What the hell is managerial accounting? And how can it help restaurants?

Managerial accounting is a key activity for bars and restaurants who want to make better decisions

I have yet to meet someone who got into hospitality because of their love of managerial accounting (with the possible exception of me). And yet managerial accounting may the key to staying in the hospitality business if you are a bar owner, restaurant owner, or other food entrepreneur. You've probably heard of financial accounting which has to do with creating reports for external reporting (it's what you pay your CPA to do, or what Quickbooks automates for you). Financial accounting is required work, and helps businesses do things like file taxes. But managerial accounting! Managerial accounting is all for your benefit.

What is managerial accounting?

Managerial accounting creates statements, reports, and documents that help management in making better decisions related to their business' performance. Managerial accounting is primarily used for internal purposes. The key here is the phrase "make better decisions."

On a typical financial statement, you might be able to tell your profit and loss, but what created that profit and loss? If you want to increase profit, or move to profitability if you're not currently profitable, what should you do differently? That's where managerial accounting comes in.

Managerial accounting helps restaurants, bars, and other hospitality businesses make better decisions about their operations to improve profitability.

Key managerial accounting measures for bars, restaurants, and other hospitality businesses

To get a better idea of what managerial accounting really is, and how it comes to life, let's look at some common 'business measures" that hospitality businesses can use to better understand the drivers of their financial performance.

What measures matter for restaurants and bars?

The list below should not be considered an exhaustive list of performance measures for restaurants, but it's a good starting point for anyone trying to analyze their business. All the measures below are calculated as "percent-of-sales" measures; In other words, how much of the dollars that you're bringing in through sales are getting eaten up by each part of your operation.

The core idea here is that all the money you spend (you costs) to operate your business, should be thought of as investments to help you generate sales. If you're not generating enough sales to overcome your cost, managerial accounting can help you figure out where you're getting out-of-whack.

High-level measures

  1. Gross Margin Percentage: (Net Sales - Cost of Goods Sold)/Net Sales. This measure tells you what percent of your sales is left over to pay all your administrative and fixed costs like rent. Net Sales is your total sales after discounts and Cost of Goods Sold (COGS) are direct costs associated with producing goods. COGS includes labor used to directly deliver your product (excludes managers) and any food (ingredients) or paper goods (trays, delivery boxes, wrappers, napkins, etc) used to get your product into your customers hands (or mouths). A close cousin to Gross Margin that may be more familiar to hospitality veterans is "Prime Costs".
  2. Prime Costs Percentage:  (Food Costs + Restaurant Labor)/Sales. This measure tells you how much of your sales dollars are being eaten up by recipe ingredients and staff costs (generally the two most significant costs faced by restaurants, bars, caterers and similar food businesses). Food costs should include food, beverage, and paper supplies.

If you decide your Gross Margin is too low, or your Price Costs are too high, you can start to drill down into the costs involved in these high-level measures.

Food and supply measures

These costs are pretty straight forward and don't require a long explanation around their definitions. Of course even these measures could be broken down further, or compared against benchmarks and against other locations for even more insights.

  1. Food Cost Percentage: Food Costs/Sales
  2. Paper Costs Percentage: Paper Costs/Sales
  3. Non-alcoholic Beverage Cost Percentage: Non-alcoholic Beverage Costs/Sales
  4. Alcoholic Beverage Cost Percentage: Alcoholic Beverage Costs/Sales

Labor and payroll measures

  1. Labor Percentage: Labor Costs/Sales. Labor costs should include wages for hourly and salaried employees, payroll taxes, employee insurance and benefits
  2. Management Salaries: Manager Salaries/Sales

Rent and occupancy measures

  1. Sales per square foot - Sales/Restaurant Square Footage. This measure tells you how efficiently you are using your available space and can help you assess the potential of new locations.
  2. Rent Cost Percentage - Rent/Sales
  3. Occupancy Cost Percentage - (Rent+other occupancy costs like common area fees or parking)/Sales

About Dashy Dash

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