Restaurant QuickBooks Guide, 2nd Edition (PDF Format)
Why Most Chains Use a 4 Week Accounting Period
By Jim Laube
In my financial management seminars I often ask how many of the participants’ prepare their financial statements every month. The vast majority of the audience usually has a hand in the air. I tell them to assume they just received their latest P&L and ask if it would be a useful exercise to compare the results of the current month to the previous month? Answer: Usually not because there were a different number of days this month than last.
What about comparing the current month this year to the same month last year? This may not be valid either if, like most restaurant’s you do 45% to 60% and even more of your weekly sales on two days of the week, normally Friday and Saturday. You may not want to get too excited about a 12% year to year sales increase this month, if this year’s sales included 5 week-ends.
With these and other shortcomings inherent in monthly P&Ls, many restaurants, nearly all the larger chain operators, prepare their financial statements every four weeks. They have 13 four week periods a year, instead of 12 monthly statements.
Four-week reporting periods usually makes sense in a restaurant environment for a number of reasons:
1. Better comparability of your numbers. Operating numbers of any kind are much more meaningful and useful if they can be compared to something like a budget or prior period(s). On a four-week cycle, every P&L reflects the sales and expenses of four Mondays, four Tuesdays, four Wednesdays and so on. This usually makes it much more useful in comparing current numbers to the prior period and the same period last year.
2. Easier to plan for physical inventories. Again I go back to my seminars where I ask, how many people that do their financials monthly, really believe they get a good, accurate ending inventory value when the month ends on a Friday night? The response is always the same, laughter and admissions that the inventory number on a Friday night probably isn’t all that accurate. If a month ends on a busy night like Friday, when there’s finally time to take the inventory, everyone is dead tired and the last thing anyone wants to do is count product. Plus, on a Friday night anyway, there’s often lots of product on the shelf to count. Ever been tempted yourself in taking some short cuts?
Many companies on the four-week cycle end their periods on a Sunday. Sunday is generally a slower day for most companies so they’re able to do some pre-inventory organizational work during the day or early evening. Also, Sunday night is when inventory should be at it’s lowest level of the week. So there’s less product to count.
3. Compliments a weekly cycle for the preparation of weekly reports. It’s no secret that most of the really successful restaurant’s in the country know what their prime costs (cost of sales and labor costs) are every week. If you’re calculating food and beverage costs weekly, then you’re on the same physical inventory cycle for your weekly prime cost report and four-week P&L.
4. May eliminate the need to accrue payroll. Finally something your accountant can get excited about. Based on my experience, the vast majority of restaurants pay their salaried and hourly staff every two weeks. Restaurants that pay their people bi-weekly and have monthly financial statements must then accrue 2 or 3 extra days of payroll in each 30 or 31 day month to show an accurate payroll expense.
The four-week cycle eliminates the need to accrue payroll when your pay period is bi-weekly. Every P&L will then reflect 28 days of actual sales and 28 days of actual payroll. Result: Payroll is easier to account for and probably more accurately reflected on your P&L too.
Resistance to the Four-Week System
While the four-week cycle makes a lot of sense operationally, many smaller restaurant companies avoid it because of resistance from their bookkeepers or accountants. Here are some common reasons for contesting the conversion to a four week accounting cycle.
1. Bank statements come monthly, not every four weeks. True, but most banks will cut off your statement when you want them to, just give them a schedule with your four-week cut-off dates. It’s also possible to gain access to your account electronically. This will enable your accountant to prepare a reconciliation at any time without having to wait for a statement to arrive in the mail.
2. What about expenses such as rent, lease payments and utilities that we pay once a month? It’s fairly easy to set up a schedule on a spreadsheet and expense 11/12ths of each monthly payment and place the remaining 1/12th into a prepaid account. Once a year the balance in the prepaid accounts are expensed into period 13.
3. What about sales tax that’s paid monthly? Many states will allow you to pay sales taxes 13 times a year instead of 12 monthly payments. If not, it’s still not difficult to keep sales tax payments on a monthly schedule.
4. Our accounting software won’t accommodate a 13 period year. Then update your accounting software. Nearly all accounting software packages today have flexible reporting period capabilities. Even the latest version of QuickBooks will handle a four week period.
There may be some valid reasons to hang on to a monthly reporting cycle, but every operator I've ever run in to using the four-week system would never consider going back to monthly financials. In my opinion, anything you can do that helps improve your understanding of how your restaurant is actually performing is worth considering. At minimum, the four-week system deserves some serious consideration.
Click here to view the Restaurant Operators Complete Guide to QuickBooks