Essential Accounting Formulas Every Restaurant Owner Should Know

Running a restaurant isn’t just about making great food—it’s about making informed financial decisions that help your business thrive. Between managing costs, optimizing your menu, and keeping up with cash flow, it can be hard to find the time to dive into the numbers. But here’s the thing: understanding a few essential accounting formulas and key restaurant terms can transform how you run your restaurant. These formulas can give you a quick snapshot of your restaurant’s financial health, showing you where you’re on track and where you might need to course-correct.

Why Accounting Formulas Matter in the Restaurant Business

Think of these formulas as tools that can help you keep your finger on the financial pulse of your business. Sure, you don’t have to be an accounting whiz, but a basic understanding of financial terms and calculations can help you spot red flags early, seize opportunities, and make smarter decisions. Let’s break down the must-know formulas and terms that every restaurant owner should have in their toolkit.

Key Accounting Formulas and Restaurant Terms

1. The Accounting Equation

   The Accounting Equation—Assets = Liabilities + Equity—is the foundation of accounting and the core of your balance sheet. It shows the balance between what you own (assets) and what you owe (liabilities and equity). For example, if you recently purchased a new oven, that goes under assets. If you’re paying it off in installments, that portion goes under liabilities. It’s simple but critical for keeping your finances in check.

2. Gross Profit

   Want to know how much you’re making off your sales? Gross profit is your go-to metric. Here’s the formula:

   Gross Profit = Revenue - Cost of Goods Sold (COGS)

   Imagine you run a popular taco spot. The revenue is everything you make from selling those tacos, and the COGS is what you spend on ingredients. Gross profit shows how much you’re earning after covering those direct costs. It’s a great way to see if you’re pricing your menu items right.

3. Net Profit

   Net profit, also known as net income, gives you a clear picture of what’s left after covering all expenses—rent, payroll, utilities, etc. This formula is a powerful snapshot of your restaurant’s overall health:

   Net Profit = Revenue - Total Expenses

   If your taco shop brings in $10,000 in revenue, but you spend $8,000 on costs, your net profit is $2,000. Knowing this can help you identify where to cut costs or invest further.

4. Break-Even Point (BEP)

   Ever wonder how many dishes you need to sell to break even? That’s where the break-even formula comes in handy:

   Break-Even Point = Fixed Costs / (Sales Price per Unit - Variable Cost per Unit)

   Say your fixed costs are $5,000, and you sell each taco for $10, with $4 in costs per taco. You’d need to sell about 834 tacos to break even for the month. Knowing your BEP helps you set realistic sales targets and pricing.

5. Current Ratio

   The current ratio shows if your restaurant can cover its short-term obligations with its short-term assets. A quick way to check your restaurant’s liquidity, it’s calculated as:

   Current Ratio = Current Assets / Current Liabilities

   A current ratio over 1 is a good sign—you’ve got enough assets to cover what you owe soon.

Essential Restaurant Terms and Definitions

Running a restaurant means juggling a lot of specialized terms. Here are some to keep you up to speed:

1. Accounts Payable (AP):

   This is money you owe to suppliers for goods or services—like your monthly produce or beverage bill. Keeping AP organized is key to staying on good terms with vendors.

2. Accounts Receivable (AR):

   This is the money owed to your restaurant by others. If you do catering or event hosting, you might have outstanding invoices—those count as AR.

3. COGS (Cost of Goods Sold):

   This represents the direct costs of making each dish, including ingredients and supplies. To calculate COGS, use the formula:

   COGS = (Beginning Inventory + Purchases - Ending Inventory) / Sales

   To maximize profitability, read our article on best practices to measure Cost of Goods Sold (COGS).

4. Prime Costs:

   Your prime costs include labor and food costs—your two largest expenses. Keeping these under control is crucial for profitability.

5. Cash Flow:

   This is the money coming into and out of your business over time. Positive cash flow means you’re bringing in more than you’re spending, which is crucial for growth.

Applying These Formulas and Terms to Run a Smoother Restaurant

Once you’ve got a handle on these formulas and terms, here’s how you can put them to work in your restaurant:

1. Set a Budget and Track It

   Create a weekly or monthly budget and use a Budget vs. Actual analysis to see how you’re tracking. Say you budgeted $1,500 for seafood purchases, but prices spiked. Adjusting other expenses can help you stay on track overall.

2. Monitor Cash Flow

   Think of cash flow as the life pulse of your business. Track your Cash Flow Statement regularly to see where money is coming in and going out. It helps you know when you can afford to restock ingredients or add new equipment.

3. Review Your Menu Profitability

   Use Menu Engineering to identify top-performing and low-performing menu items. If your bestselling burger has a high food cost, consider pricing adjustments or tweaking ingredients to improve its margin.

4. Manage Inventory Efficiently

   Inventory is often the biggest headache in restaurant management. Keep an eye on your Inventory Turnover Ratio to see how efficiently you’re using your stock. Aim to have just enough on hand—not too much or too little.

Common Mistakes to Avoid in Restaurant Accounting

While these formulas are handy, it’s easy to make errors that can throw off your numbers. Here are a few common pitfalls:

• Skipping Regular Reviews:

  Restaurant finances change fast. Even if you’re busy, take a weekly look at your numbers to catch any shifts early.

• Ignoring AP and AR:

  Falling behind on payables or letting receivables go unpaid too long can strain your cash flow.

• Not Managing Prime Costs:

  These are the biggest expenses in the restaurant business. Keep an eye on labor costs, especially during slow shifts, and watch your food costs closely.

Ready to Take Control of Your Restaurant’s Finances?

Understanding these accounting formulas and restaurant terms is the first step to taking control of your restaurant’s financial health. They’ll give you the confidence to make decisions that drive growth and profitability—whether you’re a small cafe or a bustling bistro.

At Over Easy Office, we get that restaurant owners wear a lot of hats, and we’re here to lighten the load. With years of experience in accounting and bookkeeping for restaurants of all sizes, we can help you make sense of the numbers so you can focus on what you do best. Contact us today to learn more about how we can support your business’s financial success.