Restaurants are notorious for being difficult to get off the ground. Small business owners are hit with statistics that suggests high failure rates in their first year, while receiving endless warnings about how difficult it is to turn a profit as a restaurant owner.
In reality, though, failure and ownership-change rates are about the same as small businesses in other industries, according to Forbes, citing a 2014 study by two economists.
What is true, however, is that restaurant owners and franchisees are facing challenges that are less acute in other industries. Margins are low, placing even more importance on the “every penny counts” mindset. But with fewer resources to invest in high-end accounting and cash management technologies, problems like employee theft, vendor fraud and overspend on perishable food are challenges that business owners are struggling to overcome.
Dev Purkayastha, founder and CEO of restaurant accounting solutions provider Indevia Accounting, recently told PYMNTS that one of the biggest challenges for this sector is the reliance on part-time bookkeepers to manage the books.
“Most restaurant owners cannot afford a full-time bookkeeper,” he said.
He added that this introduces a slew of new problems. Come tax time, for example, those bookkeepers are working with several clients and may struggle to obtain up-to-date financial data for each business. Part-time bookkeepers don’t always document what they’re doing, either, so if a professional happens to get sick or take time off, their replacement may not know how to pick up where the first accountant left off.
Perhaps most important, however, is that not all part-time bookkeepers have insurance, and restaurant owners can be left without recourse should a serious error occur. Purkayastha said that, through his work with Indevia, he has come to find that accounting errors — like double payments to vendors, for instance — are quite common.
One characteristic of the industry that exacerbates the lack of visibility into finances is the fact that restaurants are particularly cash heavy. According to Purkayastha, card payments are on the rise, thanks to online ordering, which make up about 20 percent of business for restaurant owners today. But a high volume of cash has restaurant owners relying on expensive services, like armored vehicle transportation of cash or electronic safes that record cash volumes — at a lofty price to the restaurant owner or franchisee.
Cash, of course, also introduces the risk of theft for restaurants, which is just one of several ways owners can become victims.
“Employee theft is something you always have to be on guard for,” said Purkayastha, “whether it’s a restaurant or a football team.”
He pointed to the Association of Certified Fraud Examiners (ACFE), which warns that employee fraud among small businesses is not only an expensive problem, it’s one that’s difficult to accurately assess because small businesses often don’t even report it.
For restaurant owners, the issue of employee fraud can be especially dangerous. High turnover rates, which can top 35 percent in some positions, mean employee fraud may not necessarily be discovered before an employee quits. Since food is either consumed or goes bad, recovering stolen products is rarely possible, Purkayastha noted.
Vendor theft, he added, is also a worrying issue for restaurant owners, particularly when they make purchases from a bakery down the street, for instance.
“Most vendors are on ACH,” Purkayastha said of the way restaurant owners pay their suppliers. “I cannot speak to the smaller, specialty restaurants that may buy from their local markets. People who buy from big vendors like Sysco are all, pretty much, on electronic payments. Where the gap comes in is that, unless somebody at the restaurant that you trust is checking inventory, you don’t know what you are getting.”
Financial challenges like these mean restaurant owners don’t just need an accounting solution, but one geared toward the unique aspects of the industry. Purkayastha noted that integration is key — solutions must be able to integrate with existing points of sale (POS), payroll and other platforms for full visibility of finances.
Indevia recently announced a partnership with Restaurant365, another restaurant-specific accounting solution, to augment its capabilities in the space. Purkayastha said the solution is particularly effective in enabling managers with adequate shift scheduling based on which times of day are busiest for a restaurant (a feature highlighting the importance of basing shifts off POS data, for example), as well as managing procurement based off menu sales, allowing managers to order the right volumes of food products from their vendors.
If restaurant owners are going to tackle some of the biggest financial challenges they face, and gain visibility into finances at the same time, they must migrate toward digital solutions. It’s not always easy, though.
“One thing the restaurant owner doesn’t have is time,” said Purkayastha. “If their grandmother started the restaurant with pencil and paper, they’re probably still using pencil and paper — they don’t have time to look for a change.”
Restaurant-specific FinTech players must push for restaurant owners and franchisees to take those steps, he said.