FINANCIAL MANAGEMENT: To skim or not to skim?

 
Nov. 24, 2003

A 25-year veteran of the restaurant industry, Jim is the owner and operator of RestaurantOwner.com, and a sought-after industry speaker.

Whether you call it skimming, dipping into the till, scraping a little off the top or giving the ol' boss a quick bonus, pocketing some portion of your cash sales without reporting it is a dangerous business practice. But the fact remains many operators do it without a second thought.

You've probably heard your share of stories about the creative schemes owners devise to avoid paying the taxman. One that comes to mind is the restaurant owner who kept an extra cash register rigged up on a stand with wheels. Through most of the day the register was hidden in a closet, but during the last few hours of every business day, the op rolled it back out for some unrecorded sales.

Jim Laube

For what it's worth, here's my take on why I think restaurant owners end up shortchanging themselves their business more than the taxing authorities when they fail to report all their sales.

1. It's against the law.

The fact that skimming is against the law may not mean much or even anything to some people. But because it's against the law, and we're talking about depriving our various governmental agencies their piece of the action, the penalties are extremely severe if you're ever caught doing it. The government gets so testy about tax evasion that it's a felony offense. Convictions come with severe penalties that may include jail time.

Not my idea of fun.

2. All meaningful controls in the restaurant are lost.

A restaurant's financial information is essentially worthless if skimming takes place; the operating percentages and cost ratios don't mean anything. Skimming makes inventory control a worthless exercise. Quite simply, you can't tell if you're doing a good or bad job of controlling expenses or whether your business is improving or suffering from operational problems when sales are understated. The way I see it, it's difficult, if not impossible, to run your restaurant like a business and make intelligent operational decisions.

3. Employees know what's going on.

Maybe the entire staff doesn't know, but a few will figure it out. When they do, some will feel entitled to some of the spoils. I've even heard of employees, who, when they find out skimming is a serious violation of the law, blackmail the operator.

And if they can't get that, it suddenly becomes a lot easier for them to justify taking home a few boxes of meat or a couple twenties out of the till.

Probably most important, though, is that operators who skim lack any moral authority and credibility. Most employees consider integrity an important character trait, and they don't respect or want to work for someone with low moral and ethical standards.

4. Skimming makes it more difficult to borrow money.

If you're addicted to skimming and you have plans to expand or grow your business, you're at a serious disadvantage when it comes to raising capital. Imagine this scenario:

An operator goes to a bank for financing to expand his restaurant concept, and while showing the banker his current restaurant's financial statements, he says something like, "I know these numbers don't look all that good, but the restaurant's really doing better than this." Well, funny as it may seem, integrity is very important to bankers, and a sharp one is likely to see right through that.

Additionally, if you ever need to take on a partner, forget about it if you skim.

5. Skimming makes it more difficult to sell a restaurant.

Pocketing cash off the top will dramatically lower the value of the business, because valuations are heavily dependent on the availability of accurate, credible financial information. When those figures are absent, there's nothing to justify or prove actual sales volume and how much money the business actually makes.

So while it may seem operators who skim are pulling one over on the taxman, the truth is they usually end up cheating themselves far more in the long run.

Other articles by Jim Laube ...

* FINANCIAL MANAGEMENT: Making menu pricing easier and more profitable
* FINANCIAL MANAGEMENT: How much money should your restaurant be making?
* FINANCIAL MANAGEMENT: Educate your staff about the cost of your business
FINANCIAL MANAGEMENT: Know your numbers
*FINANCIAL MANAGEMENT: Preparing a monthly P&L won't give you the best numbers


Topics: Financial Management


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