Restaurant margins face constant pressure, even when business is thriving. As an owner or operator, a strong culture of internal controls from the top down is critical to the ongoing success of your business. Start with this internal controls checklist.
Operating a restaurant is challenging. Constant pressure from changing customer demands, food and labor costs, tighter margins, and increased competition — to name just a few factors — elevate the need for a comprehensive strategy to manage risk and drive a prosperous business forward. With the long list of considerations for operating a successful restaurant, internal controls can easily be overlooked — and that critical oversight can cost you.
Strong internal controls are important for any business, but restaurants come with unique considerations given the limited number of nonoperational personnel and, in the case of a multiunit operator, sprawling operations. Without strong internal controls, a restaurant could be subject to fraud, duplicate payments, revenue leakage, or other unchecked vulnerabilities. With so much at stake, restaurant owners and operators must prioritize robust internal controls; include these seven strategies in your internal control checklist to manage risk and ensure your business thrives for years to come.
1. Strengthen internal accounting controls with segregation of duties
A sound internal control strategy should include segregation of duties to minimize opportunities for fraud or operational error by a single individual. For example, the same person shouldn’t order goods, receive goods, and authorize payment for goods. Likewise, the same person shouldn’t operate the register and reconcile cash and credit cards to the point-of-sale (POS) at the end of the night. Even if most of the sales are credit card sales, the risk that your staff could provide an unauthorized free or reduced meal still exists.
If there aren’t enough nonoperating personnel (i.e., store managers and assistant managers) on staff, enlisting a trusted employee to perform a function is the next best option. Ask a server, cook, or host to assist in one task in the chain. Alternating responsibilities among staff from time to time is also effective. If that isn’t a viable option, owners or district managers can randomly audit the records to ensure everything is in balance as an additional check in your internal control process.
2. Manage controls over cash: Do’s and don’ts
Proper cash management, primarily in the store, but also in the bank, is critical for restaurant owners and operators.
For effective cash management, you should:
- Implement fraud prevention tools for cash and electronic payments. Establish auto payment for as many expenses as possible and ensure the appropriate person (store manager or above) is responsible for approving vendors for auto payments. Someone outside of the restaurant should authorize all nonrecurring electronic payments. Setting up dual signatures, positive pay, and dual authorization over wire transfers can also help prevent the risk of unauthorized transactions.
- Monitor credit card expense management. Use a store credit card for nonrecurring expenses and items such as technology subscription charges. Manually review your POS sales reports against credit card activity and follow up on any charges from vendors that aren’t immediately recognizable.
- Require systematic cash deposits in the bank. While it may not be feasible to go to the bank daily, make bank deposits at least once or twice per week as a best practice. Your store manager should use a separate deposit ticket for each day that is reconciled to POS reports.
- Have an established method of payment for each type or category of expense. Require a manager to sign off if payment is to be made via another form of tender to avoid possible double payment.
Conversely, avoid these common missteps in your cash controls:
- Don’t maintain a petty cash box. Avoid routinely taking cash from the register to pay bills (paid outs).
- Avoid paying out credit card tips in cash. Instead, pay tips via payroll on regularly scheduled cycles. It can be tempting to pay out credit card tips nightly in cash, but doing so may require owners to keep more cash on hand than necessary. If you must offer cash tips to retain staff in a competitive market, maintain detailed records of the cash paid out to accurately report tip income on payroll.
- Minimize the number of manual checks. Control the check stock as you would cash, preferably in the store safe. Wherever possible, pay expenses via ACH, credit card, or payroll. If a check needs to be written to an employee for wages, make sure to report the payment properly on the next regularly scheduled payroll.
- Don’t pay from vendor statements/invoices or respond to demands for immediate payment. Research the vendor claim and pay using your approved method of payment. If you’re paying bills manually, confirm a three-way match between your purchase order, invoice amount, and the goods received.
- Never commingle cash for business and personal use. As a best practice, your business and your personal expenses should always be kept separate.
3. Monitor and report financial results
Your best defense against fraud, duplicate payments, and revenue leakage is constant monitoring of your bank account and financial results. Reviewing the bank transactions online daily helps identify potential irregularities on a real-time basis. Additionally, reviewing store profit and loss statements weekly can provide insight into potential irregularities. For example:
- Sales should agree to the POS reports.
- Gross margin and labor percentages to sales should be consistent, and, if there’s a significant variance, the reason should be obvious and known to the manager.
- Compare expenses to the prior period or the prior year. Again, any significant variance should be known.
- Accounts such as cash over/short, employee meals, inventory waste, overtime wages, and repairs/maintenance should be reviewed.
Overall, the store manager shouldn’t be surprised by any result on the profit and loss statement and should be able to easily explain any anomalies.
4. Administer staff training on internal accounting controls
Proper training of employees helps ensure they understand how to perform functions properly and sends an early message that you’re serious about internal controls. This training should be preemployment and provided at least annually. Training should also be required following a significant change in procedure (e.g., a new POS system). Additionally, documenting your controls in an employee manual can help solidify policies and procedures in an easily referenced resource for all staff.
5. Safeguard IT systems from data breaches
Your POS, computers, and other technology in the store should be configured by an IT professional to ensure the proper access, controls, and safeguards are in place. Strong IT controls are also critical to thwart potential cybersecurity threats to your restaurant operations. Access should only be granted on an “as-needed” basis, and nobody in the store should have access to the entire system.
Immediately cut off access for any departing employees, but especially the store manager. If the store manager departs, make sure to disable any authority the manager may have with the bank accounts, credit card, payroll provider, or any vendor.
6. Maintain controls over physical inventory
At minimum, you should take physical counts of goods at least monthly. Liquor should ideally be inventoried nightly. Restaurant owners or operators can also leverage restaurant management software packages with recipe features that can predict food usage and cost based on sales to help manage inventory. Proper inventory management will help you manage costs, minimize food waste, and identify potential theft or losses.
When receiving food orders, ensure a three-way match: require a signature on receiving documents for food received and compare totals to your invoice and food service portals. If you observe any discrepancies between the documentation, follow up with your vendor immediately.
7. Establish an anonymous tip hotline to the restaurant owner
Establishing an anonymous hotline that empowers employees — not just store managers — to report theft or abuse directly to you gives you an effective method for preventing and identifying fraud before it becomes a potentially debilitating issue. Emphasizing a no-retaliation policy for whistleblowers and offering a cash reward for certain information are other ways to encourage employees to report abuse or irregularities. This also creates an environment of trust and shared responsibility among your staff.
A strong business strategy requires strong internal controls
Strong internal controls not only protect your business and enhance operational efficiency — they’re a critical part of your business strategy. The key to success starts with an inventory of gaps and exposure in your control environment. Are you equipped to prevent fraud, or even detect it? Are your staff aware of common best practices for their various responsibilities, and crucially, are they following them? Do you have consistent visibility into the financials of your business? Answering these questions will put you on the path to a stronger, more secure business and from there, help foster a culture of accountability and trust among your staff.
