How many times have you caught yourself overspending on inventory? A lot of times right? This happens when you don’t know where your money is going. There is a way that will help you track each ringgit that comes and goes from your restaurant. This is where accounting comes in handy and cash-based accounting is the most common accounting method used to track finances.
Read more about restaurant accounting.
What Type of Accounting is Used in Restaurants?
Restaurants usually use two main types of accounting: cash accounting and accrual accounting.
- Cash Accounting
- This is the simpler method. You record income when you receive cash and expenses when you pay them.
- Example: If a customer pays you RM50 for a meal today, you record it as income today. If you buy RM100 worth of vegetables and pay today, you record the expense immediately.
- It’s ideal for smaller restaurants or cafes with straightforward transactions.
- Accrual Accounting
- This method tracks income and expenses when they are earned or incurred, not when cash changes hands.
- Example: If you cater an event and the client pays you later, you record the income as soon as you send the invoice. Similarly, if you buy stock on credit, the expense is recorded immediately.
- It’s more accurate but requires more effort to maintain.
What is the Best Accounting Method for Restaurants?
Choosing the best method depends on your restaurant’s size and complexity.
- Cash-Based Accounting System
- Suitable for small or medium-sized restaurants.
- It gives a clear view of your cash flow. You always know how much money is coming in and going out.
- It’s easier to manage without hiring an accountant.
- Accrual-Based Accounting
- Better for larger restaurants with more transactions.
- It helps you plan better by showing a complete picture of your income and expenses, even before the money is paid or received.
- However, it might require professional accounting software or an accountant.
For most small restaurant owners in Malaysia, cash accounting is often the go-to choice. It’s simpler, saves time, and doesn’t need complex software.
Why Is Restaurant Accounting Important?
1. Tracking Profits and Losses
Understanding your profits and losses is essential to knowing if your restaurant is performing well.
For example, imagine your restaurant earns RM50,000 in sales but spends RM45,000 on costs. Without accurate accounting, you might not realize you’re only left with RM5,000 profit. Regular tracking helps you identify what’s working and where you need to improve, such as reducing food costs or renegotiating supplier deals.
2. Controlling Costs
Restaurants often operate on thin profit margins, so controlling costs is vital.
Accounting helps you categorize expenses like food, labor, rent, and utilities. For instance, if labor costs are eating up 35% of your revenue when the industry standard is 20-30%, you can adjust staff schedules or reduce overtime. By managing costs effectively, you can boost profitability.
3. Improving Cash Flow Management
Cash flow is the lifeblood of any restaurant. Proper accounting ensures you always have enough cash to cover expenses like rent, inventory, and salaries.
For example, if you earn RM100,000 in a month but have RM120,000 in expenses due, you’ll face a cash crunch. Tracking cash flow helps you plan payments and avoid financial stress. It also ensures you have reserves for emergencies or slow periods.
4. Simplifying Tax Filing
Filing taxes in Malaysia requires accurate records of income and expenses. Poor accounting can lead to errors, penalties, or overpaying taxes.
With proper accounting, you can keep receipts, invoices, and financial reports organized. This simplifies tax filing and ensures compliance with local regulations, saving you time and money.
5. Supporting Business Growth
If you’re planning to expand, accounting provides the data needed to make informed decisions.
For example, if your reports show consistent growth, you can confidently invest in opening a second location or upgrading equipment. Accounting also helps when applying for loans, as banks require accurate financial statements to assess your eligibility.
Challenges in Restaurant Accounting
1. Ignoring Small Expenses
Many restaurant owners overlook minor expenses, thinking they won’t make a big difference. However, small costs like napkins, sauces, or cleaning supplies add up over time.
For example, spending RM5 daily on disposable containers might seem insignificant, but it totals RM150 per month. Ignoring these costs can lead to an inaccurate understanding of your overall expenses. Always record every purchase, no matter how small, to get a clear picture of your finances.
2. Not Reconciling Bank Statements
Skipping bank reconciliation is a common error. This involves comparing your financial records with your bank statements to ensure everything matches.
Without reconciliation, you might miss errors like duplicate transactions, unrecorded fees, or even fraud. For instance, if your POS system shows RM10,000 in sales but your bank account reflects RM9,500, you need to find and fix the RM500 discrepancy. Regular reconciliation helps you spot and correct mistakes promptly.
3. Mixing Personal and Business Finances
Combining personal and business expenses creates confusion and makes it difficult to track profitability.
For example, if you use the restaurant’s account to pay for personal groceries, it skews your expense records. It can also complicate tax filing and lead to compliance issues. Open a separate bank account for your restaurant and stick to using it exclusively for business transactions.
4. Delaying Record Keeping
Procrastination in updating financial records is a critical mistake. Many owners wait until the end of the month to log sales and expenses, increasing the chance of errors.
For instance, forgetting to record a supplier payment or a refund can lead to inaccurate financial reports. Dedicate time weekly, or even daily, to update your records. Using accounting software can simplify this process.
5. Failing to Monitor Cash Flow
Poor cash flow management is a silent killer. Many restaurants focus on profits but ignore the timing of cash inflows and outflows.
For example, if you have RM10,000 in sales but RM15,000 in expenses due this month, you’ll face a cash shortage. Track your cash flow regularly and plan payments to ensure you have enough funds on hand.
How to get started with Restaurant Accounting
Check if your existing POS system provides you accounting feature. If it doesn’t then you should upgrade to other POS systems that have this feature. EasyEat is one of them and it comes with SQL accounting and it can help you manage your restaurant finance better. You also don’t have to look for other software separately.
Restaurant accounting doesn’t have to be overwhelming. Whether you choose a cash-based accounting system or another method, the key is to stay consistent. Track your sales, manage your expenses, and keep your records up to date.
With proper accounting, you can not only save time but also improve your profits. Start small, use tools to simplify the process, and don’t hesitate to get professional help if needed.
Remember, keeping your finances in order isn’t just about surviving. It’s about building a successful, long-lasting restaurant business. So take charge of your accounts today and watch your restaurant thrive!
