Restaurant Financial Basics / Edition 1

by Raymond S. Schmidgall, David K. Hayes, Jack D. Ninemeier

Overview

One of the keys to a successful restaurant business is strong financial management. This volume in the Wiley Restaurant Basics Series provides restaurateurs with the tools necessary to manage their food-based operation by explaining basic accounting principles such as pricing, budgeting, cost control, payroll, and cash flow.

Product Details

ISBN-13:	9780471213796
Publisher:	Wiley
Publication date:	10/02/2002
Pages:	352
Product dimensions:	6.10(w) x 9.20(h) x 0.80(d)

About the Author

RAYMOND S. SCHMIDGALL, PhD, CPA, is the Hilton Hotels Professor of Hospitality Financial Management at Michigan State University.

DAVID K. HAYES is the managing owner of the Clarion Hotel and Conference Center in Lansing, Michigan. He is the coauthor of Restaurant Law Basics and Food and Beverage Cost Control, Second Edition, both published by Wiley.

JACK D. NINEMEIER, PhD, is a professor at Michigan State University.

Read an Excerpt

Restaurant Financial Basics

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By Raymond S. Schmidgall David K. Hayes Jack D. Ninemeier

John Wiley & Sons

ISBN: 0-471-21379-9

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Chapter One

INTRODUCTION TO FINANCIAL MANAGEMENT

MANAGER'S BRIEF

In this chapter you will begin the study of procedures to effectively manage and document your restaurant's finances. You will be introduced to the accounting process and its four specialty areas. In addition, you will see how the various users of accounting information will count on you to follow special accounting principles and practices that have been standardized for use by businesses in general and restaurants more specifically. As you use these specialized principles other businesses and government agencies that may be required to review your financial documents will be able to understand and use them.

There are several restaurant management and staff positions that may assist you in managing the money you earn and spend in your operation. This chapter introduces you to each of them and the important roles they can play in the financial management process.

Restaurant managers are not accountants; however, in this chapter you will learn how the financial control processes necessary for success are interrelated with the accounting process and the work of the accountant. Finally, you will review the characteristics of an effective working relationship among the restaurant manager, owner, and accountant.

If you own or manage an existing restaurant the accounting system isalready established. It may be a cost-effective system that yields high-quality, usable information or it may be a less-than-adequate system that is not cost-effective. A new manager beginning work in the restaurant must know the basics of effective financial accounting systems to know, first, if the current system provides meaningful and helpful information, and second, what to do if it does not. Alternatively, if you are going to own or manage a new restaurant that is "on the drawing board," you may be asked for input on the design of the basic accounting system, or at least on the development of source documents and basic record-keeping procedures. If a system is being proposed (for example, by an accounting service you have hired for the task) you should be able to evaluate its potential worth to your new restaurant. Regardless, then, of the restaurant you will manage (existing or not-yet-opened), you will need to know about the standards that make up a good accounting system. A good restaurant manager must be aware of what is needed, why it is needed, how information can most effectively be collected, and when accounting-related activities must be undertaken.

FINANCIAL MANAGEMENT: WHAT IS IT?

Restaurant managers use financial information to manage activities involving money that is earned and spent in the operation of their business. Financial information that summarizes these activities must be organized and expressed in ways that are meaningful. Analysis and interpretation of data is necessary, and the results must be recorded, summarized, and reported to those needing to know about the economic health of the restaurant. As will be seen, users will be both internal -owners and managers, for example-and external -including lenders and government agencies.

FINANCIAL MANAGEMENT

The process of organizing, analyzing, interpreting, recording, summarizing, and reporting financial information in ways that are meaningful for owners, managers, and other internal users and for lenders, government agencies, and other external users. Also referred to as accounting.

Financial management is not the same as bookkeeping: There is a big difference! Financial management includes organizing, analyzing, interpreting, recording, summarizing, and reporting financial information. By contrast, a bookkeeper's primary task is to analyze and record transactions. In very large restaurants, a bookkeeper may handle only one type of transaction, such as sales, accounts receivable collections, or payroll. The accountant then summarizes the bookkeeper's work and further interprets the results for management.

BOOKKEEPING The task of analyzing and recording financial transactions of a specific type (for example, sales, collection of revenue, and payroll).

ACCOUNTING SPECIALTIES

There are several specialized areas within the accounting profession. For example, financial accounting-the topic of this book-involves the overall process of developing and using accounting information to make business decisions; the "deliverables" of financial accounting are such financial statements as the balance sheet, income (profit and loss) statement, and the statement of cash flows-all of which are discussed in this book. These are among the most important reports that managers, owners (investors), government agencies, financial institutions, and others use to learn about the financial status of the restaurant.

FINANCIAL ACCOUNTING The process of developing and using accounting information to make business decisions, which involves organizing and presenting financial information in financial statements. The major focus is on the past.

Auditing

Auditing is another accounting specialty. Auditors review the internal controls of restaurants to assess measures taken to safeguard cash and inventory. They study the accounting system to ensure the proper recording and reporting of financial information. Auditors evaluate whether the restaurant's financial statements fairly present the financial position, operating results, and cash inflows and outflows by activity, and whether generally accepted accounting principles are consistently applied from period to period.

AUDITING The accounting specialty that involves studying the restaurant's internal controls and analyzing the basic accounting system to assure that all financial information is properly recorded and reported.

Managerial Accounting

Managerial accounting uses historical and estimated financial information to develop future plans. Managerial accountants may help managers make decisions by assessing the financial impact of alternatives being considered. For example, should the restaurant open or close on a specific day or for a specific meal period? A managerial accountant can study actual and estimated information and provide managers with recommendations.

One way to view the difference between financial accounting and managerial accounting is to focus on the reports they produce. Statements stemming from financial accounting are of particular interest to parties external to the restaurant (investors, creditors, etc.). By contrast, reports stemming from managerial accounting are mainly designed for managers and other internal users. Likewise, they are generated more frequently (weekly or daily) than statements from financial accounting (monthly). Examples of managerial reports are inventory values (separated by product: food and beverage), listings of food and beverage products received, sales history records, and operating reports. Operating reports typically include actual operating results and budget estimates for the period.

MANAGERIAL ACCOUNTING The process of using historical and estimated financial information to help managers plan for the future. The major focus is on the future.

Tax Accounting

As the name implies, tax accounting is concerned with the tax consequences of business decisions and the preparation of (often) quite complicated tax returns. Accounting methods restaurants use for tax purposes may differ from the methods they use for financial reporting. For example, depreciation may be calculated using a method that results in a faster write-off of a piece of equipment for tax purposes than for financial reporting purposes. (This may be preferred because taxable income is lowered, taxes are reduced, and cash is conserved.)

You can see, then, that the accounting field is broad; restaurant managers who must be well versed in diverse areas such as food preparation and service, marketing, personnel management, layout design, and equipment and systems maintenance must also be able to organize and use accounting data and procedures to make the best possible management decisions. They may, as well, need to rely on accounting experts as financial systems are designed and as special accounting-related issues arise.

TAX ACCOUNTING The accounting specialty that involves planning and preparing for taxes and filing tax-related information with government agencies.

DEPRECIATION The allocation of the cost of equipment and other tangible assets as an expense for a series of accounting periods according to the useful life of the assets.

USERS OF ACCOUNTING INFORMATION

We have already emphasized that restaurant managers need accounting information to help evaluate the daily, intermediate (monthly), and long-range success of operations. Other users of accounting information include:

* Owners. Those who have invested in the business. Owners may include one person in a sole proprietorship, two or more people in a partnership, or up to thousands of people in a corporation. All owners want to know how their investment is doing.

* Boards of directors. Large restaurants or foodservice chains may have corporate stockholders who elect persons to represent them in the management of the business. They need accounting information to evaluate the effectiveness of the managers who operate their restaurants.

* Creditors. Those who lend money (lenders) or provide products and/or services (suppliers) want to know the likelihood that payment obligations will be met.

* Government agencies. Income is taxable by the federal government, most states, and many communities. Accounting information is based upon the type of tax assessments that are made. For example, the Internal Revenue Service (at the national level), state revenue departments, and local taxing authorities have an ongoing interest in accounting records. Also, the Securities Exchange Commission (SEC) is required to review audited financial statements as it approves prospective information developed by large restaurant organizations wishing to issue securities to the public.

* Employee unions. Accounting information is used by union officials and membership in unionized restaurants to assess the abilities of the business to meet wage and benefit demands.

* Financial analysts. Persons outside of the restaurant, such as staff members of mutual investment and insurance companies, may desire accounting information about a restaurant for their own or their clients' purposes.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAPs)

A set of standards called Generally Accepted Accounting Principles (GAAPs) constitutes the framework against which accounting procedures and techniques are measured.

GAAPs include:

1. Business entity. The restaurant is distinct and separate from its owners; it generates revenues, incurs expenses by using assets, and makes a profit, suffers a loss, or "breaks even" by and for itself. The impact of this principle occurs when income is measured as it is generated by the business (there is an increase in owners' equity), not when it is distributed to owners. Likewise, an obligation owed by the business is considered a liability. It may be owed to a vendor to pay for products received, or the liability may be an obligation (such as a loan to the business) which the owners owe to themselves!

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAPS) Standards that have evolved in the accounting profession to ensure uniformity in the procedures and techniques used to prepare financial statements.

ASSET Something of value that is owned by the restaurant. Examples include cash, product inventories, equipment, land, and building(s).

LIABILITIES Obligations (money owed) to outside entities. Examples include amounts owed to suppliers, to lenders for long-term debt such as mortgages, and to employees (payroll that has been earned by but not paid to the restaurant's staff members).

2. Historical cost. The value of an asset is its agreed-upon cash equivalent. When a transaction occurs (for example, an asset such as an equipment item is sold), the price paid normally reflects its current fair value. Over time, the value may change (for example, inflation may increase the value of land or buildings). However, the historical cost-not the current fair value-normally represents the asset's value in accounts and in financial statements.

CURRENT FAIR VALUE The market value of the asset at the date of the financial statements. For example, assume a building (structure and land) cost $5,000,000. At the time of purchase, the cost would equal the fair value. Two years later the current fair value may be $6,000,000, yet the financial statements would reflect the historical cost of $5,000,000.

3. Going concern. An accountant assumes-unless there is reason to believe otherwise-that the restaurant will exist in the indefinite future. If, for example, the restaurant were to-cease operation, certain liabilities would be due immediately. Likewise, assets might need to be sold at a considerable loss. When accountants assume that the business will continue (and this is the normal assumption), there is no need to write down assets to a liquidation value or to reclassify long-term liabilities as being due immediately.

4. Periodicity. Statements of the restaurant's financial condition, including the income statement, should be developed periodically. For example, income tax regulations require the annual filing of tax returns. Owners and others desire monthly statements about the economic health of their organizations. Tax authorities require annual reports.

5. Expenses matched to revenues. Expenses that are incurred must be matched with, and deducted from, revenues that are generated in an accrual accounting system that recognizes revenues and expenses without concern about when cash is received or paid by the restaurant. Amounts owed to the restaurant are called accounts receivable; amounts owed by the restaurant to suppliers are referred to as accounts payable.

Continues...

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Excerpted from Restaurant Financial Basics by Raymond S. Schmidgall David K. Hayes Jack D. Ninemeier Excerpted by permission.
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Table of Contents

Preface.

1. Introduction to Financial Management.

2. Debits and Credits-The Mechanics of Accounting.

3. The Balance Sheet.

4. The Income Statement.

5. Analysis and Interpretation of Financial Statements.

6. Cash Flow.

7. Understanding Cost Concepts and Break-even.

8. Pricing for Profits.

9. Operating Budgets.

10. Accounting Aspects of Food and Beverage Control.

11. Payroll Accounting.

12. Accounting for Fixed and Other Assets.

13. Cash and Revenue Control.

Recommended Reading.

Index.