Category Business Finance

Tips for Accounting for Restaurants

When you are running a restaurant, it can be easy to focus on the food and hospitality and brush off accounting a,s a secondary task. Like any business, however, you are looking to gain and maintain a profit, and good accounting systems are crucial in order ensure your success . Here are our tips to help you on your way:

Choose the right accounting software

Not all accounting software is created equal. The right system should not only help you track your sales and expenses, but should also help track your inventory.

In addition, choose the right POS system that, ideally, is integrated with your other accounting software. This saves the additional step of entering POS information into your accounting software and will help you keep your reports up-to-date in real time.

Constantly monitor the most important reports

Many different reports will help you manage your business, but the most important are typically your food inventory costs, food sales, beverage sales, and operating expenses. Running these reports on a monthly basis may not be sufficient; you may find it most beneficial to maintain these records and analyze them on at least a weekly basis. A detailed plan and breakeven analysis are also critical to help you understand your costs and how to improve your profits.

Be aware of Industry benchmarks and KPls

Understanding other businesses is as important as knowing your own business in the competitive restaurant industry. Benchmarks help you to know where you stand and where you can improve in relation to your competitors. Stay on top of paying your expense. The restaurant business moves quickly and it can be easy to fall behind if your payables are not organized. Ensure that your bills are cycling efficiently for cash flow purposes, but never make the mistake of paying late. A vendor could refuse delivery if they have not been paid on time, which could be a disaster when it comes to fresh food inventory.

Use a payroll service provider.

Many restaurant managers monitor hours and wages very closely. When it comes to actually paying staff, however, manually keeping track of benefits and payroll deductions can become quite time-consuming, and possibly open you up to liability in the case of payroll errors.

Consult a professional accountant

The right accountant will have expertise in the restaurant business and will help you to analyze your financial information and provide guidance.

Contributed by Carly Matheson CPA,from DMCL. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore North America.

Resolve the Deal Breaker

lores_handshake_agreement_deal_reach_blue_MBDisagreements over a business’s valuation aren’t uncommon.

If, for example, you want to sell your business, you may feel it is undervalued because of market conditions, so ou want to factor into your asking price the company’s future performance. A buyer may come along, however, who isn’t so sure that those future projections will be realized and hesitates when it comes to closing the sale.

That disagreement doesn’t have to be a deal breaker. You can bridge the gap of the two valuations by arranging an earn-out agreement, where you receive a partial payment with future specified amounts paid when the business meets certain goals.

For example: You set a sale price of $1 million based on projected sales for next year. The buyer feels those sales projections aren’t guaranteed. So you agree to take $500,000 on the spot and the remainder is paid out of, or adjusted to reflect, the income your business actually earns based on those projections.

You both benefit: The buyer gains an additional source of financing while minimizing risks and costs and you get to share in future earnings and, because the deal isn’t simply an installment plan, you gain some tax benefits. 

But the agreement needs to be structured properly and address several issues, including:  

  • Duration: Earn-outs can typically run as long as five years. However, the longer the term the more difficult it can be to attribute performance to the business alone. On the other hand, you may face resistance to a short term if the buyer is concerned that a shorter duration could encourage you to make business decisions that favor short-term results but damage the long-term viability of the business. Moreover, to be able to get the benefits of using the cost recovery method when you pay your taxes, the Canada Revenue Agency (CRA) insists that the agreement last no longer than five years.
  • Authority: You may want to draft an employment contract that specifies who has ultimate control over management and strategy. As the seller, you may want to retain control over operations to help ensure performance goals are met, over the sale or purchase of additional assets, and over the hiring of key staff members. Pay particular attention to the duration of the contract: the buyer may not be willing to maintain an employee role once the earn-out is paid.
  • Performance goals: The agreement should outline such clear and achievable performance goals as sales, pre-tax earnings or gross profit as well as non-financial goals such as product or account development, capacity utilization, or service improvements.
  • Performance evaluations: Clearly define the measurement base and be sure it is monitored. If the base is pre-tax earnings, you should ensure that the agreement specifies how one-time costs, unexpected costs, new management costs, transfer pricing and other costs or windfalls will be treated. Periodic audits can ensure that systems and operations aren’t manipulated to artificially boost or suppress performance measures.

Last Word: Any of these issues create the risk of litigation, so you should choose some method to resolve disputes and avoid litigation.

Reap Tax Benefits from an Earn-Out Agreement

lores_canada_money_dollars_coins_calculator_pen_glasses_mbOrdinarily, any income from your business or property is fully taxable but when you sell your business you benefit from a capital gains tax, where only half of the proceeds from the sale is taxable income.

But let’s say you sell your business under an earn-out agreement where the buyer pays a partial amount up front and the remainder is derived from and based on meeting certain financial goals. The precise amount of your proceeds cannot be determined at the time of sale and, in fact, may not be known for several years.

That type of earn-out agreement depends on the use of — or production from — the company’s property, and ordinarily the money generated would be taxed as business income, not as a capital gain.

Canada Revenue Agency (CRA), however, recognizes that bind and allows you to use the cost recovery method of reporting the gains or losses if you meet the following five conditions:

  • You and the buyer deal at arm’s length.
  • The gain or loss is clearly of a capital nature.
  • It is reasonable to assume that the earn-out feature relates to underlying goodwill and that the two parties cannot reasonably be expected to agree on that value at the time of the sale.
  • The duration of the agreement does not exceed five years.
  • You, as the seller, file a copy of the sale agreement with your income tax return for the year of the sale, send a letter requesting the application of the cost recovery method to the sale, and agree to follow the cost recovery procedures.

Keep in mind, however, that if the deal amounts to an installment plan it is not considered an earn-out agreement for purposes of using the cost recovery method.Under the cost recovery method, you reduce the adjusted cost base (ACB) of your company’s shares when you are able to determine the amounts that will be paid. Amounts exceeding the ACB are considered a capital gain and the ACB becomes nil. All amounts that can then be calculated with certainty are treated as capital gains.

So let’s say your company’s stock’s ACB is $120,000 and you sell them all in an earn-out agreement. The sale price for the shares is $100,000 up front plus additional payments based on an earn-out formula over the next four years. The first $30,000 payment is due the year following the year of the sale. Here’s how the cost recovery works:

Year of the sale: You report no capital gain or loss, but the $100,000 reduces the ACB of the shares to $20,000 ($120,000 minus $100,000).

Year after the sale: The $30,000 payment due exceeds the $20,000 ACB, so you recognize a capital gain of $10,000. Half of that is included in your income as a taxable capital gain. You adjust the ACB of the shares to nil.

Following three years: The remaining payments under the earn-out formula are treated as capital gains, half of which are taxed.

The CRA recognizes a capital loss only when the maximum payable to you is less than the ACB of the shares. In that instance, the loss can be reported at the time of the sale. If, over time, it becomes clear that the actual total paid will be less than the initial maximum amount, a further capital loss can be claimed.

If there is no maximum amount set out in the agreement, a capital loss can be reported once it can be established that the total of the amounts to be paid will not exceed the ACB of the shares.

Regulators Keep Tight Reins on Corporate Behaviour

lores_business_man_building_street_walk_corporate_AMCanadian securities regulators are serious about corporate transparency and the need to maintain investor confidence in capital markets.

To achieve that objective, the regulators follow one set of rules in all provinces and territories and they apply to public companies, income funds, limited partnerships and some other entities. While the guidelines are voluntary – aimed at allowing business to tailor governance to their specific situations — companies that don’t comply with the disclosure rule will be breaking securities law and could face enforcement proceedings, as well as sanctions.

The governance guidelines set out a series of recommended best practices, including:

  • Maintaining a majority of independent directors on the board.
  • Appointing an independent chairman of the board or lead director.
  • Holding regularly scheduled meetings of independent directors without the presence of non-independent directors and management.
  • Adopting a written board mandate.
  • Outlining board responsibilities such as reviewing and showing satisfaction with the integrity of the company’s top officers and their efforts to develop a corporate culture of integrity.
  • Approving strategic plans at least once a year; actively taking part in succession planning; and overseeing internal controls.
  • Developing job descriptions for the board chairman, the chief executive officer and board committees.
  • Providing each new director with a comprehensive orientation, and all directors with continuing education opportunities.
  • Adopting a written code of conduct and ethics that deals with: conflicts of interest; protection of corporate assets; fairness toward shareholders, customers, competitors and employees; confidentiality; legal compliance, and ways to report illegal or unethical behaviour.
  • Appointing a nominating committee and a compensation committee composed entirely of independent directors.
  • Adopting a process for determining the competencies and skills of the board as a whole and applying this to the recruitment of new directors.
  • Assessing on a regular basis the board’s own effectiveness, as well as the contribution of each board committee and individual director.

Under the disclosure rule, companies must file a Corporate Government Disclosure Form with the provincial or territorial securities commission that requires information about each recommended governance practice, including:

  1. Information about the independence of directors and the names of other boards they sit on.
  2. Disclosure of whether the independent directors hold separate meetings and an explanation if they don’t.
  3. Disclosure of whether the board has adopted the recommended governance policy and if not, how their governance practices differ from the recommended standards and why that is appropriate to the company’s circumstances.
  4. Descriptions of the policies in effect and how they achieve the desired governance goals.

Companies are also required to file a copy of their ethics and conduct code (or any change to it) on the System for Electronic Document Analysis and Retrieval (SEDAR) by the date on which the issuer’s next financial statements must be filed.

Maintain Liquidity by Minimizing Credit Risk

Liquidity is critical to the viability of any business, regardless of the industry where it operates.

lores_sample_invoice_bizactions_mock_mb

Shore up Listless Collection Practices

When your business is confronted with some past due accounts, there are several ways to help encourage payment of bills. The first step, of course, is to be sure the invoice contains the due date. Providing incentives for prompt payment will also help. You can offer discounts for payments received before the due date and you can charge interest on late payments. If you apply penalties on overdue accounts, be sure the amounts you charge fall within the provisions of the Criminal Code and the federal Interest Act. When a customer does miss a due date, prompt and courteous contact will generally produce results. This can be done by telephone, mail or fax. Document all your collection attempts by sending written notices and keeping copies. It is important to respond rapidly in case the customer does clear the account so that unnecessary delays in shipping are avoided. Your company’s credit department and the accounts receivable bookkeeper should maintain close communication.

The most extreme method to obtain payment is to stop providing goods or services until you receive full payment. But be cautious. This could damage your company’s relationship with an important customer who provides you with significant business. If it becomes clear that you are not going to be paid, you have three main choices:

1. Write-off the account if you determine that it is not worth spending more time and money trying to collect it.

2. Hire a collection agency. You will have to pay a fee or a percentage of the amount collected. Meet with the agency to discuss its procedures and confirm that the collector will not incur any costs of start litigation without your permission.

3. Take legal action. This is no guarantee of being paid, so before you start litigation try to determine the likelihood of collection. Assess whether the individual has sufficient assets to cover the debt and legal fees.

Simply put, liquidity is the ability of your enterprise to meet its financial obligations, usually with cash on hand or by converting assets to cash. It also entails making sure your business has the financial ability to continue providing goods and services without heavy discounting and collecting your receivables timely with minimal write downs and write offs.

One way to avoid sliding into a liquidity crunch is not to extend credit to customers with little creditworthiness. Your enterprise’s liquidity and survival depends on a steady inflow from timely collected receivables.

Accomplishing that requires taking cautious steps before extending credit and staying on top of collection procedures. (See right-hand box for ways to encourage credit customers to pay on or before the invoice’s due date.)

Credit policies and procedures, however, do not always ensure the cash flow to sustain a business. Without a steady stream of revenue from sales, your business runs the risk of illiquidity and therefore being unable to pay its own debts.

When a customer asks for credit, be sure that the application requires:

1. The names, addresses and phone numbers of at least three companies the applicant has had credit dealings with.

2. The applicant’s bank accounts with branch addresses and account numbers.

With this information, you can start taking action. The next steps are critical to helping ensure your customers stay on track with their payments:

  • Call the applicants’ banks to ask if they are a good credit risk.
  • Verify the applicant’s bill-paying history with the business references.
  • Run a credit check with one of the two main rating agencies in Canada, Equifax Canada and TransUnion Canada.

Staying in Control of Receivables

Of course once you’ve granted credit to a customer, your job is just beginning. Your company’s collections manager needs to constantly monitor receivables and closely monitor slow-paying accounts. Part of that process involves balancing the benefits of extending credit, which will boost sales on paper, against the costs of carrying receivables and perhaps being unable to collect them.

There are tools to help you stay in control. Three of the most critical are:

1. Receivables Ratio. You should hold receivables for the shortest time possible. This boosts the timeliness of payments and maximizes the accounts receivable turnover ratio, or the rate at which you are collecting bills during a given period. To determine the ratio, divide net credit sales by average accounts receivable.

2. Aging Schedule. This gives you a bird’s eye view of your receivables and the due dates. It’s a straightforward way of understanding your collection efforts and highlighting overdue bills. The accounts receivable aging schedule typically includes the name of the creditor, the total due, and the amounts due in the current month, the previous month, the preceding two months and more than 60 days.

3. Average Collection Period. One of the most important measurements is the average number of days it takes to collect a bill. This is the length of time it takes to convert sales into cash and underscores the relationship between accounts receivable and cash flow.

The longer the collection period, the more you invest in accounts receivable. And a long collection period means less cash available for your company’s own needs. Remember your firm isn’t the banker so stop acting as if you are. It will only add to your financial problems if you continue doing so.

To calculate the collection period, divide the number of days in the year by the accounts receivables turnover ratio. Or you can take the average accounts receivable and divide that by the average daily sales (net credit sales/days in a year).

The average collection period is commonly used to compare your success at accounts receivable management to that of your industry peers. It can also be used to analyze your collection efforts across various time periods, and determine how well your customers are doing paying their bills when compared with your credit terms.

These are just some of the tools that let will assist you in controlling and monitoring accounts receivables. Your accountant can help you implement the use of these tools and interpret other ratios, reports and measurements involving credits and collections.