Food for thought: Key financial controls to consider in the restaurant business

CloudCfo services a wide portfolio of clients across a number of industries in the Philippines. Over the coming months, we will be publishing a series of articles on best practices for financial processes across various sectors. In today’s article, we outline the importance of implementing robust financial controls in the restaurant industry.

Make sure to check www.cloudcfo.ph on a regular basis for updates and information on accounting and bookkeeping in the Philippines throughout 2019.

Many of us often dream about running our own restaurant or bar and the new and exciting concepts we could bring to the industry. What an adventure it would be! However, those who have actually followed through with this dream would be quick to point out that it is not always as glamorous as it sounds – and rightly so! The restaurant industry is one of the toughest and most competitive industries to build a profitable business. The slightest deviation in daily operations can have a significant impact on a restaurant’s finances. Putting in place (and sticking to!) solid financial processes will help maintain control over a restaurant’s cashflow and profitability. This is the case whether a restaurant uses an outsourced accounting service provider or manages its accounts internally.

Outlined below are some key control mechanisms and processes which can assist restaurant owners and managers with their financial decision-making activities. If you own, manage or operate within the restaurant or bar industry in the Philippines, don’t hesitate to contact us for a free initial consultation at enquire@cloudcfo.ph.

1. Payment Controls – Point of Sale System

Whether you are a small family owned restaurant, bar or an established food group, strategic use of your Point of Sale system (POS) could result in significant benefits for your business. At its most basic level, a POS system is a modern day cash register that records goods sold to and payments made by customers. However, a POS system can do much more to assist management. It can generate data on key business metrics such as best-selling products, daily sales reports, stock level warnings and employee performance. It can also help in reducing human error and fraud. If optimised correctly, a POS system can be utilised to send financial data directly to your in-house or outsourced accountant. This will significantly reduce the workload for management and help to ensure that information is recorded accurately in the books of accounts. This is especially helpful come audit season! So make sure to investigate the various capabilities of your POS system to identify how it can be best optimised to benefit your business.

2. Purchasing Controls – The Three-Way Matching System

The purchasing process is a highly cost sensitive activity for any restaurant or bar. Poor purchasing practices can lead to cashflow issues, incorrect stock levels and balance sheet discrepancies. The Three-Way Matching system is used by restaurants to maintain control over its food and beverage costs, purchasing processes and accounts payable. It imposes a “checks and balances” system that requires three purchase-related documents for every transaction – the restaurant’s purchasing order (formal authorisation for an order), the vendor’s receiving report (proof of payment/delivery) and the vendors invoice (the bill). The information contained on these documents (e.g. goods description, quantities, prices) must “match” before a transaction can be entered into the restaurant’s books of accounts. The system reduces the potential for error and fraud and also provides a validated paper trail for your accountant or bookkeeper. Another process to be thankful for when audit season arrives!

3. Food cost planning

A restaurant must be vigilant when calculating food costs to be able to forecast potential margins (gross and net) and profits (gross and net) across each of its products. Any change in the cost of raw materials is likely to have significant implications for a restaurant’s profitability. It is therefore crucial for a restaurant to carefully plan its food costs and identify precisely what profit (or loss) it is making on each product. Execution is even more important. Poor portion control, unanticipated wastage, stock substitution or volatile food prices are all factors, specific to the restaurant industry, that can impact a cost plan. By sticking to a food plan (or at least as closely as possible!) a restaurant will have a much better chance of achieving its financial objectives for each reporting period.

4. Payment Reconciliations

Restaurants receive various forms of payment from different sources on a daily basis. Consumer payments may include cash, credit card, debit card, authorised vouchers, money-off coupons or payments through affiliates. A restaurant must have a rigorous payment process in place reconciling all forms of payments received to be sure of its financial position. Otherwise, payments could be overlooked, incorrectly recorded and/or misattributed and it could be difficult to identify where the discrepancy is coming from. A knock-on benefit of having such a process in place is that it will help to ensure the follow-on bank reconciliation process (i.e. the exercise of reconciling the difference between accounting records and the bank in a given period) is receiving accurate information. Two value-added accounting processes for the “price” of one! For further information on this topic, click here for our recent article on why the bank reconciliation process is so important for businesses.

5. Inventory Management

Inventory management is having the right product, at the right time, in the right place, at the right cost and in the right quantity. It is a critical activity across any business or industry that involves buying or selling goods. The importance of inventory management is heightened however in the restaurant business due to the perishable nature of the goods (i.e. food products) being bought and sold. Excess inventory can lead to food wastage, storage issues and disposal costs. A restaurant should continuously check that its purchase and inventory prices are in line with its recipe costs in order to maintain gross profit margins. Frequent inventory counts will also ensure that food wastage is kept under control and that tight controls are maintained across the range of food costs.

At CloudCfo, we are intensely process driven and output focused. Through our extensive experience, we have seen the significant benefits of a restaurant putting in place robust accounting and bookkeeping processes – particularly when these processes are enabled by cloud accounting. Not only do such processes help a restaurant record accurate information in its books of accounts and achieve compliance, they can generate value-added data that enables restaurant management to make key strategic decisions about the restaurant’s future.

If you need further information or advice in relation to any of the above, please don’t hesitate to contact us at enquire@cloudcfo.ph.

We are constantly seeking for innovative ways to use technology and online tools to streamline processes and create efficiency for our customers.

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