If you know more about cappuccinos than cash flow, you’re not alone. Many small business owners find it tricky to understand accounting and bookkeeping. So much so, that keeping more money coming in, than money going out, is the number one challenge for small businesses across the board.
While you may have originally started your business out of a passion for good food, keeping a close eye on your finances is essential for your business’ success. This will help you to pay suppliers on time, cover the cost of creating your dishes and ensure you don’t run into debt.
Our guide helps you understand the basics of bookkeeping for food trucks and small food businesses, including:
- How to take payments as a food business
- Keeping track of profit and loss
- Types of expenses for food businesses
- Determining cost to sales ratios
- Managing inventory
- Best accounting software for your cafe & small food business
How to take payments as a food business
Taking customers’ payments is an essential part of running your food business. How you accept payments will depend on your business set-up; for example, if you’re catering weddings, you might send an invoice, while card payments might be a better bet for processing small transactions on the go.
Whether you’re running a food truck, a stall at a farmer’s market or serving partygoers at summer festivals, mobile food vendors often need a payment solution that allows them to quickly and securely process transactions on the go.
You’ll need a POS (point of sale) terminal so you can take payments. Mobile terminals use an app to turn your smartphone or tablet into a terminal, giving you greater flexibility in accepting payments.
Customers can then pay directly into your business current account using their credit card or contactless payment. Accounting software like Countingup will keep a record of each transaction and create a running profit and loss statement for you to gain insights from.
While the food industry is currently experiencing a move towards cashless with 38% of food vendors refusing to accept cash, many customers still want to pay using cash.
You don’t want to turn away customers who don’t have a credit card, so you may occasionally take cash payments for small purchases. With cash payments, it’s essential to keep a record of any incoming transactions and provide customers with a receipt.
You’ll then need to enter these transactions into your accounting software to keep your financial records up-to-date.
Some food vendors may want to send an invoice instead, especially if you’re processing larger, one-time transactions. Invoices are a formal way of asking for payment for your product.
To make sure your invoice is paid, you want to make sure it includes:
- Unique identification number (UIN)
- Client details (name, point of contact, address, phone number and email address)
- Description of the product (for example, 40-people wedding catering or 1x custom birthday cake)
- Product cost including any tax or VAT
- Payment terms (typically net 30 days)
Depending on your offering, you may also want to consider taking an upfront deposit to cover your base costs and then requesting the final payment on delivery. To take a deposit, you’ll need to send two invoices: one before you start work and one after.
You’ll need to keep a record of any invoices for tax purposes. Accounting software like Countingup, allows you to create invoices in seconds, get notifications when you’ve been paid and that automatically reconcile. You can save hours of accounting admin by choosing a software that enables you to keep digital records and comply with the government’s Making Tax Digital regulations.
Keeping track of cash flow
Running a successful business requires keeping a close eye on your cash flow. After all, cash flow is the lifeblood of your business. It allows you to purchase the necessary ingredients, rent any equipment and ensure you can continue to produce food.
You want to maintain a positive cash flow, which means that your company’s liquid assets (cash, savings, investments) increase, and you have enough cash to cover your operations. Your cash flow may dip if you need to invest in a new set-up or pay for equipment upfront .
Restaurant and hospitality businesses often operate with a profit margin of between 2-6%, with small, quicker food businesses, like food trucks, at the higher end. The cost of goods, labour and overhead costs all contribute to the relatively low-profit margins.
Keeping an eye on your cash flow will ensure you can maximise your profit margins and make sure you always have the funds to cover your base costs.
Types of costs and expenses for small food businesses
Small food businesses have to compete with a range of different expenses and operating costs. Here are some of the basic costs you’ll need to account for in your small food business.
Cost of Goods Sold (COGS)
Often abbreviated as COGS, the Cost of Goods Sold is the total cost required to create your product. So this will take into account all the ingredients needed to make the items on your menu.
You can calculate COGS for individual dishes to determine how much each menu item costs to make, or you can calculate COGS by subtracting your beginning weekly inventory from the inventory you have left at the end of the week.
Understanding how much it costs to create each dish helps you set accurate pricing to make a healthy profit.
Note: COGs does not take into account any labour or utility costs.
Occupancy expenses are the cost of renting your space. For example, if you need to rent a spot for your food truck or farmers’ market stall.
Occupancy expenses may also include any utilities or insurance, like van insurance, that you have to pay. It’s important to note that occupancy expenses are fixed and remain the same, which means you can’t reduce them to increase profitability.
Operating expenses include all other costs for running your food business, for example, napkins, plates, marketing and advertising, equipment, etc. It’s important to note that this does not include the cost of ingredients or rent.
Monitoring cash flow
You’ll want to keep a close eye on any outgoings as well as income. By tracking how much money comes in and goes out of your business, you’ll be able to better plan for peaks and troughs and make sure you don’t run out of money.
A cash flow statement essentially acts as a cheque book to help you pull together all the information on your income and expenses and understand overall profitability. You can also see your net cash flow, which is the amount of money your business made during a specific period after costs.
As a small food business owner working within low-profit margins, you want to keep track of your cash flow daily, weekly, monthly, and quarterly and use these insights to create a budget.
How to create a budget for a food business
With a good understanding of your expenses and how much money you need to run your food business, you can create a budget. Creating a budget allows you to put money aside and save for a rainy day. That way, you’re never caught off guard by unexpected expenses, like repairs to your food truck or a sudden increase in orders.
The below steps are an excellent way to start creating a budget.
1) Create a list of all your expenses
Sit down and create a list of all your expenses. Then categorise them into:
- Cost of Goods Sold
- Occupancy Expenses
- Operating Expenses
2) Identify fixed and variable expenses
Next, identify fixed and variable expenses. Variable expenses change over time, which means they can be scaled back should you need to increase cash flow or face a sudden slump in orders. COGS are often a variable expense as you would need fewer ingredients for fewer orders.
On the other hand, fixed costs remain the same regardless of demand and are much more challenging to scale back. For example, the fee you pay towards renting your spot at a festival remains the same whether you sell 100x hamburgers or 1x.
3) Determine how much you need set aside
Try to do some planning by thinking about how much money you might need in various situations. For example, if your food truck needed to be repaired or you received a surge of orders.
You want to try to set aside enough money to cover all eventualities, so you’re prepared. Having enough money set aside gives your business the best chance at success. After all, as the old saying goes, ‘fail to prepare, prepare to fail’.
Bookkeeping for cafes and other food businesses
As part of your bookkeeping, you want to create regular financial reports that allow you to track your inventory, cost-to-sales ratio, and overall income. Financial reporting is essential for staying alert to any changes in your business and flexing with changing customer demands or seasons.
Managing inventory as a small food business
As a small food business, you’ll need to keep a close eye on your inventory to ensure you have enough ingredients to fulfil orders and deliver to your customers. Since food businesses often depend on perishable goods, it’s even more critical to maintain an in-depth awareness of your inventory.
To monitor your inventory, calculate your inventory turnover ratio by dividing your net sales by the average inventory cost. You typically want to keep your inventory turnover at less than seven days, especially if you’re working with fresh ingredients.
If your inventory turnover is less than seven days, this might indicate that you’re not buying enough inventory or you’re at risk of running out of supplies. On the other hand, if your inventory turnover is higher than seven days, this may mean you’re purchasing more inventory than you need. It could impact the quality of your food as you’re working with older ingredients.
Keeping track of your inventory can help ensure you have enough ingredients to run a successful business without wasting money by letting ingredients go out of date.
The cost-to-sales ratio helps you understand the overall financial performance of your food business and ensure you maintain a healthy profit margin. Understanding your cost-to-sale ratio also helps you know how you stack up to other food businesses and get a clear picture of your finances.
The cost-to-sales ratio essentially calculates all expenses into a percentage of the overall sales using the below equation:
Overall expenses/overall sales x 100%
Daily sales reports
In addition to keeping a close eye on your expenses, you also need to closely monitor your sales. Monitoring sales helps you understand how each item on your menu contributes to your overall sales. Are hamburgers more popular than pizza? More cappuccinos than americanos? Do you sell more food than beverages?
Understanding the unique breakdown of your sales allows you to compare how customer demand varies from week to week, predict what inventory you’ll need and make a plan for your company’s overall success.
You can also use this report to set revenue goals and track your progress as you continue to grow and scale your business.
Discover the best accounting software for your cafe & small food business
With Countingup, you can apply for a business current account online in minutes and for free. It automates the time-consuming aspects of accounting and it’s saving thousands of UK business owners time and money. Find out more here.