Restaurant Owners Face Complex Accounting Challenges: Why Professional Help is Essential in 2024

Running a restaurant in 2024 means navigating an increasingly complex financial landscape where every penny counts. Operators are working with incredibly thin margins, daily fluctuations in sales, and constantly changing costs for things like food and labor. On top of that, they’re dealing with things like tip reporting, spoilage and multiple revenue streams — from dine-in to takeout and even catering. These unique challenges require specialized accounting expertise that goes far beyond traditional bookkeeping.

The Triple Challenge: Tips, Inventory, and Labor

Restaurant accounting needs people experienced with the unique demands of restaurants, including handling tip reporting, daily or weekly inventory reports, and a sometimes volatile labor force, as well as expertise with accounting software designed for the restaurant industry. Each of these areas presents distinct complications that can derail profitability if not managed properly.

Tip Management Complexities: Under the Federal Labor Standards Act, employers may pay tipped employees a reduced wage as long as that wage plus the tip income total the minimum hourly wage. The employer’s reduced liability is known as a “tip credit.” The federal guidelines as of April 2019 allow for up to $5.12 per hour in tip credit. This means that employers must pay an hourly wage of at least $2.13. However, state regulations vary significantly, and if employees receive at least $20 in tips during the month, then employees must report the amount of cash tips to their employer by the 10th of the following month. Employers must keep their employees’ tip reports. They also must withhold employee income taxes and the employee share of social security and Medicare taxes for both wages and tip income received. You must report this information to the Internal Revenue Service on the quarterly federal tax return filing (Form 941).

Inventory Nightmares: Businesses such as retailers and manufacturers may assess inventories weekly, monthly, or quarterly, but restaurants may need to do that daily, given that food can spoil and demand can shift rapidly. In contrast, weekly inventory management is critical for restaurants because restaurant inventory is food — much of which is perishable and will spoil in less than a month. Inventory and food waste management are the biggest operational challenges faced by restaurant industry. Inventory accounting can help you solve this issue.

Labor Cost Volatility: Though payroll expenses vary by region, type of restaurant and the restaurant itself, labor costs typically range from 25 to 40 percent of gross revenue. Labor costs include salaried employees, hourly wages, benefits, taxes and tips. The restaurant industry is labor-intensive, with changing shifts and, often, a mix of part-time and full-time staff. Managing payroll and understanding labor costs compared to sales are essential aspects of effective restaurant accounting.

The 2024 Reality: Rising Costs and Shrinking Margins

Recent industry data reveals the mounting pressure on restaurant operators. Participants reported continued food and labor cost increases, with 88% experiencing rising staff expenses, compared to 89% in last year’s annual survey, and 86% reporting an increase in food costs. For most restaurants, a good average COGS ratio is 30% to 35%, according to Restaurant Owner and Manager Magazine, though this percentage can fluctuate depending on consumer demand and changes in the cost of ingredients. Managers need to be prepared to make quick adjustments to menu items or prices to ensure that they can continue to maintain a healthy COGS ratio even when costs increase.

The situation becomes even more challenging when considering labor and food costs will be higher during a busy week with $10,000 in sales than a slow week with $5,000 in sales. For budget planning purposes, to stay profitable, you’ll want to keep labor and food costs each at 30 percent of sales.

Why Professional Accounting Support is Critical

Managing restaurant accounting presents several challenges. The complexity arises from handling various revenue streams, managing inventory, and tracking food costs. Restaurants also face issues with fluctuating expenses, labor costs, and maintaining accurate records for tax purposes. The high volume of daily transactions can lead to errors if not meticulously recorded. Additionally, compliance with industry-specific regulations adds another layer of difficulty.

For restaurant owners in Pennsylvania, working with an experienced accountant Brooklyn, PA can provide the specialized expertise needed to navigate these complex financial waters. Professional accountants understand the unique challenges restaurants face and can implement systems that provide real-time visibility into crucial metrics like food costs, labor percentages, and inventory turnover.

Technology Solutions and Best Practices

Integrating your accounting software with your POS system is a key step towards efficient financial management in a restaurant. This connection streamlines data flow and provides a holistic view of your operations. “The more you can connect your accounting to your operations, the better,” Gunn said. “It gives operators the full picture they need to make smart, timely decisions without getting bogged down in spreadsheets.” Proactive daily monitoring of your restaurant’s financial metrics helps you identify trends, control costs and make timely adjustments.

A combination of cost accounting, inventory control, labor optimization, and strategic menu design offers the most sustainable path to reducing costs. Cost accounting involves tracking every expense category to understand spending patterns, identify inefficiencies, and inform better pricing and operational decisions.

The Path Forward

Restaurant accounting in 2024 requires more than basic bookkeeping skills. Restaurants often find it challenging to allocate time and resources to accounting while focusing on core operations. As a result, many choose to outsource their accounting tasks. Outsourcing ensures accurate financial reporting, compliance, and efficient bookkeeping, allowing restaurant owners to concentrate on providing quality service and growing their business.

The key to success lies in implementing robust systems that can handle the unique demands of restaurant operations while providing the real-time data needed for quick decision-making. With proper accounting support, restaurants can not only survive but thrive in today’s challenging economic environment, turning their biggest operational challenges into competitive advantages through better financial management and strategic planning.