries are incorrectly categorized – or missing – the accuracy of the other financial statements go straight to… well, you know.

It seems every accountant has a preferred method for setting up COAs for their clients. The setup can vary a lot depending on the type of business and how much detail is required for the particular business. That said, an independent restaurant chart of accounts should be restaurant specific.

Restaurants are simply not retail businesses. Restaurants combine elements of a storage facility, manufacturing plant, and retail outlet with fast turnover of product. That's why many accountants actually enjoy having a restaurant or two in their client portfolio: they're kind of fun with so many different activities (and maybe they get a free meal or discount once in a while).

You might not be an accountant, but you are not on your own in terms of understanding how restaurant accounting works. RestaurantOwner.com offers a great many accounting articles for setting up independent accounting programs. Jim Laube, president of RestaurantOwner.com, and Barry Shuster, editor of Restaurant Startup & Growth magazine, co-edited The Uniform System of Accounts for Restaurants. As a Restaurant Owner.com member, you can download a COA consistent with restaurant industry standards. (See "The Uniform System of Accounts for Restaurants" and "RestauarantOwner.com Restaurant Chart of Accounts" below for more information.)

Available in MS Excel format, the RestaurantOwner. com COA can be downloaded and used in all of the current accounting software programs. Beware of using an 'out of the box' standard chart of accounts from the software companies as they don't really contain the category nuances that make for good independent restaurant reporting systems.

Once the COA is set up and reviewed to assure that inventory, sales, credit card, gift card, and other expense categories are reflected in it, the owner or manager will have confidence that every transaction in the business is being recorded.

If you are a business owner who only reviews your P&L and balance sheet to track financial activity, hundreds, perhaps thousands, of dollars per month might be slipping through the cracks undetected.

Setting up the COA is an important first step, but getting comfortable with your general ledger is also critical. Your P&L and balance sheets are typically two to four pages of information. The GL can run well over a hundred pages, depending on how it is set up and how much detail is in it.

The more detail the better; but the more detail, the more pages. At first glance, it can look daunting; but there are lot of pages that any good accounting software figures out automatically. These include tax transactions, FICA withholding, and direct deposits. Some of these items account for a good deal of the information, particularly if you have a relatively large number of employees.

Once you look past these regular transactions and get past the "deer-in-the-headlights" expression as your comb through the many lines of data, you will learn to quickly locate items that raise questions. Even a quick scan of these pages can be helpful in looking for "out of place" items, or some number that stands out and just doesn't look right or has accidently been entered wrong. This includes transactions of which you have no recollection.

As a busy independent operator, time is a precious resource. A good hack for an efficient review of your GL is to create a separate sheet with key GL categories and their corresponding GL number and review those periods first. This shortcut allows you to hone in on critical categories such as cash or food and beverage expenses, rather than wading through a sea of account numbers. This can also save you and your accountant a lot of time if you find items placed in the wrong category.

Often in general accounting software, you'll see expenses- es compared to "all revenue or sales" rather than just food revenue compared to food expenses, liquor sales and liquor expenses, or wine sales and wine expenses. This happens more often than you might think. And it presents misleading, if not meaningless, information.

Familiarity with your restaurant's GL and knowing how to review it helps prevent these problems. With practice, your mind will automatically pick up on something out of line which will lead to greater insight into — and confidence in — what your P&L is telling you.

Another important element in reviewing the GL is paying attention to the vendors selling products and services to the restaurant. You should recognize all of them. And if there is one or more whom you can't identify, you need to dive deeper into who they are and what they provide. Is one vendor the source of multiple invoices that don't make sense to you? Many restaurants have fallen victim to fictitious vendors set up in accounts payable and the stream of fraudulent transactions that follow.

Enlightening Reading

The GL is not light reading. But it is enlightening reading. If used property, you GL can offer important and useful insights to what really going on in any independent restaurant. It's also a great tool in working with an accountant in directing their focus on what is important to you, the restaurant owner.

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. Manag- ing 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 account, 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."

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."

Rudy Miick, a 40-year industry veteran and founder of The Miick Companies, LLC in Boulder, Colorado 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."

How Your General Ledger Explains Your Profit-and-Loss Statement

The General Ledger allows a restaurant to dig into expenses and understand why line items on the profit-and-loss statement (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, 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. Willner believes that 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."

ADDITIONAL RESOURCES:

The Uniform System of Accounts for Restaurants

The Uniform System of Accounts is a guide to standardized restaurant accounting, financial controls, recordkeeping, and relevant tax matters. The guide is designed to assist single-unit and small multi-unit operators maximize the usefulness and value of their financial information as a management tool and help restaurant bookkeepers and accountants navigate the unique issues of restaurant operations.

Order it directly from the National Restaurant Association

ADDITIONAL RESOURCES:

RestauarantOwner.com Restaurant Chart of Accounts

This will show you how to set up your P&L consistent with restaurant industry standards, and how to cost code your operating expenses by account. Using a restaurant industry standard chart of accounts is one of the smartest things an independent operator can do. An industry standard chart of accounts will give you financial information in a much more useful format and enable you to compare your P&L numbers with other restaurants. Also included is a detailed Cost Coding Guide that will help you determine where nearly every type of cost you incur should be charged.