Not everybody is a financial expert. Some people hate math. They think they’re terrible with numbers, but your restaurant finances are vitally important. Today’s guest, Cindy Montoya, from KAC Consulting, is gonna talk all about the importance of bookkeeping to restaurant profitability.

We’re gonna talk about. Payroll mistakes that are commonly happening in restaurants, tip reporting and compliance, and the pitfalls there. Not paying your sales tax on time and what can happen or what you can do to head that off at the pass, the FICA tip credit, certain states are trying to eliminate that and what’s that gonna do to your bottom line, as well as putting yourself in best position for tax time coming up.

It’s not too early to start planning. And what happens if your books are a mess? Can you clean it up? Yes, you can. Can they help? Yes, they can. So stay tuned to this week’s episode. Thank you so much for tuning in. You’ve probably heard about my academy, but do you really know that your bandwidth is limited and that maybe you’re burned out and you can’t be in your restaurant 24 7 and you’ve got great people that can really help you run your restaurant if only they.

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Cindy, welcome to the show today. Thank you. It’s good to be here. You are a financial guru when it comes to small business and restaurants especially.

So I’m especially glad to have you on the show.

 What are some of the the biggest financial challenges that you see restaurants facing today, post pandemic and with the climate of the economy and all those types of things? What are the biggest challenges? Food food costs for one is just absolutely insane now, especially after the pandemic and then of course labor.

There’s always the labor issues and that seems to be, seems to be a greater issue after the pandemic as well. The margins are just so extremely tight in this industry. After the pandemic, we had restaurants that were, eking out 1% in net profit and wow. You’re talking about if you’ve got a restaurant with, just to translate those numbers, if you’re talking about a restaurant with $3 million in sales, you’re eeking out $30,000 in net profit, they’re not getting rich.

And then that the, they have to take that $30,000 in profit and then service debt with that. We’ve got negative cash flow at that point. Yeah, cash flow is definitely an issue in shrinking margins for sure. And so many restaurants are just trying to put out the daily fires, put out great food.

Staffing is certainly an issue and they’re pulling their hair out saying, wow, I’m tied to this business 24 7 and I’m not even making any money. So what would you suggest as being the basis to just start fresh so that, ah, I got a sigh of relief because someone is in my corner and they’re giving me great advice.

What would you tackle first? Oh, what would we tackle first? First of all I would say we have to dial in the bookkeeping. There is a direct link between bookkeeping and profitability. If those, if your bookkeeping is up to date on a daily basis. Let’s just say even for a smaller restaurant on a weekly basis, let’s say you’re closed on a Monday and you take that, you’re able to take that day and reflect on the previous week.

If your bookkeeping has been up to, kept up to date daily for that week, then you’re able to compare that week to the week before, what, what changed? Were there any price increases on any ingredients? Do we need to maybe push a different menu item because our cost on avocados, for example, went up by 25%, so now I need to, figure out what that means for my menu.

You’re talking about prime costs also, which is misunderstood in our industry. Everyone knows food and beverage and labor costs, but no one really expresses it as a sum total of those things expressed as a percentage. And I think you really struck a chord when you said, wow, a 1% profit margin, which is, wow, you’re on the verge of disaster here.

Okay. And I do some consulting as well, and the prime cost. Formula they say shouldn’t exceed 55%, which means for every dollar a sales 55 cents goes to food, beverage, and labor. And then as there’s such a laundry list of other expenses that factor into the equation. Obviously your rent is a big one and the dumpster in the parking lot, and if you got linens and utilities and all these other things, that means there’s only 45 cents left.

If you’ve got a decent prime cost. So this is an eye-opener what you’re talking about and it’s something that every operator needs to pay attention to if they don’t have a healthy bottom line. So I’m really glad that you brought that up. Let’s talk about tip reporting and compliance. ’cause that’s another headache in some cases for a lot of operators.

And a lot of paid, people are on payroll, but they’re also tipped employees, and it was always a challenge to get people to report. A good percentage of what they’re actually bringing in tips and everyone wants to cheat and all that kind of stuff. Is there a way to, make the compliance thing so that you’re not on the, on the government’s red flag list.

Yeah, that’s a big one. So one of the things that restaurant owners have to be aware of is that if they have over 10 employees on a typical business day, then they’re subject to that reporting of the the form 80 27 where they have to. The tips and it’s expected. The IRS expects the reported tips to be at least 8% of the sales.

And so if it’s not, then you have to do this thing called a tip allocation, and so then you’re allocating basically the difference between what the employees did report versus 8%. Taking that difference and dividing it out over, between the the tipped employees, putting it on their W2 so it’s very important that, you get your employees to report their tips and that you’re tracking that using a system, a process to track tips.

Okay. Yeah, we haven’t, we had an issue, this was many years ago, back when I worked for a CPA firm and they were not. Tracking and then they were not reporting on their 80 27. We had a client. It wasn’t my client, but it was a client of the firm and it turned into a huge issue that almost put them out of business.

It’s interesting, this takes me back to when I didn’t process the payroll from my restaurants, but I did compile the information, which I then sent to our payroll company, and obviously you’d get a report on your point of sale system and it would show sales of each tipped employee, and then obviously they would report their tips, and I would always have to make sure that their percentage was at least that certain amount.

And this was a time consuming process, but it was essentially a piece of important bookkeeping. Because if all, if if most of those people were underreporting, then I was exposing myself to some sort of liability. And then suddenly you get audited and the restaurants on the hook sometimes for these big charges that you can’t afford.

So you’re making a very valid point there. Now what about the FICA tip credit? Can you explain that? Sure. As tips are subject to social security and Medicare tax, just like wages are. And so the employers can get a tax credit for the FICA taxes that are paid on tip income that’s above minimum wage.

And so interestingly, this can play into your entity choice for your restaurant operations because. W we have some of our restaurant clients are taxed as S corporations. An S corporation is a flow through entity. And so that tip credit actually at the end of the year when they file their tax return, the credit that they get for paying those Social Security and Medicare tax tax on tips actually flows through to the business owners or the shareholders of a s corporation.

And so then. That credit is not able to be used by the business to, to plow that back into into retained earnings. And there may be a case here depending on a lot of other factors, but there could be a case for choosing a C corporation entity type where that tip credit is actually gonna be able to be taken advantage of.

By the business the business itself is going to get that credit. That was one of my questions. I wanted to talk about the ramifications of a form of organization depending on what it is. Like when I owned restaurants, they were S corps and that did flow to my personal 10 40 and all that kind of stuff.

And now I’m not in restaurant ownership anymore, but my company is a partnership LLC, and there’s single person lcs and there’s C corps. And it must vary by business. In general, is there one form of organization that is shown to be the best tax friendly way to organize? And if so, would you recommend that restaurants switch a form of organization?

That’s such a loaded question. As you mentioned, it is on individual basis and there’s so many. So many different types of scenarios, do you you said, do you have partners or are there multiple owners or, so there’s it’s a thing that has to be looked at as a whole and not just focus on one piece, but the FICA tip credit definitely should be. A, especially for a larger restaurant that’s where that tip credit is huge. It should be one of the considerations and making that decision. And yes, if there is a case for it, switching entity types is. Totally doable. That’s also a really controversial topic.

I know in my state of Maine, I’m on the board of directors of our state hospitality association, and I’ve been on it for many years in multiple terms. And the tip credit keeps coming up in the legislature and they’re trying to eliminate it. And these are legislators that don’t understand our business, that don’t realize that you know that people are making in excess of the minimum wage with tips.

When you eliminate that, then suddenly, can you imagine in different states having that have a high minimum wage that you have to pay servers that high minimum wage and all that kind of stuff, even though they’re making an excess of that with tips. And we have constantly had to go before and speak to our issue in our industry.

And I know this is happening in other states as well, so if there’s any advice there, be involved in your state association? ’cause something really devastating to our industry could happen in your state related to this tip credit. So just a word to the wise. I’m sure some people are aware of it and some people are not.

But wow, what a contentious issue that can be. And for employees too. It, if you’ve got a great server, a salesperson that’s making really good tips and their hourly rate ends up by the time tips are included at $35 an hour or whatever the case may be, right? And then they take that away and now they’re paid minimum wage and maybe they’re in a state where minimum wages.

Like Texas, it’s $7 and 25 cents an hour. They’re not gonna, they’re gonna go look for another job. So it leads into the session of keeping employees too. That’s absolutely true. So it’s a double-edged sword there. Yikes. What other payroll mistakes are you seeing that companies are making?

Is there anything else besides what we talked about? There is the issue of, and th this is for small businesses in general, not just restaurants, but misclassifying staff as as independent contractors. Oh yeah. When they really should be classified as employees over time, incorrect overtime calculations.

That’s a big one. I wholeheartedly recommend using a payroll company for processing payroll because there’s issues that, you miss one form 9 41 filing or one state filing, and you can have some pretty significant penalties. We had a we had a client several years back that they had, they decided to bring their payroll in-house.

For whatever reason, and the bookkeeper who was processing payroll didn’t realize that she had to submit the forms W2 at the end of the year to the Social Security Administration. So she handed out the W twos to the employees. They have, I don’t know, an excess of 50 employees. Anyway, long story short, she started getting IRS notices because.

The SSA reports to the IRS and the IRS says, where’s the W twos? She was sticking those notices in a drawer. Oh boy. Because, oh boy, she was afraid she would get in trouble, Uhhuh. So time passes. This ends up being an issue for two years in a row. The IRS imposes the heavy duty penalties for failure to file the W twos.

Long story short, over two years with interest in penalties, it ended up being a quarter million dollars in penalties. We were able to work with the IRS and get them out of those penalties, but it took two years and the headaches and the time. I can only imagine what a nightmare. So expensive. Yeah, what a nightmare.

And that’s something that no one wants to experience. You wanna stay off the radar and dot your t’s for sure. Okay let’s talk about financial statements. What are they telling people? And I know a lot of restaurant owners that I’ve spoken to or I meet on the road just don’t even look at their financials, and that’s so important.

Yeah. So your financial your financial statements are telling you the whole story. Like we mentioned earlier, you’ve got your prime costs, your food and your labor and, looking at those financial statements at a minimum of weekly, you need to know that your your prime costs are falling in line.

And then being able to budget your your other expenses, your operations expenses your bottom line. We could have a target of. Five to 8%. If you’re making 1% gross profit margin, you’ve gotta, set your target a little bit higher and we can use the financial statements to guide us.

It’s a roadmap. So let’s dive a little deeper because I recall when I owned restaurants, things get wasted and spoiled and thrown in the trash and comped and voided off a checks and stolen out the back door.

And then the walk-in, the walk-in goes down and you don’t have a generator and you lose a thousand dollars worth of food before it gets fixed and all these things happen. I used to have a category called sales discounts, so that was an expense on my p and l where the point of sale system would print out every comp. Anything that got comped off a check or any sales discount that we provided.

Let’s just say we, we charge full price to a customer, but we had 50% off for any employee, or we had a special promotion where we discounted things to bring people in the door. We accounted for that, and that was a line item on our p and l as an expense. So is there a way that. Bigger losses, like I mentioned.

If the power goes out and you lose a thousand dollars worth of food, but you don’t have insurance against that lost product, is that something that you can just capture as a credit against taxes? It becomes a detection at that point. We’re prob we’re probably gonna take it not against cost or goods sold, but against a separate line item on your profit and loss.

And definitely those things are deductible. All right. That happens so frequently, if not daily. In the small things are the comps, but some major event that you’re not insured against is a much bigger deal. So we’re halfway. A year end here and tax planning becomes so vitally important.

What would you suggest? Bookkeeping is primary important. So if you don’t have your books in order, now’s the time to do that. Can your firm, clean up the books if someone has really erratic bookkeeping, and where do you begin and how do you fix that? And then that’s the first step in, okay, let’s get our ducks in a row and really start planning for the end of year so that we can maximize our benefits versus liabilities.

What would you suggest? Absolutely. Yeah. We can clean up the bookkeeping. In fact, that’s one of the things that we specialize in, is taking whatever, wherever your bookkeeping is, if it’s in Zero or QuickBooks online, QuickBooks Desktop even. We get in there. We look first at the balance sheet. We compare your balance sheet to the tax return if you’re an S Corp or a C Corp, or a partnership where you have a balance sheet on your tax return.

We’re gonna compare that balance sheet. See where things have gone awry. And then we’re gonna dig into reconciliations, making sure your bank accounts are reconciled, your loan accounts are reconciled, credit cards, accounts are reconciled. Go through all of those things to get your balance sheet up to date.

And then and then we’ll be in a position to look at. Tax planning. The first step is always to figure out where you are, right? And then how can we plan for making sure that that your taxes are, you’re able to take the most deductions minimize taxes, maximize deductions, and and that’s an investment.

It’s not a cost because that planning in advance can save you lots of money when it’s too late after the fact and you file your taxes. So I know I took advantage of that opportunity when I owned restaurants, and I definitely recommend others. Work with a professional such as yourself to. Not only clean up your books if it needs it, but really put yourself in the best position.

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There’s a term that I never quite understood, ’cause I took accounting in college, but we didn’t go this deep. But what does the term basis mean exactly? Oh wow. Okay. That’s a good one. So basis is basically the amount of money that an owner has invested in their business. And so that, that is the initial basis.

And then as the years go on and your restaurant hopefully. Is earning money and then that retain what we call retained earnings gets added to that basis. And so sometimes I’ll liken it to a bank account because you start with an initial amount of money, which is your equity, and then that increases or decreases with earnings or losses.

Okay. Thank you. That’s a simplified explanation. There’s a little bit more that goes into it, but All right. Perfect. That impacted what we called I had a S corporation and we took shareholder distributions at certain times of the year, and it was related to basis, and I was able to take this money.

Tax free that I could just write myself a check and my partner as well. And I never understood why, but I always said I’ll take it. So thank you for that. So a little bit more, let me dive a little bit more. Please do deeper into that. That’s, it’s helpful. So when you take a shareholder distribution, you’re taking a distribution of what we call earnings.

So your earnings are what your net profit after. Your wages and all of your expenses, your food, everything has been paid, including if you’re an S corporation shareholder, including your own payroll. It’s important that S corporation shareholders pay themselves a reasonable payroll, so net profit after all of those expenses are paid.

Is your earnings. And so then a shareholder is able to take a distribution of earnings and profits that has already been taxed because your net income is taxed. Yes. So now the issue is if you take a distribution in excess of those earnings. Now we have a tax issue where you could potentially be facing paying capital gains on that distribution in excess of basis.

So it’s real important to, to track that basis, make sure you’re not doing that. That’s super helpful to know. Thank you for clarifying. Let’s talk about. The sales tax issue. I’ve seen restaurants that spend their sales tax before they report it to the state at the end of the month, and suddenly they’re in arrears and then suddenly there’s penalties and all that kind of stuff.

What do you suggest? Should you immediately take that money on a weekly basis or a daily basis and put it aside in a separate account? Because it’ll, I know you, margins are low and cash flow is tough and you gotta make payroll. I get all that, but it’s you don’t want to be on the wrong side of your state government and be in arrears.

Absolutely. On sales taxes, what do you suggest? I suggest having a separate account. Number one, having a separate account. If you’re not gonna do that, then use a service there. There’s a service out there called oh man, I think it’s called davo. Davo. I’ve worked with them. Sure. Avalara. Yes. Yeah. And so they will integrate with your POS system, and every day they’ll pull out that sales tax and set it aside for you automatically.

Yeah. So that’s a service that we’ve used. And then, like you said, just having a separate account, if you’re not gonna do that, having a separate account, I think they even do the filing for you, so you don’t even have to fill out the report. Isn’t that right? They will, there are some limitations to that.

For example, in Texas we have a couple of things that they’re not equipped to do. For example, they, we have the use tax where businesses are required to track their comps. And then on those comps you have to multiply by the gross, your gross profit percentage. Yes. And then you pay. A sales tax, which we call use tax on that because the comptroller wants to get tax on those comps.

 It’s good these are things to be aware of and obviously to look into if you’re not, if you’re not currently aware of it. Absolutely. KAC consulting is your company and that stands for something. Wanna tell us that story? Originally 12 years ago when we started the business, it was going to be me, my daughter, and my son. And then my son decided he wanted to go a different path. That was our initials, KAC.

So when he decided he wanted to go a different path, we said okay, let’s figure out what KAC stands for. So we rebranded a little bit and K stands for Know Your Numbers. A for adjust and allocate and C for be consistent, all important things in this business. That’s terrific. Cindy, thank you so much for sharing your knowledge and your expertise in all things financial, bookkeeping and taxes and tip credits and all the important things that restaurant owners don’t typically think of on a daily basis, but really is important to the bottom line.

And to improve your cash flow and your margins, you need to work with a professional. Thank you so much for being in the show. Thank you for having me on. I enjoyed it. Thanks, Andy. That was the restaurant Rock Stars podcast. So glad you tuned in. Can’t wait to see you in the next episode. Stay well and I’ll see you then.

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Thanks for listening to the Restaurant Rock Stars Podcast. For lots of great resources, head over to restaurant rock stars.com. See you next time.

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