Restaurants that fail to maintain proper business data and accurate financial records are setting themselves up for failure on multiple counts. Without access to reliable data, the restaurant management will be flying blind as they attempt to navigate the business landscape. Not being able to differentiate between business decisions that are contributing to their profitability and those which are causing them to lose money essentially means relying on guesswork and crossing their fingers as they implement one-size-fits-all solutions.

The first part of this blog covered the key advantages of accurate financial reporting. In this part, we’ll look at the other side of the picture and explore some of the issues that financially irresponsible restaurants may run into:

Legal penalties: Complying with the law and paying their dues to the taxman are not optional for restaurants. It has to done accurately and in a timely manner. Non-availability of accurate data will lead to miscalculation of tax dues, resulting in excessive payments or underpayments. The latter will attract hefty fines and legal penalties which will destroy the restaurant’s goodwill and reputation.

Financial uncertainty: If the correct numbers are unavailable to the management, it will undeniably lead to inaccurate reporting, poor management of restaurant stocks, ineffective pricing strategy and unplanned expenses. The restaurant will be unprepared to serve their target market effectively, will fail to adjust for seasonal demand fluctuations and will drive itself into loss. They may end up overpaying their tax dues and locking up valuable working capital in needless red tape.

Cash flow problems: Inaccuracies in financial records essentially mean that the restaurant does not have a clear picture of money inflow and outflow. Lack of visibility makes it tough to manage cash flow. This makes it difficult to make payroll, supplier payments, and other expenses on time, thus upsetting operational continuity and damaging relationships with vendors and staff.

Inefficient operations: Financial mismanagement of a restaurant will lead to operational inefficiencies, because the restaurant won’t be able to negotiate favorable contracts, cannot raise funds on reasonable terms and will even fail to attract good customers in the long run. A badly run restaurant which doesn’t care enough to maintain its books efficiently will be a money sink for the promoters and affect their overall financial stability.

Reputation and goodwill loss: Once a restaurant is driven to the ground by financial irregularities and mismanagement, the promoters will lose their reputation, not just among the public but also among bankers, financiers and the policymakers. This could negatively impact their future business plans, potential partnerships and even their personal financial future.

Practical approach to ensuring accurate financial reporting

Inaccurate financial reporting can be a slippery slope, and any business which is in such a precarious situation must act fast to redeem themselves. Here are some of the practical steps which a restaurant can focus on:

Invest in good accounting software: Assuming the business has knowledgeable finance and accounting professionals in their fold, it is important to equip them with good software packages which enable them to operate efficiently. Invest in intuitively made software which allows a good extent of automation, thorough configurability, coverage of all key accounting protocols and above all a high degree of security and integrity of business data. The role of the software is to reduce the risk of human error and make data accessible to authorized personnel without complications.

Engage Professional Accountants: Engaging a team of professional accountants with specific experience in the restaurant industry is a major advantage. Accountants who are well versed in the domain and have worked with other organizations can provide valuable insights into financial best practices, proactively ensure compliance with regulations, and help maintain accurate financial records in easily accessible form.

Audits: Regular audits – both internal and external – will enable the restaurant to spot discrepancies at an early stage and rectify them. Audits can also detect internal threats such as malpractices or fraud.

Staff Education: Well trained staff members are less likely to make errors that stem from human errors, negligence and domain inexperience. Training the financial and operational staff on the importance of accurate financial reporting and proper record-keeping practices will make it a shared responsibility and a part of the work culture.

Financial Metrics: Every restaurant must have clarity on the key metrics they are optimizing for at different stages of their journey. For example, a new restaurant aiming to get market attention may focus on footfalls and sales instead of profitability for the first few quarters. But once the brand is established it may be time to focus on profitability, even if it means trimming the menu and focusing on only certain types of customers. When the strategic priority changes, it is important that the whole organization understands this and can optimize accordingly. Profit margins, cost of goods sold and cash flow are crucial metrics in this regard. The restaurant management can monitor these metrics, identify trends and potential issues so they can take corrective action.

For a discerning restaurateur, having access to accurate and meaningful data about his/her business aids in informed decision making, good financial planning and sound business growth. But most importantly, reliable data is crucial to ensure compliance with legal requirements, gain credibility with stakeholders and to safeguard the business from falling prey to fraudulent elements both inside and outside the organization. Reliable insights into financial data and trends allow a business to plan effectively and avoid leaving money on the table, as well as to plug leakages before they become serious threats. A good financial management and accounting solution is an intelligent investment in this context, which will inherently strengthen the business, reduce risks and poise the organization for future growth.