New business owners have to learn a lot about their industry as they go. It’s especially true for restaurant owners, who must understand the day-to-day financials, the food industry in general, ordering, tax terms, and more. You want to make sure you know important industry terms so you can run your business properly and also exhibit confidence when discussing business with your vendors, employees, and partners. And these days, that task is even more daunting, thanks to how many terms are abbreviated!
Below are ten acronyms you need to know and understand as the owner of a restaurant.
Compound Annual Growth Rate. CAGR is often used to describe the rate of revenue or volume growth for your restaurant, as well as the average return received from investments, over a series of years. Financial outlets use CAGR to report on growth of different market segments and franchises in the restaurant industry year over year. CAGR can be calculated in 5 simple steps to arrive at a final percentage, i.e. 4.5 percent.
Cost of Goods Sold. Simply put, COGS is the cost to your restaurant for the food and beverage it sells. The simple calculation is (Beginning Inventory) + (Purchases) – (Ending Inventory). It’s important to take into account where your inventory starts, because new purchases alone don’t always account for items consumed if you have a significant stockpile of inventory. You may also want to account for food and beverage that you “transfer out” or “transfer in” from your kitchen to your bar, or from location to location, if you diligently segment your profits in each area or store.
Earnings Before Interest, Taxes, Depreciation, and Amortization. One indicator of a restaurant’s overall financial success, EBITDA is another way of understanding net operating income by subtracting fixed costs from gross profit. It doesn’t take into account debt loads or the amount of working capital you have at any given time. EBITDA is a useful way for lenders or companies themselves to compare profitability across industries without having to consider the effects of financing.
Fixtures, Furniture, and Equipment. These are the items that normally would be called out as included (or not) in the sale of a restaurant. Of course, they are also an integral purchasing step in opening your restaurant to the public.
FIFO and LIFO
First In, First Out and Last In, First Out. Using a FIFO system for the inventory at your restaurant ensures that food doesn’t get pushed to the back of the shelf and spoils before it has an opportunity to be used. Items are rotated to the front, so that inventory is used chronologically, oldest to newest. The restaurant industry would almost never use LIFO, as most of its items are perishable, but that model has some practicality in the construction industry or in vending machines, for example.
Merchant Cash Advance. A form of capital funding that provides upfront cash in exchange for the purchase of future receivables (i.e., credit card sales) generated by your restaurant. An MCA is different from a loan and may be a better choice for some small businesses. Businesses that receive a merchant cash advance do not repay on a fixed schedule as they would with a loan. Rather, their payment is based on the ebb and flow of their business. Payment is simply delivery on a purchase already made by the MCA provider when those credit card sales occur.
Revenue Per Available Seat Hour. Based on models used by hotels and airlines, RevPASH measures a restaurant’s seating, sales, and profit performance to determine your most profitable times and identify areas of improvement. It is calculated by dividing the total amount of revenue generated divided by the number of seats in a given time period. By comparing RevPASH from one hour to another (or even one shift to another) in your day, you can see where special offers or marketing promotion (like a Happy Hour) is most necessary to improve overall profitability.
Return On Assets. One way of determining profitability, ROA is designed to show how efficient your management is at leveraging financial assets to generate earnings. The formula used to determine ROA is (net income) ÷ (total assets). Most investors would like to see ROA at 5 percent or more.
Return On Investment. Like ROA, ROI is another way to understand profitability of your restaurant. Return on investment is calculated by subtracting cost from monetary gain (i.e. gross profit), and then dividing the result by the cost. It is also a method that can allow restaurant owners to weigh one type of investment against another to determine which was more successful. Expected ROI is completely dependent on the type of investment and the factors involved.
Work Opportunity Tax Credit. One method for alleviating discrimination in hiring, WOTC is a federal tax credit given to businesses that hire employees from pre-determined target groups. These groups include individuals who have historically faced significant barriers to employment, including: unemployed veterans, food stamp recipients, ex-felons, residents of Empowerment Zones, individuals referred by vocational rehab, and more. The amount of the credit ranges from $1,200 to $9,600, depending on the employee hired.
Need a boost to get some of these acronymns more in your favor? Find out if an MCA (merchant cash advance) right for your restaurant.