Restaurant accounting series: Prepping your Restaurant for a Sale (before or after it’s open for biz)

By: Michael Viola, Restaurant CPA

You expect what you inspect.  Sounds pretty straightforward, right?  If you expect or want more profitability, inspect where the money is going.  But don’t lump it to just a dozen or so accounts.  A comprehensive and flexible chart of accounts will give you best-in-class restaurant reporting.

By having a good chart of accounts, you can do many things.  First, you are more likely to benchmark against yourself or budget, compare with your peer group, negotiate with a vendor and so forth.  But you should also be able to review just a summary of the restaurant’s performance with a one-page P&L.  And if desired, that same P&L can be “exploded” to show every account and the detail behind the summary information.  The art is setting the chart of accounts up properly so that the accounts can roll up correctly.  Most operators want a “50,000-foot” view, as they have limited time to delve into multiple reports with multiple pages!

With granular information at your fingertips, you have more power to understand your business and run it well by making intelligent and informed decisions.  Additionally, developing a track record with consistent financial data will help down the road should your concept seek financing from a bank/SBA or investor, look to sell the concept or quite often…both!

We can help you with the design or redesign of your restaurant’s accounting.  Contact us (info@go-pure.com) a no-cost evaluation to understand your unique needs so we can tailor a solution for you.

Today, I attended a luncheon seminar for restaurant owners and decision makers.  The topic was how does the restaurant staff steal.  It was an interesting talk in that servers, bartenders, etc. are always looking for an angle to steal.  Sadly, I think employees will look to steal if no one is looking.  Stealing from an employer in a restaurant environment is usually a team game as it requires several to be in cahoots to pull off a legitimate scam and to keep this scam going.

That is the name of the game...keep the scam going.  No one gets rich by onesie-twosie stealing.  Rather, a good scheme is one that is not too aggressive so that it is identified by the owner or manager.

Michael Viola, CPA, MBA, is the president and founder of PURE Restaurant Solutions, an accounting firm that specializes in restaurant accounting. PURE is located in Orange County, California, but with the help of cloud computing, PURE's clients are nationwide. With nearly 14 years of service in the industry, he has worked with some of the leading restaurant concepts as an employee, auditor (through his "Big 4" audit clients) or as a Controller/CFO. Michael is passionate about restaurants and enjoys seeing concepts succeed. He can be contacted at blog [at] go-pure.com.

What is wage compression?

Great question.  On May 31, 2013, I submitted a post regarding the recent wage proposal for the State of California.  Over time, the current rate of $8.00 per hour would go to $9.25.  While it may be easy to figure that your financial impact would be those at or below the current minimum wage rate to the new minimum wage rate multiplied by the collective number of hours they work, there is more to the story.

The notion of compression is that the workforce would get "compressed" and certain disparities that are created when the rate artificially goes up (a wage increase for a promotion or merit would not be considered an artificial increase; increases on account of law or legislation would be considered an artificial increase).  For example, let's say worker A earns $8.10 per hour.  In 2014, he or her rate would be below the minimum wage rate and therefore would need to be brought up to $8.50.  Great...he or she just got a bump of $0.40 per hour.  But what about Worker B who is already at $8.50 before any legislation went into effect?  They may have tenure of 2-3 years and started at the minimum wage level but have since been promoted.  After all that hard work, they are now back at the minimum wage rate level and they aren't too happy.

Not fair you say?  Maybe or maybe not.  The notion of fair is not for me to judge here.  I will say the story doesn't end there.  What if Worker B made a (compelling) case for their rate to go up also, say another $0.40 to $8.90?  Now the impact is a total of $0.80 per hour times the number hour hours worked by Workers A and B.  Meanwhile Worker C is hot that their rate is now in line with Worker B's.  And, by the way, Worker C has been with the company for twice the number of years as Worker B.  It can go on and on.

As a restaurant owner/manager, the good news is that the farther you get from the minimum wage rate level, the less impactful it becomes, meaning there will be fewer gripes and issues with who's earning what compared to whom.  The bad news is that you need to figure out a sliding scale that accommodates your workers so that the change isn't all black and white.  The rate for Worker A has to go to $8.50 as required.  But perhaps after that the increase for Workers C, D and others might be a percentage of the $0.40 increase so that the financial impact is lessened and there is parity among your workforce.  Over time, merit increases and overall rate increases might also work any disparity out among the workforce.

In the meantime, having an objective way to handle the minimum wage rate increase so that the restaurateur is law-abiding and their workers don't feel cheated, jealous is important.

Employee morale is also critical here, and handling it judiciously, decisively and objectively is the name of the game.  Do not overlook the key topic of employee morale.  Left unattended, it can have a worse financial blow than any minimum wage legislation.

Interestingly, I performed an analysis like this for a restaurant chain in the late 1990s and the results were telling.  If the analysis is set up right, the compression amount can be manipulated to see what the impact (or its sensitivity) is on the total financial impact of the increase.  It was a great and important exercise for the restaurant's leadership to go through to not only understand the financial impact but to understand the human side of the change and what worker reaction would be.  After all and like it or not, it is often the case that the same workers who are affected by this rate change are the ones interacting the most with your customers.  You don't want to make them mad or disenfranchised, do you?

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Michael Viola, CPA, MBA, is the president and founder of PURE Restaurant Solutions, an accounting firm that specializes in restaurant accounting. PURE is located in Orange County, California, but with the help of cloud computing, PURE's clients are nationwide. With nearly 14 years of service in the industry, he has worked with some of the leading restaurant concepts as an employee, auditor (through his "Big 4" audit clients) or as a Controller/CFO. Michael is passionate about restaurants and enjoys seeing concepts succeed. He can be contacted at blog [at] go-pure.com.

Earlier this week, the California senate approved the passage of the minimum wage act for California.  This means that the current wage rate of $8.00 per hour would move to $9.25 over the next three years starting in  2014.

On January 1, 2014, the rate would be increased $0.50 to $8.50.  On January 1, 2015, the rate would be increased again by $0.50 to $9.00.  On January 1, 2016, the rate would be increased one more time by $0.25, to $9.25.  After that, it would be indexed to inflation and presumably would go up again.
This is good news to minimum wage workers and their consumption habits.  Depending on what side of the aisle you are on, this may come as good news.  However, for restauranteurs this is yet another headwind that appears to directly affect their profitability.  This in addition to healthcare, the payroll tax hike and the increased laws, certain commodity pricing and compliance that come with operating an establishment in the state of California make it difficult to survive.

These same entreprenenurs need to find a way to remain competitive.  While the obvious answer is to raise prices, that may not be a viable option.  Competitors are always looking for a leg up, and pricing news by one of their local establishments may open the door for them to compete on price if they can handle the additional volume that comes with below-market pricing (think Southwest versus some other airlines).  Yet, despite these headwinds, entrepreneurs always come out on top.  The good ones know how to eek out a profit and still keep their heads up and their staffs motivated.

Motivation can come in various forms.  No matter how one motivates their staff, the goal is for them to bring their A-game every day to the restaurant.  In this hyper-competitive world of numerous eating options, instant results as well as Yelp and other review sites, it's critical, very critical, to ensure each customer has an A+ experience.  Not easy.

Hopefully, the minimum wage and the plan to increase this provides the incremental incentive for the workers to do their very best each day...because that's what managers need from their people.

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Thanks.

Michael Viola, CPA, MBA, is the president and founder of PURE Restaurant Solutions, an accounting firm that specializes in restaurant accounting. PURE is located in Orange County, California, but with the help of cloud computing, PURE's clients are nationwide. With nearly 14 years of service in the industry, he has worked with some of the leading restaurant concepts as an employee, auditor (through his "Big 4" audit clients) or as a Controller/CFO. Michael is passionate about restaurants and enjoys seeing concepts succeed. He can be contacted at blog [at] go-pure.com.

Burning Down the House

The book, Burning Down the House, is a great and quick read.  The book relies on the chicanery of two restaurant employees who teach the reader about the successful scams they have performed.  With an "us versus them" bent, these two servers are anti-establishment, including the manager and just about any one who isn't in on their scams.

Bottom line, the book is a great read and informs the reader (ostensibly an owner of restaurant or similar establishment) that your employees are looking for ways to rob you blind.  With all due respect to the honest employees out there, most employees seem willing to take the risk to steal from their employer for short-term personal financial gain.  In an industry where the lowest paid person can seemingly impact customer service, handles your cash and can influence the success of failure of your enterprise, it's important to pay attention to ALL of the details, including what is happening at your restaurant.

The moral of the story is to beware of employee theft in all of its forms.  Also have a system that has strong internal controls and processes is key to thwarting theft.  Sure, opportunities for theft will be with a restaurant nearly 100% of the time -- the key is to minimize the threat and teach your employees to aspire for something more lucrative...a raise and a promotion!

Michael Viola, CPA, MBA, is the president and founder of PURE Restaurant Solutions, an accounting firm that specializes in restaurant accounting. PURE is located in Orange County, California, but with the help of cloud computing, PURE's clients are nationwide. With nearly 14 years of service in the industry, he has worked with some of the leading restaurant concepts as an employee, auditor (through his "Big 4" audit clients) or as a Controller/CFO. Michael is passionate about restaurants and enjoys seeing concepts succeed. He can be contacted at blog [at] go-pure.com.