The Ultimate Guide to Restaurant Finance Management

A nickel. That’s the average profit a restaurant makes on each dollar of sales. Such a business model doesn’t leave much room for error, which is why even those outside the industry are aware of the grim statistics regarding restaurant failures. If you own, run, or are considering opening or investing in a restaurant, this article will give you a comprehensive overview of everything you need to know about restaurant finance management.

What Is Restaurant Finance Management?

At its most basic level, restaurant finance management is about obtaining and managing funding to sustain the business and generate profit for the owners. Effective financial management in a restaurant includes many of the same components as in other types of businesses: creating budgets, monitoring costs, attracting customers, managing and paying staff, complying with tax regulations, and implementing the systems that support these functions. In most single-location restaurants, these responsibilities fall to the owner or manager, adding another layer of duties to their already busy roles.

Key Takeaways

• Restaurant finance management includes budgeting, forecasting, maximizing revenue, controlling costs, balancing cash flow, and complying with tax and legal codes.
• Applying the 10 strategies highlighted below can improve a restaurant’s chances of success in this highly competitive, low-margin industry.
• Food and labor require extra attention because they’re the two largest expenses for most restaurants.
• Multiple technologies make restaurant financial management easier and better, especially when they’re seamlessly integrated.

Restaurant Finance Management Explained

Finance management for restaurants is particularly specialized. At the opening of a new restaurant or the purchase of a going concern, it’s common for the owner(s) to take out loans to fund the purchase, secure and build out the space, and cover startup costs, such as equipment and inventory. Managing this startup debt and any future credit is a vital task for restaurant owners.

Once the restaurant is operating, finance management involves setting menu prices, negotiating terms and prices with food and beverage suppliers, and hiring, scheduling, and paying staff. Behind-the-scenes financial management tasks include facility management (rent or property taxes, utilities, cleaning, and parking), implementing technology to run the business, and complying with health, safety, and tax requirements.

Important Restaurant Financial Statements and Ratios

Several financial statements and ratios can help make restaurant finances more manageable by organizing and conveying key information. Many of these may be required by investors or lenders. Ideally, each of these financial statements can be generated using automated restaurant accounting software. Information from the financial statements is also used to calculate key performance indicators (KPIs) and ratios, which the most advanced restaurateurs monitor in real-time dashboards.

• Balance sheet: A balance sheet shows a restaurant’s financial position as of a certain date. It has sections that list the restaurant’s assets, liabilities, and owners’ equity. Restaurants’ assets are things they own, such as cash, equipment, inventory, and delivery trucks. Liabilities include amounts they owe to others, such as lease payments, supplies purchased on credit, loans, credit card debt, and payroll due to staff for hours worked but not yet paid. Equity represents amounts invested by owners and can take different forms, depending on whether the restaurant is owned by a sole proprietor, a partnership, or a public or private corporation. The balance sheet shows the financial health of the restaurant and alerts the owners/managers to liquidity issues (i.e., when the business’s liabilities are greater than its assets).
• Income statement: The income statement shows the results of operations for a specific fiscal period, giving owners and managers a comprehensive view of the restaurant’s revenue, expenses, and profits. Also known as the P&L, the income statement is organized to break out revenue from various sources, such as dining, takeout, catering, and bar, as well as the costs needed to fulfill them and overhead costs such as marketing, rent, and taxes. While it may be tempting to focus only on “the bottom line” showing profit or loss, the information on each line item and the subtotals are equally useful for managers’ financial analysis.
• Cash flow statement: These statements look at the restaurant through a different but equally crucial lens. Cash flow statements measure cash coming into the business in comparison to cash flowing out. This statement cuts through accrual accounting timing issues reflected in the P&L and gets to the heart of changes in cash balances, which is especially pertinent for paying employees and keeping operations running smoothly. Ideally, cash inflows always exceed cash outflows, but restaurant managers need to be prepared for times when cash demands exceed inflows.
• Profit margin: Profit is what’s left after all expenses have been deducted from revenue. It’s also what’s available to distribute to owners or reinvest in the business. Profit margin is a ratio that shows a restaurant’s profit as a percentage of its sales. Looking at profit margin, rather than the dollar amount of profit, aids comparisons of differently sized businesses or different periods in which a restaurant’s revenue fluctuates. Higher profit margins are preferred to lower ones, but as mentioned in the opening, the average profit margin for restaurants is about 5%.
• Gross margin: Gross profit is a subtotal on the P&L that represents the amount of sales left after deducting costs of goods sold (COGS)—for restaurants, that’s the cost of food and beverage ingredients. Gross margin is the gross profit expressed as a percentage of sales. For restaurants, it should be around 70%, which means that food costs should be roughly 30% of sales. Gross margin is an extremely important ratio for restaurants because it’s used for setting menu prices, portion sizes, and profitability. Prime costs is a related concept that adds labor costs to COGS, since labor and food are far and away the two largest cost components for restaurants. Restaurant labor costs should average around 35%, so industry experts expect total prime costs should be about 65% of sales or less (30% COGS + 35% labor) for a restaurant to be profitable. That leaves about 35% of sales (100% – 65%) to cover all other restaurant expenses and the profit.
• Current ratio: This ratio is calculated by dividing a business’s total current assets by its total current liabilities. The result is a measure of liquidity, indicating how well a business can cover obligations due within one year using its short-term assets. A current ratio of 1 indicates that all current liabilities could be paid in full if all current assets were converted into cash. Higher current ratios are desirable (up to a point), but current ratios below 1 are a red flag for owners.
• Inventory turnover: This ratio shows how many times inventory balances were sold off during a particular time period. Stated another way, it shows how many times a restaurant needed to replace its entire inventory in a given period. Monitoring inventory turnover is especially important for businesses handling perishable inventory as it represents a way to balance having ingredients on hand without incurring costly waste.

Key Elements of Restaurant Financial Management

Effective financial management is crucial for the success and sustainability of any restaurant. Six key elements of restaurant financial management follow.

Budgeting

Think of a budget as the annual income statement the restaurant hopes to achieve, and use it to guide operations. Creating a budget usually begins with thoughtfully estimating revenue for each month of an upcoming year. Revenue budgeting typically starts with historical sales that managers adjust to accommodate expected changes in restaurant capacity, hours of operation, seasonality, advertising and marketing efforts, menu pricing, competition, and customer behavior. Budgeted expenses are often then calculated as a percentage of that anticipated revenue, covering prime costs, credit card processing charges, and miscellaneous supplies. Other overhead costs are added based on planned spending for rent, insurance, equipment, and technology. Together, the budgeted revenue and expenses yield the budgeted profit. This document and all the supporting assumptions serve as a useful benchmark for comparisons to actual operations. Once the budgeted income statement is set, a budgeted cash flow statement and balance sheet can be derived from it.

Forecasting

A forecast is another key financial management tool. Unlike a budget, which is a set plan, a forecast is continually updated with actual results to date, and it projects the most likely future scenario using current information and trends. By way of analogy, compare a budget to mapping out a course for a road trip from point A to point B, whereas a forecast is more like using a navigation app that adjusts the turn-by-turn path, redirecting as needed based on traffic updates. Forecasts help managers react to changing conditions and make more informed, proactive financial decisions. Circumstances that can affect restaurant forecasts include weather conditions, popularity of high- or low-margin offerings, better than expected responses to advertising campaigns, social trends, statutory changes in wages, and shortages of certain supplies or labor. Restaurant managers rely on forecasts for scheduling staff, purchasing inventory, and monitoring cash flow.

Cost Control

Controlling costs is especially important in the restaurant industry because of its low profit margins. Controlling costs involves setting standard costs, monitoring actual costs, and making operational adjustments if there are significant variances. While restaurants must manage many expenses, such as rent, maintenance, and other overhead, the two largest costs are food and labor. More on controlling those costs below.

• Food costs: Controlling food volume requires standardizing recipes and yields, maintaining consistent portion sizes, and limiting waste. Negotiating supplier prices and developing a menu that uses many of the same ingredients—to earn bulk discounts—is another way to attack food costs.
• Labor costs: Optimizing staff schedules to handle busy periods, yet avoid overstaffing during the quieter times, helps keep labor costs in check. Cross training staff for multiple jobs is another way to manage the number of labor hours. Controlling rates for labor involves hiring the right mix of experienced and new staff, as well as limiting overtime. It is also helpful to monitor productivity KPIs, such as number of guests served per server per hour and table turnover rate.

Revenue Management

Revenue management begins by delighting customers—doing you can to make certain they enjoy the food and that the restaurant is clean, has a good vibe, and attentive service. Missing the mark on any of those items can lead to one-and-done customers.

Restaurant revenue is also driven by capacity and turnover. Capacity is a function of space (including patios and balconies) and table layout. Restaurateurs monitor revenue from each table using KPIs such as table turnover rate and time per party. The goals: Maximize the amount of revenue from each customer and/or expand the customer base. Both require careful data analysis, thoughtful tactics, and strong process execution.

The two other major factors driving restaurant revenue are pricing and promotions. More on those below.

• Pricing strategies: Most profitable restaurants are able to maximize menu prices without alienating customers. A first step toward that state of grace is understanding the price-to-cost ratio for every menu item. Restaurants should review these ratios and adjust their menu prices often to meet profit targets.
• Promotions and upselling: Consider offering special deals, such as combo meals, happy hours, and new-customer discounts, or offering value adds, such as free desserts, to bring in more patrons. Changing up menu offerings can attract new customer demographics, but it’s important not to alienate the regulars. A good way to raise revenue from existing customers is to encourage them to order certain items—those that POS and cost data identify as big, highly profitable sellers. Giving these winners prime positioning on menus and encouraging servers to recommend them are good ways to boost their sales. Loyalty programs are another way to reward customers for coming more often and buying more. Upselling, too, can increase the amount of each table’s check by suggesting add-ons, such as toppings, dessert, bottled water, and specialty cocktails.

Cash Flow Management

Cash flow management means keeping a close eye on the timing of cash coming into and going out of the business so that it can meet all its financial obligations. It’s important to generate cash flow statements regularly to monitor the business’s free cash flow and gauge the amount of cash available for near-future requirements. It’s also a good idea to monitor the mix of cash and credit card sales, as a large unnoticed shift can cause a cash crunch. It typically takes credit card processors one to three days to pay the restaurant and even longer for checks to clear. All the while, cash is being paid out to suppliers, staff, the landlord, and other places. Judicious use of trade credit—supplier agreements that let a restaurant delay payments for a specified period—is a common restaurant strategy to avoid running out of cash.

One of the most important methods for managing cash flow is to create, and regularly update, a cash flow forecast. This tool estimates expected cash flows for future periods. A weekly or monthly cash flow forecast helps managers plan for times when cash is expected to be tight so that they can set aside some cash when they’re flush.

Legal and Tax Considerations

A restaurant that fails to properly manage legal and tax issues may face costly penalties and fines and, in worst-case scenarios, may even have to close. Fastidious recordkeeping is a baseline requirement. That can work can be error-prone if done manually; automated accounting software makes it easier. Hiring a knowledgeable bookkeeper can take pressure off restaurant managers and owners who already wear several hats, and it helps to ensure that transactions are handled in a timely manner and that systems are up to date.

Additionally, engaging a tax adviser is a best practice because restaurant tax compliance has many complex facets. For example, income tax requirements vary based on how the restaurant is legally structured, and payroll tax requirements are more complex than for most businesses because of tipping. Plus, sales taxes must be collected and remitted to various jurisdictions. And if you own the building, there are also property taxes.

10 Restaurant Financial Management Strategies

The 10 strategies discussed below can help improve a restaurant’s financial health.

1. Establish Clear Financial Objectives

   Short-term financial goals might include achieving specific sales or profit targets or launching a to-go business. Medium- and longer-term goals might be to open another location or locations, pay off debt, or renovate the dining room. These financial objectives inform the budget and help guide day-to-day decision-making. especially when progress toward the goal is measured and that information is shared with key managers.

2. Develop a Detailed Budget for Your Restaurant

   A detailed budget establishes a plan for achieving the restaurant’s financial goals. It’s important for the budget to be thorough, capturing all revenue and expenses. Consider organizing the revenue budget by sales stream, separating dine-in, take-out, and catering, especially if the pricing, costs, and capacity differ for each stream. When budgeting expenses, use historical financial data to estimate food, labor, and other costs. Don’t forget overhead costs, such as rent, utilities, and maintenance. Adjust any historical figures for known changes, such as an annual rent increase or expected new hires. The budget should also include discretionary spending, such as planned advertising and equipment purchases.

   Once the budget is in place, continually compare actual results to the budget and investigate any variances. It’s helpful to break the budget into the time periods that are most useful, such as monthly, weekly, or daily, to reflect seasonality and for eventual comparisons to actuals.

3. Perform Frequent Financial Audits

   Staying on top of the restaurant’s finances is a best practice that helps you catch issues early and pursue opportunities as soon as they arise. The audit process involves several layers. Review cash drawers at the end of each shift to ensure that staff have recorded sales properly and safeguarded cash. Review sales data from POS systems daily to uncover patterns and track progress against budget. You can also use this information to purchase inventory for trending products and to schedule kitchen staff. Examine financial statements at least monthly to investigate unexpected changes, develop solutions, and revise forecasts.

4. Adopt Technology Solutions

   Technology solutions can help make restaurant financial management easier and improve accuracy, efficiency, and the customer experience. Automation saves time and reduces the likelihood of manual errors. Restaurant-specific applications are used to track sales, monitor table turnover, manage inventory, and pay staff. Automated accounting systems simplify and speed up transaction processing and can generate real-time financial statements and dashboards for timely analysis. However, it’s important to adopt technology solutions that work together seamlessly with any legacy systems.

5. Price Menu Items for Profitability

   Menu pricing is part art, part science. Consider the psychological correlation between price and quality, while respecting the target customer’s sense of value. Ultimately, however, prices must support profitability, which is mostly set by analyzing financial data. Understanding how much it costs to make a dish and setting a gross margin target are the critical steps when setting menu prices. Beyond that, consider competitor pricing, promotions, and seasonality.

6. Optimize Inventory and Manage Food Expenses

   Because food is one of the biggest expenses for restaurants, keeping tight control of food costs can make the difference between profit and loss. You must manage the cost of food waste, whether from overstocking, spoilage, mishandling, or inconsistent portion sizes. These extra costs will drive up COGS and eat into profits. To manage food costs most effectively, use inventory management software that can track food coming in from suppliers and food being used in the kitchen. This provides two main benefits: It gives restaurants a better view of current inventory, helping to avoid overstocking, reduce waste, and prevent ingredient shortages; and it offers better information to predict future inventory needs, making ordering more precise and cost-effective. Inventory software also provides useful data for negotiating with suppliers for better pricing or higher-quality products.

7. Lower Labor Expenses

   To manage labor expenses effectively, you must balance costs with customer service. Actively manage staff schedules, rather than taking a “set it and forget it” approach. Analyze peak sales periods and schedule shifts accordingly to avoid understaffing or overstaffing. Use scheduling software to streamline this process, which is especially complicated for restaurants due to the large number of employees and frequent turnover. Integrate scheduling software with payroll systems to extend the advantages. Reducing turnover is another tactic for lowering labor costs without impacting the customer experience. Implement cross-training, offer performance incentives, and provide tools that make jobs easier, such as automated order-taking and payment processing. These measures can increase employee satisfaction and reduce turnover costs for recruiting and training.

8. Select High-Efficiency Equipment

   Restaurants use a lot of equipment, from the dining room to the kitchen, so it might be tempting to select inexpensive options to reduce costs. However, investing in high-quality and high-efficiency equipment is likely a smarter financial decision over time, by lowering ongoing costs for utilities, maintenance, and replacement. Consider the potential financial impact of a faulty refrigeration unit on perishable inventory. Regularly service equipment to extend its life.

9. Build a Financial Reserve

   A cash reserve can cushion the financial blow in the event of an emergency, such as a broken refrigeration unit, supply chain disruption, or natural disaster. It can also save time and money, avoiding the hassle and interest charges of taking out an emergency loan or leaning on credit cards. A financial reserve fund can also help bridge slow periods or economic downturns. Industry sources suggest building a reserve for contingencies that can cover three to six months of operating expenses, depending on certain attributes such as seasonality and business size. A financial reserve is likely to be a sizable amount. Incorporate the practice of setting aside a small amount of profits in the budget and putting the cash in a separate bank account to avoid dipping into it for everyday expenses. As the restaurant grows, the financial reserve may need to grow with it.

10. Stay Adaptable to Industry Trends and Innovations

    Restaurants are trendy businesses: What’s hot today may be tepid tomorrow. Food and beverage preferences, delivery models, and restaurant layout and decor are just a few elements that constantly evolve. Incorporating trends and innovations that align with a restaurant’s profile keeps it relevant with customers. However, it’s important to understand the impact these trends and innovation will have on the business model. Perhaps catering to customers’ desires for sustainable seafood will increase food costs? Adopting QR codes instead of printed menus might be a cost-saver, but will it annoy older patrons?

Leveraging Technology in Restaurant Financial Management

Technologies tailored to the restaurant industry make financial management easier and more effective. Technologies will help track sales, manage inventory, and analyze financial data, in addition to increasing overall operational efficiency. Online reservation systems let customers easily book and cancel, keeping staff away from the phones and improving table management and turnover. Online ordering applications can boost takeout sales and improve order accuracy, compared to phoned-in orders. POS systems provide valuable data for tracking sales. Inventory management systems help control food and beverage stock levels and costs. Staff scheduling and payroll software helps with labor management. Automated accounting systems serve as the backbone for controlling, analyzing, and managing the overall business.

NetSuite: Financial Management for Restaurants and Hospitality

NetSuite Financial Management is an integrated accounting system that includes all the financial modules a restaurant needs, including general ledger, accounts payable, fixed assets management, cash management, and budgeting and forecasting. Real-time processing and drill-down functions enable managers to monitor daily transactions. Financial statements, detailed reports, and prebuilt, configurable dashboards give restaurant managers and owners visibility into sales, cash flow, and KPIs to actively manage their business.

What’s better is that NetSuite’s cloud-based accounting software is part of NetSuite for Restaurants, so it integrates seamlessly with specialized restaurant POS, inventory management, guest services management, employee scheduling, time tracking, and payroll functions. NetSuite thus provides a single, scalable platform that lets restaurant owners and managers manage and monitor their entire business, at whatever level of detail they seek.

Running a restaurant involves juggling many financial and operational elements to attain profitability and growth in an industry with notoriously thin profit margins. Restaurant financial management includes creating budgets and forecasts, monitoring costs, driving sales, managing and paying staff, and complying with tax regulations, all while delivering a customer experience that makes diners want to come back. It’s a complex undertaking made easier and more efficient with the right integrated software.

Restaurant Finance Management FAQs

What is financial management in restaurants?

Financial management in restaurants includes budgeting, controlling costs, attracting customers, managing staff, and complying with tax codes. It involves managing cash flow to keep business operations running smoothly and profitably. It also involves managing debts, pricing menu items, negotiating with suppliers, handling payroll, keeping facilities up to date, integrating technology solutions, and adhering to regulations.

How to manage money in a restaurant?

Key elements of managing money in a restaurant include setting financial goals and budgets and creating updated forecasts. In addition, revenue management includes setting prices and driving new revenue with promotions and upselling. Controlling costs is important, especially food costs and labor, which are the two largest expenses for a restaurant. In addition, cash flow management is critically important, to ensure that the restaurant can fulfill its obligations, such as paying its employees. And finally, it is important to adhere to legal and tax regulations to avoid costly penalties and fines.

What are the five main functions in financial management?

The five main functions in financial management are financial planning and forecasting, cash flow management, financial reporting and analysis, financial control, and risk management. Financial planning and forecasting deals with the creation of budgets based on revenue and cost projections. Cash flow management involves ensuring that cash coming into the business is adequate to meet the level of cash going out. Financial reporting involves the creation of financial statements, such as the income statement, balance sheet, and cash flow statement, as well as analyses to support management decision-making. Financial control refers to the various ways to optimize the company’s resources, focusing on improving profitability, efficiency, and liquidity. Risk management involves identifying, assessing, and prioritizing potential business risks in order to avoid or minimize them.

What are the four types of financial management?

The four types of financial management include planning, controlling, organizing and directing, and decision-making. Planning refers to establishing financial goals and targets. Controlling involves putting processes in place, such as establishing and monitoring KPIs, to ensure progression toward those goals. Think of organizing and directing as the “how” in achieving an organization’s plan, identifying needed resources such as funding, personnel, and technology. Decision-making entails selecting a particular path to achieve financial goals.