A 25-year veteran of the restaurant industry, Jim is the owner and operator of RestaurantOwner.com, and a sought-after industry speaker.
In my financial management seminars I often ask how many of the participants prepare monthly financial statements, and the vast majority usually has a hand in the air.
I then tell them to assume they just received their latest P&L and ask they believe it would be useful to compare the results of the current month to the previous month?
Answer: Usually not, because there were a different number of days this month compared than last.
And what about comparing the current month this year to the same month last year?
The truth is this may not be valid either, if, like most restaurants, yours does 50 percent or more of your weekly sales on Friday and Saturday. (I know of some pizza operators who claim they do over 60 percent of their weekly sales on Friday alone.)
One reason why this is a problem is because there are some months -- and this changes annually -- that have five week-ends, which changes your P&Ls dramatically. In other words, don't get too excited about a 12 percent year-to-year sales increase this month if the same month last year was only a four-weekend month.
Report four weeks at a time
With these and other shortcomings inherent in monthly P&Ls, many restaurants and nearly all large chain operators prepare their financial statements every four weeks. The result is 13 four-week periods each year instead of 12 monthly ones.
Four-week reporting periods usually make good sense in a restaurant environment for a number of reasons:
1. Better comparability. With a four-week period, every P&L reflects four Mondays, four Tuesdays, four Wednesdays and so on. This usually makes it much more useful in comparing this period to prior periods and the same period last year.
2. It makes it easier to plan for physical inventories. Again, I go back to my seminars where I ask, how many people who do their financials monthly, really believe they get a good, accurate ending inventory value when the month ends on a Friday night?
The response is always the same, laughter and admissions that the inventory number on a Friday night probably isn't all that accurate. If a month ends on a busy night like Friday, when it's finally time to take the inventory, everyone has worked hard and is tired, and the last thing they want to do is count product.
Plus, on a Friday night, there's often a lot of product on the shelf to count because Saturday and Sunday lie ahead.
Many companies on a four-week cycle purposely end their periods on a Sunday. Sunday is generally a slower day for most companies so they're able to do some pre-inventory work, like organize products on the shelves, during the day or early evening. Also, Sunday night is when inventory should be at it's lowest level of the week. So there's less product to count.
3. It complements a weekly cycle for the preparation of weekly reports. It's no secret that many of the most profitable restaurants in the country know their prime costs (the cost of sales plus the cost of labor) are every week. If you're using a four-week reporting cycle, then you're calculating food and beverage costs weekly, and you're on the same physical inventory cycle for your weekly prime cost report and four-week P&L.
Compare that to doing monthly and weekly reporting, in which you end up counting inventory even more than once a week.
4. It may eliminate the need to accrue payroll. Finally, something even your accountant can get excited about. Based on my experience, the vast majority of restaurants pay their salaried and hourly staff every two weeks. Restaurants that pay their people bi-weekly and have monthly financial statements must then accrue 2 or 3 extra days of payroll in each 30 or 31 day month to show an accurate payroll expense.
The four-week cycle eliminates the need to accrue payroll when your pay period is bi-weekly. Every P&L reflects 28 days of actual sales and 28 days of actual payroll. Result: Payroll is easier to account for and more accurately reflected on your P&L too.
Resistance to the four-week system
While the four-week cycle makes a lot of sense operationally, many smaller restaurant companies have avoided it because of resistance from their bookkeepers or accountants. Here are some common reasons for contesting the conversion to a four-week accounting cycle.
Bank statements come monthly, not every four weeks. While this is true, many banks will cut off your statement when you want them to. Just give them a schedule with your four-week cut-off dates.
It's also possible to gain access to your account electronically. This will enable your accountant to prepare a bank reconciliation statement at any time without having to wait for a statement to arrive in the mail. In fact, this is a good idea regardless of the type of accounting period you use because it can really speed up the preparation of your financial statements.
What about expenses such as rent, lease payments and utilities paid once a month? It's fairly easy to set up a schedule on a spreadsheet and expense 11/12ths of each monthly payment and place the remaining 1/12th into a prepaid account. Once a year the balances in the prepaid accounts are expensed into period 13.
What about sales tax that's paid monthly? Many states will allow you to pay sales taxes 13 times a year instead of 12 monthly payments. If not, it's still not difficult to keep sales tax payments on a monthly schedule.
Our accounting software won't accommodate a 13 period year. Then update your accounting software. Nearly all accounting software packages priced above $50 today have flexible reporting period capabilities. Even the latest versions of QuickBooks will handle a four-week period.
There may be some valid reasons to hang on to a monthly reporting cycle, but the vast majority of operators I know using the four-week system would never consider going back to monthly reporting. In my opinion, anything you do that helps improve your understanding of how your restaurant is actually performing is worth considering. At minimum, the four-week system deserves a good look.