What Are Retained Earnings on a Balance Sheet

Retained earnings on a balance sheet are the net income that a company has decided to keep or ‘retain’ after distributing dividends to its shareholders. This balance, found under shareholder’s equity, can be utilized for reinvestment in business expansion, debt reduction, or reserves against future losses. It’s the profit that fuels a company’s growth and symbolizes its financial health.

What Do Retained Earnings on a Balance Sheet Tell You

Retained earnings on a balance sheet provide a window into a company’s financial health. A positive retained earnings balance suggests a profitable company, demonstrating that it has generated surplus income over its dividends and overheads. Conversely, negative retained earnings might indicate a company’s consistent losses or large dividend payouts. Observing the evolution of these earnings can reveal business profitability trends and the management’s dividend policies.

How Retained Earnings on a Balance Sheet is Used

Retained earnings serve multiple purposes, integral to a company’s financial well-being. This money can be used to fund business expansions or to finance new projects and product development, propelling the company’s growth. Retained earnings can also help reduce liabilities by repaying debts, thereby improving the company’s debt-to-equity ratio. Furthermore, they can act as a financial cushion for future downturns or unforeseen expenditures, strengthening the company’s financial resilience.

How to Calculate Retained Earnings on a Balance Sheet

Understanding how to calculate retained earnings on a balance sheet is crucial to assessing a company’s financial strength. The calculation starts with the retained earnings at the beginning of the period, adds the net income or subtracts net loss of the current period, and then deducts any dividends paid out. The formula is as follows:

Retained Earnings = Beginning Retained Earnings + Net Income – Dividends Paid

Example of Retained Earnings on Balance Sheet

To illustrate how to calculate retained earnings on a balance sheet, imagine a firm starting the year with $50 million in retained earnings.

It earns a net income of $30 million during the year but decides to distribute $10 million as dividends to its shareholders.

In this case, the retained earnings at year-end would be calculated as $50 million (beginning retained earnings) + $30 million (net income) – $10 million (dividends paid) = $70 million.

Difference Between Retained Earnings and Dividends

Retained earnings and dividends represent different paths for a company’s net income. Retained earnings on a balance sheet are those profits that a company chooses to reinvest in its operations or hold as a safety net. In contrast, dividends are a portion of the profits distributed to shareholders. The decision to reinvest profits as retained earnings or distribute them as dividends depends on the company’s growth strategies and financial health.

Limitations of Retained Earnings

Although retained earnings provide crucial insights into a company’s ability to generate profits and reinvest in its operations, they are not without limitations. High retained earnings could mean the company is consistently profitable, but it could also suggest the company isn’t reinvesting its profits effectively or isn’t returning enough profits to its shareholders. Therefore, when examining retained earnings on a balance sheet, it’s important to consider other financial indicators for a well-rounded view.

Understanding retained earnings on a balance sheet and how to calculate them helps you to steer your company toward greater growth and success. For more assistance with your restaurant accounting, please schedule a demo or call us today at (720) 826-9900.

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What is Net Income on a Balance Sheet

Net income on a balance sheet is the ultimate result of all business activities during a given period. It is calculated as the difference between a company’s total revenue and its total expenses. The net income is critical as it not only shows the profitability of the company but also influences other areas of the balance sheet, including retained earnings and shareholder’s equity.

How to Calculate Net Income on a Balance Sheet

To calculate Net Income on a balance sheet, take your total revenue and subtract all expenses, including cost of goods sold, operational costs, interest and taxes. The resulting number represents the net income, a key indicator of a company’s financial health and profitability.

Calculating net income on a balance sheet is a critical skill for any financial analyst or business owner.  

Components of Net Income Calculation

Net income on a balance sheet is the end result of a multi-step calculation involving several essential components:

• Revenue Recognition: This is the process of recording revenue when it is earned rather than when it is received. It gives a true picture of a company’s financial performance during a particular period.
• Deducting Expenses: Expenses related to business operations, such as the cost of goods sold, rent, salaries, and utilities, are deducted from the total revenue. This step ensures that the net income calculation considers the cost of conducting business.
• Depreciation and Amortization: Depreciation accounts for the loss in value of tangible assets like machinery or buildings, while amortization applies to intangible assets like patents or trademarks. Both deductions help accurately assess a company’s net income by accounting for the gradual use or expiry of assets.

Importance of Net Income on a Balance Sheet

Net income on a balance sheet serves as a crucial indicator of a company’s profitability. By demonstrating how much revenue exceeds expenses, it provides a direct view of a company’s financial success. For investors and stakeholders, net income becomes a key metric that influences investment decisions, as it gives insight into how effectively the company is being managed and its potential for future growth.

Presentation of Net Income on a Balance Sheet

Net income on a balance sheet is presented under the equity section, specifically as a component of retained earnings. A balance sheet consists of three primary sections: assets, liabilities, and shareholders’ equity. The net income flows from the income statement to the balance sheet, increasing the retained earnings under shareholders’ equity. In effect, net income represents the increase in a company’s wealth over a specific period.

Analysis and Interpretation of Net Income

Analyzing net income on a balance sheet offers a wealth of insights into a company’s financial health. This figure plays a pivotal role in computing profitability ratios, such as the net profit margin, which reflects how efficiently a company converts revenue into profit. The quality of earnings, discerning the regularity of income, is another essential factor. Furthermore, net income integrates with several other financial metrics, influencing computations like return on equity and earnings per share.

Understanding net income on a balance sheet is essential to growing your business and tracking your progress. For more assistance with your restaurant accounting, please schedule a demo or call us today at (720) 826-9900.

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What is Included in a Balance Sheet?

How to create a balance sheet begins with documenting and understanding its key components:

• Assets: Current (all cash, accounts receivable, marketable securities, prepaid expenses, inventory) and long-term assets (any fixed assets, intangible assets, long-term securities).
• Liabilities: Current liabilities (utilities, taxes, accounts payable, short-term debt) and long-term liabilities (bonds payable, long-term debts).
• Shareholders’ equity: Share capital and retained earnings.

Once you know how to create a balance sheet and account for your small business’s assets, liabilities, and shareholders’ equity, let’s see how to use this crucial financial tool.

Internal and External Importance of a Balance Sheet

Understanding how to create a balance sheet is a key element of both internal and external business analysis.

• Internally: Internally, your balance sheet is a tool for assessing your small business liquidity, identifying financial trends and issues, and prompting necessary operational adjustments.
• Externally: Externally, a well-documented balance sheet assists investors, lenders, and stakeholders assess your financial position, determine available resources and financing methods, and ensures compliance with reporting laws for external auditors.

Now that we understand what a balance sheet includes and the crucial role it plays in financial analysis, it’s time to learn how to put together a balance sheet for your small business. We’ll break it down into manageable steps.

Step-by-Step Guide to Creating a Balance Sheet

      The process of how to create a balance sheet involves several key steps:

1. The first step is selecting the balance sheet date, commonly set on a quarterly or monthly basis, which signifies the period you’re examining.
2. Next, you need to list all your assets, arranging them by liquidity, from cash and accounts receivable to longer-term investments.
3. After listing your assets, verify the total assets against your general ledger, which acts as a master list of all financial transactions, to ensure accuracy.
4. Then determine your current liabilities, which include money you owe soon, such as accounts payable, short-term notes payable, and accrued liabilities.
5. Next, calculate your long-term liabilities that extend beyond one year, such as long-term notes, bonds payable, pension plans, and mortgages.
6. Following your liabilities assessment, add up all your current and long-term liabilities to provide a complete financial picture.
7. Then calculate your owner’s equity, factoring in retained earnings and working capital, essentially showing the value left for owners after all your debts are paid.
8. Finally, validate your balance sheet by ensuring the total liabilities and owner’s equity match your total assets.

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Understanding how to create a balance sheet lets you effectively steer your small business toward financial stability and ongoing growth. For more assistance with your restaurant accounting, please schedule a demo or call us today at (720) 826-9900.

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Profit margin can be used as a tool for pricing, and as a measurement of production efficiency. 

• As a pricing tool, profit margin can be used to reverse engineer the right price to sell a dish at. That is, you start with your expenses and desired profit, and from those numbers you calculate what the sale price of the dish should be. Let’s say you know it costs $5 to make a breaded chicken entrée, and you want to make at least $9 dollars in profit on the dish. Adding these numbers together, you can see that the minimum the dish can be sold for is $14.
• As an instrument for cost control, you can set a goal for a given level of profit from your operations. Say you want to clear 15% profit after all expenses are accounted for. You can then use this number to see the maximum allowable production expenses for a given level of sales. Say you have a busy restaurant that averages $10,000 in sales per night. If you want to maintain a 15% profit margin, then you cannot allow costs to exceed $8,500 per day. (10,000 * ((100 – 15)/100) = 8,500)

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Restaurant Profit Margin Calculator: Benefits and Use

The restaurant profit margin calculator replaces manual procedures for determining your profit margin. The calculator takes your business data and performs the necessary computation to arrive at the margin of profit. Using this calculator is the best approach to how to calculate profit margin in a restaurant.

Understanding Profit Margin

Profit margin is fundamentally a measure of how much money the business makes above its costs, expressed as a percentage. You can think of profit margin as the remainder after all expenses have been accounted for. For 100 dollars of revenue, say that 90 dollars are consumed by expenses (labor, food costs, overhead). The remaining 10 dollars is the profit, and your profit margin is 10 out of 100, or 10 percent. That’s how to calculate profit margin.

Profit come in different varieties: gross and net. It’s helpful to think about these definitions in terms of the sale of a single dish at a restaurant. Gross profit is your sale price minus the cost of the ingredients. Net profit is the sale price minus all expenses, such as labor, utilities, rent and ingredients. Net profit measures the income that can potentially be distributed to owners.

Factors Affecting Profit Margin

To fully understand restaurant profit margin, it’s critical to know the most common sources of expenses. In restaurants the most important expenses are known as “the big three”. These are labor, cost of goods sold (COGS), and overhead. Roughly speaking, each of the big three expenses consume a third of the expense total. So, labor is 33% of your expenses, and so on. Each big three category presents the opportunity for cost reduction and optimization. Can you more strategically allocate shifts to exactly meet demand? Can you change suppliers to reduce your ingredient costs? Can you negotiate with your landlord for a better deal on rent?

RELATED: How Do Small Business Restaurants Make a Profit?

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How to Use a Profit Margin Calculator

To calculate your restaurant profit margin, simply input your restaurant revenue, labor costs, cost of goods, and other expenses – then click Calculate Profit Margin! Once calculated, you’ll see your restaurant profit margin for both gross and net profit.

Tips for Improving Profit Margins

There are two approaches to a better profit margin—increase sales and reduce expenses. Increasing sales is the most effective of two methods, so we’ll examine it in detail. You can increase sales in a number of ways: engage in menu engineering, increase table turnover, add tables, and increase upsells. 

• Menu engineering is the process of examining the menu for opportunities to increase sales and reduce costs. This is done by creating more popular dishes using favorite ingredients and favorite types of preparation, to increase sales. Then to reduce costs, you remove unpopular items from the menu, which allows you to stock less inventory, thereby reducing your food costs. 
• Table turnover can be increased by using technology to process orders from servers and transmit them to the kitchen via a kitchen display monitor. Additionally, you can train your waitstaff to regularly check in on customers, and (without pressuring) swiftly deliver bills once guests are ready to depart.
• Adding tables is one of the easiest ways to increase sales. Review your table layout and see if there’s space for extra tables, a counter service/bar area, or additional seats at existing tables.
• Upsells are items added to the customers order. Beverages, appetizers, and deserts are the most common upsells. Train your staff to ask customers if they want these items, and encourage your servers to recommend their favorite appetizers, deserts, and drinks. Because they have the highest profit margin on the menu, alcoholic drinks are a particularly potent upsell.

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As the summer season approaches, restaurants nationwide gear up to capitalize on the influx of diners seeking delicious meals and memorable experiences. While warm weather and longer days naturally draw people out of their homes, savvy restaurant owners understand that strategic planning and innovative promotions are essential to maximizing sales during this peak period. But increasing restaurant sales isn’t just about serving delicious food and providing exceptional service; It’s about leveraging the power of technology to make informed financial and operational decisions that drive growth and profitability. In this comprehensive guide, we’ll explore how restaurant owners can harness the capabilities of technology to boost sales while keeping costs in check.

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Collaborative Promotions and Networking:

One effective strategy for increasing restaurant sales is to expand your network through collaborative promotions with nearby establishments. By partnering with complementary businesses, you can cross-promote each other’s offerings, tapping into new customer bases and generating mutual interest. During the summer months, when dining out is particularly popular, these collaborations can yield significant results.

The first step is to recognize and target your intended customers. What is the main demographic you’re targeting? Families? Couples? Location plays a big role as well. If your restaurant is near a stadium, perhaps a sports-themed happy hour might be the perfect restaurant promotion. Loyalty programs are a great low-cost route for restaurant event ideas; use this tool to bring in more customers and then have more promotions available once they sign up.

Harnessing the Power of Social Media:

Social media platforms like Instagram, Facebook, and Twitter have become indispensable tools for restaurant promotion. With minimal financial investment, you can create engaging content, interact with customers in real time, and showcase your restaurant’s unique offerings. By leveraging social media influencers, running targeted ad campaigns, and encouraging user-generated content, you can increase brand visibility and attract more patrons to your establishment.

Offering Exclusive Discounts and Happy Hours:

Promotions such as exclusive discounts and happy hours are effective ways to drive foot traffic and boost sales, especially during summer. Promoting these offerings through social media channels and collaborative partnerships can maximize exposure and entice customers to visit your restaurant during off-peak hours. Additionally, implementing a loyalty program can incentivize repeat business and encourage customer retention.

Leveraging Restaurant Technology to Create Effective Budgets:

Promotions such as exclusive discounts and happy hours are effective ways to drive foot traffic and boost sales, especially during summer. However, ensuring that these promotions are financially sustainable requires careful budgeting and monitoring. Leveraging restaurant technology, such as advanced accounting solutions integrated with real-time data analytics, allows you to create a precise budget for your promotional activities.

You can accurately allocate resources to promotional campaigns without compromising profitability by analyzing historical sales data and forecasting future trends. Additionally, restaurant management software can provide insights into the performance of past promotions, enabling you to refine your strategies and optimize your marketing spend.

With the ability to track expenses, monitor revenue, and assess ROI of each promotion, you can make data-driven decisions to maximize the impact of your marketing efforts. By leveraging restaurant technology to create a precise budget for your promotions, you can ensure that every dollar spent contributes to the growth and success of your business.

Menu and Beverage Strategies:

You won’t have much to show for your efforts without a menu that matches your restaurant’s summer events and promotion schedule. With this in mind, invest some time and effort in offering fresh, locally sourced, cost-effective ingredients for new menu items.

Refreshing your menu with seasonal offerings and locally sourced ingredients can attract food enthusiasts and cater to evolving consumer preferences. Summer-themed cocktails and meal discounts can entice customers looking for a taste of the season, while prix fixe menus offer value-driven options for diners seeking a complete dining experience. By staying agile and responsive to market trends, you can ensure that your menu remains relevant and appealing to your target audience, thereby increasing your sales.

Pro Tip? When planning your menus, be sure to employ strategic food cost management solutions to analyze the profitability of each item and adjust pricing and portion sizes to maximize revenue.

Enhancing the Dining Experience:

Beyond food and beverages, the overall dining experience is crucial in driving customer satisfaction and loyalty. Summer-themed décor, live entertainment, and special events such as trivia nights or karaoke contests can create memorable moments for patrons and differentiate your restaurant from competitors. You can foster a sense of community and encourage repeat visits by curating an immersive and engaging atmosphere.

Monitoring Results with Data Analytics:

Even the best planning and execution can use a little analytical boost. Are your restaurant summer events and promotions actually driving more revenue? Where can you improve? Should you change your restaurant event ideas mid-stream?

You’ll know exactly where your summer promotions stand by setting realistic, measurable goals with key performance indicators (KPIs). We recommend having some key performance evaluations ready for late spring, even before your summer events go live.

Another helpful idea is to have constant customer feedback and reviews on your site or through social media apps.

By leveraging restaurant management software like RASI, you can track sales performance, analyze customer feedback, and identify areas for improvement in real time. Armed with this data-driven intelligence, you can make informed decisions to optimize your promotional strategies and drive sustainable growth.

Once you have KPIs and customer feedback information, you can utilize financial reporting, purchasing tools, and data analytics to adjust scale, scope, and planning.

As you prepare to capitalize on the summer sunshine to boost your sales, remember that innovation and technology are your greatest assets. By crafting targeted promotions, updating your menu offerings, and leveraging technology to back each decision you make, you can create memorable dining experiences that keep your guests coming back for more. Request a free demo today and discover how RASI can set you on the path to success this summer and beyond!

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Give us a call today at (720) 826-9900 or drop us a line to see how we can help. Or, simply schedule a free demo today with our restaurant software specialists!

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Learn about the business

A preliminary step in how to buy a restaurant is to gain a clear picture of why a given restaurant is for sale.

Are the owners retiring and uninteresting in maintaining a popular spot? Or is the business struggling to attract customers?

Note that business owners may be reluctant to share detailed information until you demonstrate serious interest in purchasing the business. Once you’ve convinced the owners that you’re a real buyer, ask to see their financial information.

When evaluating a restaurant’s finances, seek to inspect the balance sheet to see the overall assets and liabilities of the business.

Also, consider the cash flow statement, which details the flow of cash through the business.

A healthy property will have positive cash flow, while a struggling business may have more money going out than coming in. Of course, if you’re ready to overhaul a restaurant and make major changes, and have the operational expertise to turn around a troubled business, then negative cash flow need not be a disqualifying condition for you. But know what you’re getting into upfront.

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Going in depth on the financials — what documents to inspect

Profit & Loss Statement, Balance Sheet, and Cash Flow Statements should all be reviewed when assessing the business’s financial health.

Inspect Profit & Loss for consistency in costs, performance against budget, and overall contribution to the bottom line. Here are some questions to ask when buying a restaurant:

• Does the current structure of the business generate a profit, or are costs too high to support profit?
• Are there large swings in cost of goods indicating opportunities with current operational controls? Can better management reduce food costs and make them more consistent?
• What is the current labor structure, and is it sustainable? Could the restaurant staff be reorganized for more efficiency in operation?
• Is the R&M budget used to maintain the property and equipment? Are long-term assets well cared for or will they require a big initial investment in reparative maintenance?

When examining the balance sheet, review any unnatural or negative balances. The balance sheet should not house negative accounts outside of depreciation and amortization.

Negative accounts indicate that there was an issue with the account where it was either over or under-collected. Also give consideration to the remaining life of asset purchases such as property & equipment.

Are the tax accounts trued up? Does the business have outstanding loans, and are they being properly allocated between principal and interest?

These questions all matter most if you’re assuming the complete assets and liabilities of the existing restaurant (also known as a FEIN purchase, because you buy and use the existing Federal Employer Identification Number).

If you’re purchasing only some of the assets of the business, you may be able to pick and choose the most valuable parts of the balance sheet, while avoiding major liabilities.

All types of buyers will be interested in the Cash Flow Statement. This document shows the health of the business in terms of cash in and out. Review it to see where the cash position is gaining momentum and to what degree future cash growth can be expected.

Do they have income coming from ownership distributions? Are they utilizing credit cards to pay bills when cash is tight? Is the way they are utilizing cash sustainable?

Learn how to distinguish between a safe bet and a red flag in restaurant financials

The following financial attributes make for a relatively safe purchase: consistency in costs (specifically look for large inventory swings period to period), Profit and Loss cost categories are in line with industry averages, consistent trends between revenue and profit when reviewing 3-years worth of tax returns, current and balanced bank reconciliations and accurate balance sheet accounts (no unnatural balances).

Conversely, these attributes raise red flags: unnatural balances on the balance sheet, heavy credit card usage to augment cash flow, inability to provide recent financial statements, inability to produce bank reconciliations, missing expenses or incomplete financials, and negative trends in sales as it relates to profit

How to think about trouble spots in the financials

No restaurant is perfect—if it was, it wouldn’t be for sale. So, as a buyer, you can expect to find imperfections. Yet not all flaws are created equal: some problems are deal breakers, while others can be easily remedied. The biggest question to answer up front is how much of the business you want to buy.

If you opt for a total package purchase (a FEIN purchase), then rocky past performance will impact the new ownership, and all previous liabilities would be the new owner’s responsibility. If purchasing the FEIN, increased audits and legal guidance should be sought prior to exploring the purchase to ensure that the new ownership doesn’t incur massive debt or, worse, legal responsibility.

If it is an asset purchase, due diligence should be completed to ensure the financials are holistic.

Are small purchases lumped in with asset accounts? Are inconsistencies in expenses tied to timeliness, and if so, are expenses missing in the current financials?

If a complete overhaul of the restaurant is going to take place, past performance is less relevant but should still be considered. If sales volume was low, was it due to concept and/or operational performance or is it due to location?

Understanding why past performance led to a sale of the business can help you structure the future of the business in a strategic way, so that you do better with the business than the previous owners were able to.

How to value a Restaurant for sale?

Use financial documents to arrive at a valuation of the property.

As a refresher for buyers, the balance sheet reflects the business’ total financial worth. It takes into account the net income (retained earnings) from all years and reflects all current assets and liabilities for the business. A close scrutiny of the balance sheet will reveal the true health of the business you want to purchase.

Once you’ve examined the balance sheet, you should be able to answer the following questions about your prospective deal:

• Are you purchasing the inventory and equipment as part of the business? If so, those totals should be taken into consideration.
• If you purchase the business, are you also purchasing the clientele? If so, historical revenue should be considered as part of the valuation to estimate future growth potential.
• Lastly, is there debt that needs to be taken into consideration? How much is owed and who is responsible for paying it?

If it all looks good, proceed to hire an attorney and business appraiser

At this stage you’ve determined you have an interesting prospect on your hands. The next question is, how much does it cost to buy a restaurant? The answer will depend on how the business is appraised (valued) by a professional business appraiser. This is a trusted third party paid for a neutral assessment of the value of business, including all its assets and liabilities. The appraiser will establish a fair market value for the business.

As a rough rule of thumb, restaurants commonly sell for about three times their annual profit, but the value can go higher for businesses with a great location or committed local clientele. When purchasing a restaurant, the price will be a combination of many factors, such as the condition of the underlying real estate (owned vs rented), the desirability of the restaurant, the local reputation of the restaurant (often demonstrated by online reviews), and the state of the equipment and furnishings.

You’ll want to work with an experienced local attorney to examine the lease agreement and purchase agreement. Your attorney will then draft a letter of intent, which is a formal statement of your intention to purchase the property, pending due diligence.

Secure your funding

You’ve found a property of interest and had it appraised. Now you have a target for how much money you have to raise to complete the purchase. With this figure in hand, calculate the relative balance of investors and loans you’ll need. Sources of investment will vary by buyer, but if you have experience in the industry, past business partners are a great bet, as you already know whether they make for good partners. Secondarily, you might turn to friends and family, or a crowdfunding platform.

Most buyers will finance at least a portion of the purchase with debt. See our recent article on how to get a loan for a restaurant. In summary, your demonstrable credit worthiness will determine the quality and quantity of debt financing you are offered by lenders. Having a strong credit history, valuable collateral, and an impressive business plan will best position you to secure credit on favorable terms. Don’t simply accept the first offer you get—speak to multiple lenders and compare their offers.

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Make the restaurant purchase

Finally, it’s time to buy your new restaurant. Establish a transition plan and responsibilities of buyer and seller over the closing period.

A typical transition would be one to two months for the seller to prepare the property, deliver financial and regulatory records, and provide access to relevant technical systems, such as payroll and accounting software, along with admin access to the website, web hosting, and social media profiles. Ensure that all property is transferred during this period, including any trademarks held by the company.

Your purchase agreement will specify the terms of closing, transition plan, and how assets are to be transferred. Have your lawyer draft this document and carefully review it yourself to check that all bases are covered. Send the document and it is signed. Congratulations, you’re now the new owner of the restaurant! Now the real work begins…

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How to Get a Business Loan for a Restaurant?

If you think you might want a loan for your restaurant, there are a few prerequisites to understand. First, assess your business prospects. Lenders want to place their money with businesses that are in good health and are likely to pay them back. You’ll need to assemble financial information to prove you meet that standard. Do you have a record of recent profit? Can you demonstrate through your books that you take in more than you spend on a regular basis? Your cash flow statement is a good place to look for this information. Once you can demonstrate that you have a profitable operation, turn your attention to the future. What projections can you make for your grow over the next one to five years? Let’s assume you have both solid profitability and encouraging growth prospects. The next step in preparing to take out a loan is to understand your creditworthiness. In the US, this is handily encapsulated in your credit rating, a single numerical score provided by the three major credit rating bureaus. According to Equifax, a credit rating above 670 is typically considered good, while scores above 740 are very good, and above 800 is excellent. A second factor to consider is your collateral. What valuable assets could you offer to a lender to secure your loan? The better the collateral you post, the more likely you are to find a lender.

4 Major Types of Restaurant Business Loans

There are four major types of restaurant loans to consider: small business loans, a business line of credit, a traditional commercial loan, and business credit cards.

SBA Loans for Restaurants

The US government supports credit provision to small businesses through the Small Business Administration (SBA). The SBA will guarantee eligible loans, thereby reducing risk for lenders and incentivizing them to work with small businesses. The process to secure an SBA loan begins with making an application to a private lender that partners with the SBA—which in the US is most banks and credit unions. If you can show strong personal and business finances and are willing to personally guarantee the loan, SBA-affiliated lenders are likely to work with you. There are many types of SBA loans, ranging from SBA microloans (below $50,000) to the more common SBA 7(A) loans of up to $5 million.

Business Line of Credit/Working Capital Loan

Working capital or business lines of credit are intended to help cover regular operational expenses such as payroll, rent or inventory costs. You wouldn’t use them to finance large one-off expenses like a land purchase or expansion to a second location. The lending standards for lines of credit vary by lender, but in general you should be able to demonstrate a strong financial position that gives them confidence you’ll have the cash available to meet your loan obligations. One nice feature of a line of credit is that it functions like a creditcard, allowing you to spend more as you repay previous balances.

Traditional Commercial Loan

The most common loan offering from banks and credit unions is the commercial loan. The amount and repayment period depends on your negotiations, but the basic structure is consistent: the lender will go through a careful inspection of your finances to assure themselves that you are credit-worthy, will demand collateral, and will offer a modest interest rate that averages 6 to 8%, while accommodating large loan totals. The commercial lending process demands high credit scores and the patience to wait for up to six months for a loan to close, but if you can meet this bar, the terms are attractive.

Business Credit Cards

We’d be remiss not to mention one of the most common sources of financing for small businesses: the credit card. Business credit cards are widely available and offer quick and easy access to moderate sums of money. Their major downside is that the interest rate is typically high, making credit cards an expensive method of financing. If you have to cover a short-term expense and will quickly be able to repay the balance, a credit card can be a convenient option. Be careful not to fall into the trap of carrying large ongoing balances at high interest.

Specific Capital Needs for Restaurants

Restaurants have characteristic financing needs that can be met with specific restaurant loan products. Here we’ll cover them in brief.

Restaurant Equipment Loans

If you’re replacing your ovens or refrigerator, you may want to secure an equipment loan. These are specifically designed to cover one-off expenses at favorable terms.

Inventory Financing

Financing is available to help with inventory purchases like large food orders. While it’s better to be able to cover these costs from your operating revenue, new restaurants might not yet have reached that point. In that case, inventory financing is your friend.

Working Capital

Regular expenses like payroll and rent can be supported by a working capital loan. See the section on lines of credit for more information. WATCH THE FULL VIDEO BELOW!

Get to Know Your Capital Lenders

Local Banks

One of the most common lenders available to the restauranteur is the local bank. These come in many flavors and varieties, yet tend to structure their lending in similar ways. For small businesses, they will often offer SBA-backed loan products that carry a partial government guarantee. Note that you will have to post collateral and personally guarantee the loan as well. The local bank is always worth checking out as a lending option. If they like your business plan and cash flow, your terms may be favorable.

Credit Unions

The credit union is highly similar to a local bank, with the structural difference that a credit union is owned by its members. In practice, they have similar products and lending standards to small and regional banks. They are worth a visit on your tour of lenders, and can sometimes offer better terms than comparable banks.

Large Banks

Banks with hundreds of branches spanning multiple states qualify as large banks. These institutions may have greater appetite for large loan amounts than your local banks, if you can satisfy their lending criteria. Be prepared for a bureaucratic process and long closing times.

Specialized and Alternative Lenders

The advent of the internet has opened up lending to many new entrants. You can find a wide diversity of online lenders who specialize in certain types of businesses or financial products. RASI can vouch for the expertise of Adesso Capital. They understand the needs of restaurants and offer a variety of loan products such as SBA loans, equipment financing, and lines of credit.

Find the Right Lender at the Right Terms

As we’ve seen there are several types of restaurant loans and lenders. It pays to determine your capital needs in advance, and go to the lender that offers a matching loan product. With any lender, the attractiveness of the product and terms you are offered will be a function of your creditworthiness. This is largely determined by the health of your balance sheet, specifically free cash flow. Lenders want assurance that you can afford to service the debt you wish to take on from available operational cash. When assessing a given credit product, pay attention to the loan size, repayment terms, closing process, collateral, and guarantees (if any). Note that it may be better to take on a smaller loan amount if that reduces the burden of interest to a point where you have greater confidence in your ability to support the loan from free cashflow. LISTEN TO THE FULL PODCAST EPISODE BELOW!

Restaurant Business Loand Frequently Asked Questions

What types of restaurant loans are available?

There are loan products for working capital (payroll, rent), equipment expenses, inventory, and major moves like opening a second location or purchasing your land. Consult your lender for specifics.

How do I qualify for a restaurant loan?

Much as in any business, your eligibility for a loan will be based on the creditworthiness of the business as demonstrated by the balance sheet. Lenders want to see you have the free cash to easily afford repayment.

What documentation do I need to apply for a restaurant loan?

Bring your balance sheet, cash flow statement, and a summation of your plans for the business. You may also need to demonstrate you have valuable assets to serve as collateral.

How long is the repayment period for a restaurant loan?

Repayment terms will be negotiated with your lender. Standard periods range from 1 to 5 years—shorter for small loans, and longer for large ones. If you’re buying real estate, terms can be much longer.

How do I compare different restaurant loan options?

The best way to get to know the options is to talk with lenders. Consult your local banker and credit union, and do research online. There are online products that will give you quotes from multiple lenders at once.

The post Restaurant Business & Startup Loans: Complete Guide appeared first on Restaurant Accounting Services, Inc..

What’s the one key ingredient – figuratively speaking – of your restaurant’s ultimate success? Some restaurant or bar owners think it’s all about location, location, location. Others may lean toward a loyal customer base. And don’t forget about seasonal swings and capitalizing on the “perfect timing” aspect of sales.

All valid “ingredients,” for sure. But have you considered the importance of menu pricing as a key driver of revenue and profit? Think about it this way: whatever type of eatery you run (restaurant, bar, catering service, food truck, etc.), day-in, day-out purchases off your menu are the most consistent source of income. And finding the right balance to offer customer value and optimal profit is critical to a profitable enterprise.

Pricing a menu impacts your restaurant well beyond the daily, weekly, and monthly books. Without a sound, sustainable menu pricing formula in place, it’s virtually impossible to ensure other sectors of your business are funded, including everything from utilities, labor, real estate, food stock levels, and much more.

RASI’s complete line of accounting services, including intuitive analytical applications, gives your restaurant a distinct advantage in all phases of pricing a menu, from conception to implementation. Let’s get into some specifics of restaurant menu pricing, including a key distinction with menu engineering.

Fundamentals of Pricing a Menu

Finding the right menu prices isn’t done by accident or on a whim. The most successful restaurant owners know it’s all in the details – namely, profit margins, food cost percentage, current market conditions, the competition, and more.

Keep in mind, menu pricing is much different than menu engineering. While menu pricing deals with finding the best possible menu costs, menu engineering is a true nuts & bolts exercise. Seasonal sales swings, vendor pricing, supply costs, you name it – menu engineering is more or less the “algorithm” of smart pricing strategies. Make sure you check out our informative article on menu engineering for some more in-depth analysis on the subject.

When figuring out your menu pricing formula, or even when engineering your menu, it’s helpful to keep in mind the relationship between costs and profit margins, especially in the wake of skyrocketing inflation: when costs increase, margins decrease. There’s simply no way around this inverse, dynamic relationship.

But back to the menu pricing formula…what are some ways to set your restaurant menu pricing?

WATCH THE FULL VIDEO BELOW!

Restaurant Menu Pricing Based on Ideal Food Cost Percentage

Once you figure out your food cost percentage, you have the foundation in place to set a profitable menu. Food cost percentage takes two factors into consideration: 

• How much is spent on food ingredients
• How much revenue is generated from this expense

Simply divide the ingredient cost by the sales, and you have the ideal food cost percentage. Those two factors in the equation require four different inputs: starting inventory, food purchases, final inventory, and total food sales.

Let’s say your restaurant, Frank’s Lunch Box, has a starting inventory of $5,000. You made $8,000 in purchases. At the end of the year, your final inventory was $3,000. With total food sales of $30,000. Your food cost percentage would be:

(Starting inventory + food purchases) – final inventory / total food sales, or

(5,000 + 8,000) – 3,000 / 30,000, which is

10,000 / 30,000, or

33%

So, your ideal food cost percentage is 33%. For every one dollar of revenue, 33 cents were spent on food inventory. Lucky for your restaurant, that’s right in the “sweet spot” of food cost percentage. Most profitable establishments keep food costs anywhere from 25% to 35% of overall revenue.

Now, how does this factor into restaurant menu pricing? The ideal menu item price formula is:

Cost per serving / ideal food cost percentage

If Frank’s has a food cost percentage of, say 40%, and you’d like to decrease that to 25%, you need to reduce this factor by 15%. Let’s say Frank’s best-selling chicken sandwich is currently on the menu for $10.00, and costs your restaurant $4.00 per serving to make. That’s a 40% food cost percentage.

In order to get the food cost percentage down to 25%, let’s plug the numbers into the equation.

Cost per serving / ideal food cost percentage

$4.00 / 25% = $16.00. So, in order to get your food cost percentage to a more manageable 25%, you have to raise the price of the chicken sandwich from $10 to $16.

Gross profit margin and cost of goods (COGs) are also helpful factors when pricing a menu. Here are a few other things to keep in mind:

• Competition pricing. It’s always helpful to know what your competitors are charging for similar menu items. If price reductions or slight increases are required, we recommend slight modifications to separate your restaurant’s menu from the competition.
• Premium menu items. Market trends and fads are common in menu items. Take “gourmet” grilled cheese sandwiches, for example. Even when made with premium breads and gourmet cheeses, many restaurants can charge up to $20 for a sandwich, even though it only costs less than $5 to make!
• Pricing balance. Your entrée selections should have a “ballpark” range that’s not too drastic; most restaurants, for example, charge anywhere from $18 to $30 for main courses. If the range is too sharp — $5 sandwiches next to $25 salads – that will cut into your profits and may confuse diners…”does this restaurant know what they’re doing?”

LISTEN TO THE FULL PODCAST EPISODE BELOW!

Contact RASI Today – To Learn More About Pricing Strategy for Restaurant Menus

Here’s a smart strategy – connect with our restaurant accounting experts today. Our powerful, agile restaurant accounting software gives you plenty of tools to help with menu pricing, not to mention multi-unit inventory, compliance, payroll, and much more.

Request a demo today, or call us directly at (720) 826-9900. 

The post Restaurant Menu Pricing: The Secret to Your Restaurant Success appeared first on Restaurant Accounting Services, Inc..

Getting a restaurant up and running is a challenge. Keeping a single establishment or franchise profitable over months and years is even more so. What separates the restaurants that quickly fail from those that have been established for an extended period?

Sales & Expenses
Point-of-sale (POS) Transactions
Financial Reporting
Accounts Payable & Cash Management
Taxes & Compliance
Inventory Management
Restaurant Accounting Formulas
Accounting Cycle
Payroll Processing for Accounting
Getting Started

You could argue – and we’d certainly agree – that taking advantage of a restaurant accounting software and service is the most significant single factor determining long-term success. As the leader in automated, expert accounting for the restaurant industry, RASI has put together an ultimate guide on restaurant accounting as an educational resource for you:

• Understanding the different types of accounting for restaurants
• Key factors to consider in restaurant accounting
• Determining efficient methods for cost analysis, accounting cycles, and more
• Grasping the importance of payroll for accounting in the restaurant industry
• And much more

With comprehensive and best-in-class restaurant accounting services, RASI can help any sized restaurant – from small, single eateries to nationwide franchises – make their accounting system work for them

Accounting in the restaurant industry generally falls into one of three categories:

• Software-based accounting system.
• Internal accounting practices – Controlled by a restaurant’s management team or financial personnel.
• Tech-enabled, cloud-based platforms – RASI’s restaurant accounting platform combines the best qualities of the first two methods. We offer our restaurants complete control using streamlined software paired with the expertise of compliant, continually updated accounting tools, resources, and a team providing continued education to ensure financial goals are met.

Before deciding which route to take with the accounting for your restaurants, you should determine your restaurant’s specific goals, factor in budgetary considerations (how much you’re willing to spend), and see if a 3rd-party solution is a good fit.

Let’s dive into the first important step – factors to consider when setting up your restaurant’s accounting system!

Accounting for Restaurants: Key Factors to Consider

Let’s lay the foundation for accounting in the restaurant industry; the following factors are essential for any operator to understand restaurant accounting. If you can grasp these ideas, it’ll make your decision that much easier for outsourcing!

Sales & Expenses: 

The two fundamental elements of any budget, sales, and expenses, ultimately help determine if your restaurant is profitable. Sales include food & merchandise sales, reward program revenue, and other similar transactions. Expenses, meanwhile, encompass any costs associated with running your restaurant: food, labor, taxes, accounts payable, rent, etc.

Point-of-sale (POS) Transactions:

POS transactions are recorded at the exact time and place they occur. These types of restaurant accounting transactions add up quickly, and it helps to have a POS integration system for any establishment with multiple locations, a merchandise portal, and other revenue streams that stream directly into your accounting system.

Financial Reporting:

Hitting your operational targets and creating a precise budget is paramount for success in the restaurant industry. This is only possible through streamlined financial reporting that spits out real-time data for operators to make timely business decisions based on facts and numbers.

WATCH THE FULL VIDEO BELOW!

Accounts Payable & Cash Management:

What’s the current situation of your restaurant’s cash on hand? How about money coming in from accounts receivable or money going out for accounts payable? Increasing timeliness and accuracy surrounding your Accounts Payable helps you proactively manage your accounts payable and cash position. Figuring out how to track cash management is one of the more overlooked aspects of restaurant accounting; you should always have complete visibility into your cash flow to make more educated business decisions.

Taxes & Compliance:

You can’t forget about Uncle Sam here. When performing accounting for restaurants, it’s critical to factor in taxes and compliance. This category includes everything from wage garnishment to payroll tax returns to 401(k) reporting to industry legislation and regulations. Forgetting these factors can mean crippling penalties and fees in an already low-margin business.

Inventory Management:

Every chef strives to optimize their menu, but many don’t know where to begin. The basis for all effective menus begins with proper inventory management. Understanding the correlation between menu items and contributed sales, proper purchasing habits, and how inventory all affect the successful management of COGS can be overwhelming without a restaurant accounting platform that addresses each of these areas.

Restaurant Accounting Formulas:

For the diehard financial analysts and accounting geeks out there, the importance of knowing basic and advanced accounting formulas is hard to overstate. Check out our comprehensive formulas page for accounting in the restaurant industry – tons of helpful information in there!

The Accounting Cycle: Focus on Frequency

Regardless of what type of accounting for your restaurants you ultimately decide, here’s a recommendation on the most successful accounting cycle: weekly works best!

Some restaurants prefer to work on monthly accounting cycles, but we recommend the methodology of comparing apples to apples rather than apples to oranges. What does this mean? A monthly accounting system is an apple-to-oranges approach. The number of days within each month varies; each month begins and ends on a different day.

Within a thirteen 4-week period, or a 4-4-5 accounting cycle (for each quarter, the first financial period is the first four weeks, the second period is the following four weeks, and the third period is the final five weeks), you’re ensuring all your data is streamlined to compare apples to apples because you’ve consolidated your months/days into very specific periods.

Additionally, we recommend an across-the-board method of weekly restaurant accounting reviews for all your data so that all your revenue, costs, expenses, payroll, and other reporting is consistent every week, every year, for all your restaurants… apples to apples!

The Importance of Payroll Processing for Accounting in the Restaurant Industry

Transforming payroll processing from a necessary function into a tactical, operational tool is one of the most underrated aspects of strategic restaurant accounting. Accurate, efficient reporting is a necessity to master this strategy. For larger restaurants and franchises, in particular, having a restaurant accounting system with a built-in payroll platform keeps all your data streamlined.

Additionally, the game has completely changed for operators paying their people properly when it comes to payroll compliance. RASI provides best-in-class payroll features with a dedicated team who understands and maintains restaurant industry compliance with Local, State, and Federal Mandates, including Tip Credit, PTO, Regular Rate of Pay, and Surcharge in all states!

Controlling labor costs in this new environment will require a more strategic, compliant-based approach – Can you identify, down to the shift, where you are losing money in comparison with sales and recognize specific job codes that need adjustments to make the most profitable impact when creating schedules? Utilizing an outsourced restaurant bookkeeping, accounting and payroll platform can provide all these actionable insights and more!

Getting Started with Accounting for Your Restaurants

OK, it’s time to implement a restaurant accounting system. Now that you have a basic understanding of the building blocks and foundational concepts that drive accounting in the restaurant industry, you might be wondering how to get things up and running.

RASI works with various point solutions to ensure your back office has the tools and resources to handle the unique challenges associated with restaurant accounting. With a well-rounded solution, you can manage labor compliance, benefits administrators, lenders, marketing solutions, and more!

LISTEN TO THE FULL PODCAST EPISODE BELOW!

We’re here to help get your restaurant accounting off the ground whenever you’re ready! Whether starting from scratch or needing a wholesale change to your outdated platform, RASI offers the best solutions that align with any budget. To get started, request a demo or send us your questions today!

The post Restaurant Accounting: A Complete Guide appeared first on Restaurant Accounting Services, Inc..

Suppose your restaurant is part of a franchise, or you own a group of individual restaurants that comprise a franchise. There are specific challenges that accompany keeping track of the financial records of this inherently unique business arrangement.

RASI’s complete suite of restaurant accounting services includes tools and resources for franchisees to simplify and streamline their franchise accounting tasks. For instance, RASI’s cutting-edge data consolidation processes — improved by standardized financial metrics and fully realized with our weekly payroll services — offer considerable advantages when keeping track of significant business expenses. That’s just one slice of the entire financial pie!

Let’s review some core principles and applications of franchise accounting basics, franchise accounting system benefits, and other insights surrounding franchise accounting. This process can be daunting for many franchisees, but with RASI’s expertise in your corner, you’ll be amazed at just how seamless franchise accounting can be!

WATCH THE QUICK VIDEO BELOW!

Franchise Accounting Basics

Before digging into franchise accounting basics, it helps to define the two primary roles in a franchise business:

What is a Franchisor?

A franchisor is the “umbrella corporation” in the equation; the franchisor has the final say on company policies, working methods, and establishing the company culture.

What is a Franchisee?

A franchisee is the individual establishment given authority from the franchisor to conduct commerce – on the franchisor’s terms, of course.

In its simplest terms, franchise accounting represents the conventional, day-to-day accounting processes that a stand-alone restaurant (the franchisee) typically accomplishes. It is simply scaled up and customized to fit into a franchisor’s standard accounting practices.

Depending on the particular standards of a franchisor, franchise accounting varies between different organizations; for example, a Chick-Fil-A and a McDonald’s. Each of these franchisors has its own franchise accounting system. But all McDonald’s franchises adhere to the same corporate structure, just like all Chick-Fil-A franchises follow the company’s franchisor guidelines.

Franchise Accounting System Benefits

Fortunately for franchisees, there are automated & efficient accounting systems in place to meet and exceed franchise accounting standards. Here are just a few franchise accounting examples where an integrated accounting system and service can provide value to a franchisee:

1) Prime cost controls: For franchise accounting, it’s critical to stay on top of prime costs – particularly in the current environment of hyperinflation and wildly fluctuating expenses. RASI’s franchise accounting tools seamlessly integrate with existing franchise POS systems, allowing managers to concentrate on the data provided within financial reporting rather than mundane administrative work – especially when implemented weekly.

2) Weekly financial statements: Weekly financial statements enable operators to adhere to budgets and grow their profitability with a weekly cash flow snapshot. Intuitive reporting has allowed our clients to become proactive rather than reacting to the previous financial period’s results.

3) Time-saving benefits of franchise accounting: One of our clients, a franchisor, saved over 25 hours per week with our franchise accounting resources, which permitted them to stay focused on other critical tasks like guest satisfaction.

Getting Your Franchise Accounting Basics On Track

It’s not only essential to have a franchise accounting service that handles your current needs; with franchises especially, it’s helpful to have a system in place that anticipates growth and expansion. That’s exactly what our franchise accounting platform does – saving you time and money along the way!

Connect with RASI today and discover a different, more efficient way of implementing your franchise accounting practices. Whether you’re a franchisor looking to streamline franchisee efficiency, or a franchisee seeking to eliminate waste and optimize profits, we’re here to help!

CHECK OUT OUR QUICK SNIPPET OF FRANCHISE ACCOUNTING BASICS BELOW!

Contact us today for practical, proven franchise accounting solutions or request a demo to get up and running in no time.

The post The Importance of Franchise Accounting appeared first on Restaurant Accounting Services, Inc..