What You Should Know About Using QuickBooks® in Your Independent Restaurant

Like most small businesses, the typical restaurant owner/operator must wear lots of different hats, usually all at the same time. Some hats fit better than others. Most likely you have come into this venture with some experience in one particular area of the restaurant business. Perhaps it's from the kitchen as a chef, or maybe it's from the front of the house as a manager. As you will learn quickly (if you have not already done so), the responsibilities of running a restaurant business are much more demanding than simply being responsible for a specific job or position within the business.

In my experience working with many restaurant startups, the "hat" that is most "ill fitting" is that of your restaurant's financial manager; however few roles are as critical to your long-term success. "If you can't count it you can't manage it," goes the saying. That's why it's so important to make sure that putting in place a well-organized and easy-to-use accounting system should be one of your highest priorities. It's equally important to have that system in place well before you open the doors, as once you get open you may have little or no time to focus on anything other than getting through each day.

You don't have to know much, if anything, about accounting or bookkeeping to take control of the finances of your restaurant. What you do need is discipline, some guidance, common sense, and a real desire to make your restaurant successful -- which means more than offering great food, service, and value to your customers. I am living proof, having never had an accounting course or any financial training or background prior to opening any of my restaurants. Both figuratively and literally I counted on a popular small-business accounting software package called QuickBooks. I'm not alone. In a recent survey of RestaurantOwner.com members, most of the respondents indicated that they managed their restaurant's finances with this tool.

Which Version to Use?

Intuit Inc., which publishes QuickBooks, has constantly upgraded its offering with annual releases since 1999. The most current release, QuickBooks 2005, is no exception. It used to be that QuickBooks had just two versions: the Basic (formerly just called QuickBooks) and QuickBooks Pro. Now there are a variety of new product variations including QuickBooks Premier, QuickBooks Accountant, QuickBooks On-Line, and even the 2005 rerelease of a version for Mac users. You don't need any of these (unless of course you are a Mac user). Just stick to QuickBooks Basic (or pay an additional $50 for the Pro version) and you will be just fine. The main advantage to Pro is that you can export all your financial reports to MS (Microsoft) Excel spreadsheets, where the data can be further analyzed and organized. I should mention that QuickBooks Pro (and all "higher" versions) offers multiuser versions that allow up to five users to access the file at the same time. I do not often see independent restaurants that use the multiuser version, but under some circumstances this can be a very helpful feature.

If you are now using, or have access to, a recent version of QuickBooks there is no real need to upgrade. Just beware that QuickBooks has a "sunset policy." Under this policy only the most current annual version of the software, plus the prior two versions, will be supported (live technical support and business services relating to that version). Therefore, if you are using QuickBooks 2002 or earlier I would highly recommend upgrading to the 2005 version to avoid putting your financial data at risk.

Installation and Setup

Unlike most software applications that can be used immediately "out of the box," QuickBooks (this goes for all accounting software products) requires that you create a file that is "configured" or set up specifically for your business (restaurant, in this case). This file should also include all your "account" balances as of the date that you begin using it (e.g., checking account, fixed assets, vendor payables, and year-to-date income and expenses).

QuickBooks makes this task simple with its "easy step interview." The software prompts you with step-by-step questions about your company, the way you want to set it up, and even prompts you to enter all your beginning account balances. These questions include the type of business that you are in with the option to create a "Chart of Accounts" that QuickBooks deems appropriate for the business you select. Other questions involve the collection and payment of sales tax, use of QuickBooks payroll, inventory, class, and item features, how you want to use bill payment options, and whether you will be using "cash" or "accrual" accounting. (For more information, see "Cash Versus Accrual Method of Accounting" below.)

Context-sensitive help is available throughout the interview to help you answer each one of these questions.

Let's go back to the chart of accounts for a moment because it is truly the "heart" of your accounting system. It defines exactly how every financial transaction that occurs in your restaurant can be recorded and used to help you manage your business. Unfortunately the chart of accounts that QuickBooks uses for restaurants is less than desirable (though I've got to cut them some slack here as they maintain a database for hundreds of business types). You should use the "Uniform System of Accounts for Restaurants" as your guide (available from the National Restaurant Association, www.restaurant.org/store). "The Uniform Systems of Accounts for Restaurants" provides all restaurants with an industry-standard accounting classification system, one that not only will allow you to make common sense of your sales and expenses, but will also permit you to compare your restaurant's performance with industry standards.

. . . 'The Uniform Systems of Accounts for Restaurants' provides all restaurants with an industry-standard accounting classification system -- John Nessel

If you are using the QuickBooks "Easy Step Interview" to set up your company file, you have two options as it relates to the chart of accounts: Select the account list for "Restaurants" that QuickBooks recommends, or select the alternate option to "Create No Accounts at the Current Time." If you let QuickBooks create restaurant accounts for you then you can always edit the list later (though the process will be tedious and time-consuming). If you choose to have no accounts set up, you have the opportunity to either manually create your own accounts or, even better, to "import" a better chart of accounts than is offered by QuickBooks, a process that is simple so long as you have access to such a list.

Select a Start Date

The interview will also ask you to select a "start date." This is the date from which you will be recording every financial transaction that occurs in your restaurant. If you are a new restaurant then this choice is simple. You will start on the day that your first financial transaction was made (most likely the day you opened your bank account). You will record every single financial transaction from that day forward.

If on the other hand you are switching to QuickBooks from another program, or you have not been using any accounting software to run the restaurant, or perhaps you are transitioning your accounting "in house" from an outside vendor, then you have a choice to make. The ideal situation in this case is for your "Start Date" to be the first day of the new year (January 1) so that you will have complete financial records for the entire year ahead. If you are already into the new year, then going back to January 1 and recording all your transactions may not be practical. In this case start on the first day of the current month (assuming that you are using monthly accounting periods), but never midmonth, and begin recording all your transactions from this point forward.

If you are using the "Easy Step Interview," then QuickBooks will walk you through the process of entering all the beginning account balances, based on the start date that you select. This process can also be performed at a later date either manually or by going back to the "Interview."

Entering and Paying Your Bills

Entering and paying your restaurant's bills represents at least 80 percent of the total time you will spend using QuickBooks, and QuickBooks is designed to make this process easy. Most restaurants have established "terms" with their vendors from "Net 7" days for the small "mom and pop" suppliers to the more typical "Net 14" to "Net 30" days for the larger commercial vendors. ("Net 30" means that the customer has 30 days from the invoice date to forward payment without penalty.)

In Massachusetts, for example, alcoholic beverage vendors are on Net 60-day terms. You should therefore be entering your bills when you receive them and paying them at a later date. This is called "accrual accounting" because the expense is recognized when the product is received and not the date it is paid. This has important implications for your profit-and-loss statement because you want all your business expenses to match the period the corresponding revenue is recorded (the date that the meals are sold). If you need to pay a bill immediately upon receipt, then simply use the "Write Check" feature to record the payment (there is no need to enter the bill when you use this feature).

Entering a bill is as easy as clicking an on-screen "icon" that reads "Enter Bills." A graphic image of a bill appears, which makes the process of entering the information almost effortless. QuickBooks "remembers" vendors' names so that when you start typing the name the software will automatically complete it. It can even be set to remember which account the bill should be "coded to" so that you do not have to search the account list every time you enter a bill from the same vendor. QuickBooks makes it easy to enter each vendor's "terms," and uses this information to let you know when each bill is due (or how many days it is overdue).

QuickBooks Vendor reports are also easy to access and the two that you will use most often are the "Open Balance Detail" (shows each unpaid bill sorted by vendor with the due date for each and total owed) and the "Vendor Balance Detail" (shows the history and running balance of bills, credits and payments chronologically for each vendor). Once you decide who and how much you are going to pay, simply click on the "Pay Bills" screen icon and a list of every unpaid bill will appear, sorted by vendor and due date. All you need to do is click on each bill you want to pay and then select the "Pay & Close" button. This screen will also indicate the running total of all the bills you select for payment to help you keep your payments in line with available cash. Once you complete this task you can use the software to either print your checks (recommended) or write them manually and assign check numbers. I suggest you use a standard three-part check (one check per sheet with two "stubs"; one stays with the check and the other attaches to the bills that you're paying to make your recordkeeping easy).

Recording Daily Sales and Deposits

QuickBooks was not really designed for a retail business (like a restaurant) that uses a POS system or cash register to record and consolidate individual sales and receipts. Fortunately, it is easily adapted to do just that. There are two approaches to accomplish this task: use of a QuickBooks form called a "Sales Receipt" or making a "General Journal" entry. The information entered is the same whichever method you choose.

Use your point-of-sale report to identify your daily sales totals (e.g., food, beer, wine, liquor), the tax you collect, other transactions that result in either more or less cash being present than your recorded sales indicate (e.g., house charges, gift certificates sold or redeemed, discounts, complimentary meals, cash over/short), and finally your cash and credit card receipts. Each of these categories should correspond to an "account" in your chart of accounts, and combined they create a single financial "entry" for each day of business (whether it be a sales receipt or journal entry).

. . . Use your point-of-sale report to identify your daily sales totals (e.g., food, beer, wine, liquor)

Some restaurants create unique QuickBooks accounts for depositing credit card receipts, and even set them up as "current assets" rather than as "bank" accounts (different categories on the balance sheet). The logic is that these payments take a few days to be processed and deposited into your checking account, and should therefore be technically viewed as receivables rather than bank deposits. The balances are then transferred into the checking account when the funds are actually deposited. I recommend that you treat credit cards as you do cash and simply use your checking account for all deposits. Use your common sense to know that when you look at your checking account balance you must take into account any credit card receipts that might still be "in transit." By the time a vendor receives and deposits a payment based on this checking account balance, the credit cards will have surely been deposited.

Just make sure that you record your credit card receipts exactly as they will appear on your bank statement. Visa and MC totals are always processed together, and deposited into your bank account in a single amount for each batch. You therefore need to record the total of the two as a single line item in your QuickBooks. Another example involves the way in which American Express (AMEX) processes its receipts. In some cases AMEX deducts the discount fee (typically 3.5 percent) from the batch total and then deposits the amount "net of the discount" into your account. If you do not make your QuickBooks entry in a way that mirrors this you will have a hard time reconciling your bank statements when they arrive.

Whichever method you choose -- sales receipt or journal entry -- QuickBooks has a feature that will make the process more efficient: the "Memorized Transaction." It allows you to create a template that you can use for each entry with all the accounts that you will be using already set up, and ready for your daily dollar inputs. Not only can you create a "Memorized Sales Receipt" or a "Memorized Journal Entry" for your daily sales and deposits, but you can also create "Memorized Bills," "Memorized Invoices," and even "Memorized Reports" for transactions or information that you use and/or repeat on a regular basis.

Accounting for Your Payroll Expenses

Restaurant payroll, including employer-paid taxes and benefits, is the highest single expense category in the restaurant industry. For this reason an accurate accounting of your monthly payroll (assuming that you use monthly accounting periods) is absolutely essential. The topic of restaurant payroll cannot possibly be covered in an article like this. For now I will simply summarize the most important issues you need to know. This will ensure that you handle your payroll recording in QuickBooks in a way that will not only provide you with high-quality accounting information, but also allows you to proactively manage your restaurant's payroll expenses:

• Outsource your restaurant's payroll to a qualified payroll processing service. While QuickBooks does have robust features to process payroll I strongly urge you to hire an outside vendor for this task. The cost is very reasonable and the headaches and time that you will avoid are worth every last nickel spent. (For more information, see "Selecting a Payroll Processing Service" below.)
• Create payroll departments to get more detail from your payroll reports. Instead of simply recording your wages and salaries in one or perhaps two general categories (e.g., "gross wages" or "salaries and hourly wages"), create detailed payroll accounts based on the functions that each category performs in the restaurant. At least create an account for "Kitchen Wages," "Front of the House Wages" and "Manager Wages." From there you can create subaccounts for more detail. Remember, what you cannot count you cannot manage.
• If possible, process your payroll twice per month (not the same as biweekly). Weekly or biweekly payroll processing will typically result in monthly profit-and-loss statements with 28 days of payroll expenses (with 35 or 42 days in some months), but will never match the number of days of income or other expenses (typically 30 or 31 days). This will result in the understating or overstating of your payroll expenses. Ask your payroll company to process your payroll twice per month, from the 1st to the 15th and then from the 16th to either the 30th or 31st.
• If you already operate with weekly or biweekly payroll periods, then make a monthly "accrual" entry into QuickBooks to account for the disparity between the number of payroll days and days in the month. (For a description of this process with detailed examples, go to How to Accrue Payroll...and Why It's the Most Important Task You are Ignoring!.)
• Use a QuickBooks "Memorized Journal Entry" to record the payroll totals summarized in the report provided by your payroll service. Your payroll company will provide you with a report that summarizes the gross wages, payroll taxes and expenses that you pay as the employer. It will also indicate any employee deductions or advances that are made, and show the disbursement of all cash based on your employee payroll checks as well as the combined taxes that are withheld from these checks and your employer-related tax expenses. All this information can be combined into a single QuickBooks "Journal Entry" that takes no more than a few minutes to make (no exaggeration). This process is made even easier if you create a "Memorized Transaction" with all the accounts set up and waiting for your dollar entries.

Many other periodic bookkeeping tasks you will need to make are beyond the scope of this article. Loan payments, inventory adjustments, allocating insurance premiums evenly during the year, creating customer invoices, paying your sales tax, dealing with charged tips, handling employee meals, bartered services, and the list goes on. The good news is that QuickBooks offers easy procedures for each. In addition, QuickBooks has the easiest "Bank Reconciliation" procedure I have seen in any comparable software program. This is extremely important as paperless cash transactions are occurring with increasing frequency, and you need to have confidence in the balance of your QuickBooks cash account.

QuickBooks is inexpensive, powerful enough to handle every financial task that you will face, exceptionally easy to use, and well-known to your accountant. Because of its popularity, you will always be able to find someone to help you if you need support, which is crucial for a busy restaurateur.

Cash Versus Accrual Method of Accounting

There are two principal methods of keeping track of a business's income and expenses: cash method and accrual method. Under the accrual method, income is counted when the sale occurs, and expenses are counted when you receive the goods or services. Under the cash method, income is not counted until cash (or a check) is actually received, and expenses are not counted until actually paid.

The Internal Revenue Service requires businesses to use the accrual method in several instances, including if the business has inventory, if the business is a C corporation with gross annual sales exceeding $5 million (with certain exceptions for personal service companies, sole proprietorships, farming businesses, and a few others).

"All restaurants should be on the accrual basis unless (possibly) they pay cash for everything at the back door," says Jim Laube, restaurant financial consultant. "Cash-basis financials are basically worthless in a restaurant because it's nearly impossible to tell what your true profit picture is."

A more detailed discussion of this matter is beyond the scope of this article; however, you should discuss this topic with your accountant when setting up your financial management system.

Selecting a Payroll Processing Service

By Siobhann Kathleen Williams, CPA

The complex laws governing employee wages and tips makes restaurant payroll more complex than other payrolls. With tipped employees comes a host of reporting and compliance issues. Tip reporting requirements, the tip tax credit, and minimum wage compliance are all important considerations when setting up your payroll systems. The right service provider can help you navigate all the pitfalls of payroll compliance.

In the restaurant industry, payroll is one of your highest cost areas. Keeping good records and accurate reporting in this area is important. Improper treatment of payroll can be costly to your business. It can lead to lost tax credits and government penalties. It is also important to keep good records so you can track your labor cost and keep it in line. In your startup mode, especially, this can lead to the success or failure of your business.

In today's high-technology world there are many options available for payroll processing, ranging from full-service outsourcing to do-it-yourself software.

Professional Payroll Services

There are large national companies that specialize in payroll processing and compliance. The largest of these are ADP, Paychex and Paydata. These companies have been in the business of payroll processing for many years and are experienced with the many laws governing all types of payroll and payroll taxes. They are well-versed with local regulations in all 50 states.

These service providers will generate your paychecks and deliver them to you on an assigned day. They will also file your employment taxes for you and make payments to the taxing authorities. Usually they will debit your bank account on your pay date for all the taxes due for that payroll and they will pay the taxes when due. They are also able to provide direct deposit to your employees as an added benefit.

The advantages of using one of these large, national payroll processing companies are their extensive knowledge of payroll tax laws, the variety of services offered, and the large staff they have available to make sure your payroll is processed when you need it. These companies stay up to date with the laws in all 50 states and can help you stay in compliance. They are also experienced in maintaining the data you need to maximize the employer tax credit.

These large providers also offer human resources services such as pre-employment screening, benefits administration, retirement plans, and section 125 plans (referring to section 125 of the Internal Revenue Code, which provides tax savings by reducing employee medical premiums from your gross salary before calculation of federal income and Social Security taxes).

As a new restaurateur these tasks can seem daunting. Your payroll service provider can help you understand employee benefits and help you set up plans that will help you retain good employees.

The downside to using one of these companies is that, due to their size, you are unlikely to receive personal attention. You will probably be assigned a customer service representative for your account, but these folks service many other clients and change from time to time as the processing company experiences turnover. These services are often more costly than the alternatives.

If you decide to use one of these services, they will assist you in setting up your payroll within their systems. You will need to verify closely that all the information is correct. If you use a CPA or accountant, you may want to have them check the first few payrolls to make sure everything is working properly. Once your payroll is set up and running smoothly, you are "good to go."

Do-It-Yourself Software

Many commonly used do-it-yourself accounting software providers have designed payroll modules to accompany their software packages. QuickBooks by Intuit and Peachtree Accounting by Best Software are the most frequently used by small businesses, because of their widespread availability, ease of use, and reasonable pricing. Both packages offer a payroll module and payroll tax services.

The advantage of using software to do your payroll yourself is the flexibility you have in processing checks at any time. You also maintain control of the entire payroll process. This means that you can process a check on the spot if necessary. This is more difficult to do if you outsource your payroll.

If you decide to do payroll yourself using one of these software programs you will be responsible for filing and paying your payroll taxes by their due dates. You also will need to track your tipped employees' wages and reported tips to make sure you are meeting the minimum wage and tip reporting requirements.

Due to the complexity of restaurant payroll, doing it yourself might not be advisable. It takes a great deal of time to track all the necessary data and file the appropriate tax returns. Late filings can result in costly fines and interest assessments.

Online Services

In today's Internet-driven economy there are many payroll services offered online. These services vary widely and offer the convenience of Internet availability. Due to the ease of entering the Internet market and the anonymity of the venue, as well as the sensitivity of payroll records, caution in using unknown Internet vendors should be exercised.

Does Your Restaurant Use a CPA?

Ask your CPA (certified public accountant) if his firm offers payroll services. If you use a firm experienced with the intricacies of restaurant accounting, it may also be able to provide you with your payroll processing service. Many firms offer payroll services at a competitive rate to the large, national providers.

The advantage of using your CPA to process your payroll is the personal attention you will receive. Because you are a client purchasing multiple services, they will value your business and should provide good service. Since they are doing both your accounting and payroll, they are more able to provide advice that can help your business succeed.

The disadvantage of using your CPA for both services is that, if you decide to change CPAs, you will have to move both your payroll and accounting services. You may also find that staff availability is limited during tax season when the firm is in the hectic rush of filing tax returns.

Local Bookkeeping and Payroll Services

Many small companies provide basic bookkeeping and/or payroll services. If you are interested in using a small local service, ask if they have other restaurant clients. Due to the complexity of restaurant payroll, a small local company may not have the resources to stay on top of the regulations and reporting requirements.

As you can see, there are many considerations in deciding how to process your payroll, and many services are available on the market today. You must be a savvy consumer to select the best one for your business. Carefully consider your needs and decide how much time you have to spend on your payroll. Due to the restaurant industry's specialized needs, select a service with restaurant experience.

Consider tip reporting requirements and the employer tip credit when setting up your payroll. (For more information, see "Tip Reporting -- Are You at Risk for Back Taxes?") Neglecting these items can be costly to your business. Using your CPA or a large, national payroll service provider are your best options. They are more likely to have experience with the specialized needs of the restaurant industry.