by Bill Carlino

As the nation's largest service-sector employer, restaurants have, historically, opened economic doors to legions who have parlayed a little more than a strong work ethic and determination to succeed, into countless examples of self-made wealth.

According to the National Restaurant Association, the industry’s Washington D.C.-based trade group, the roughly 858,000 restaurants and foodservice outlets in the United States, are projected to generate sales of nearly $408 billion by year-end 2002, a 4-percent rise from the prior year.

CPA firms with established restaurant practices are serving up an array of client services in addition to tax and audit work, including payroll and benefits administration, fraud prevention, cost analysis, profit-enhancement programs and of course, IT consulting. The Accounting Today 2002 Top 100 Firms Survey shows that some 31 percent of the firms listed in the poll currently have clients in the hospitality industry.

But the grueling hours and uncertain survival rate of restaurants put added pressure on firms to ensure that their clients remain open for business. According to national averages, about 80 percent of those who open a restaurant for the first time, fail. And in large cities like New York, Chicago and Los Angeles, restaurant obituaries can run as high as 90 percent.

"It’s a tough business, no doubt," said Gary Levy, hospitality practice director at J.H. Cohn in New York. "If you have a $5 million-a-year restaurant business, it’s usually built $20 at a time."

Indeed, the complexity of restaurant operations mandates the CPA to familiarize themselves with both the front- and back-of-the-house operations of their clients.

Practitioners have to advise restaurant clients on such matters as tip credits, inventory control, equipment depreciation schedules and, depending on the size of the restaurant, help them maintain a handle on hundreds of transactions per day, either via credit card or cash.

"It’s [having restaurant clients] definitely big-time different," echoed CPA and restaurant consultant Jim Laube of Houston-based Restaurant Consulting Group, which specializes in the areas of profit enhancement, financial management and staff development. "With restaurants you essentially have a little manufacturing facility plus a retail store - not just one or the other. You also have a raw materials inventory, materials in process and a final manufacturing process in which the food goes out to the customer. The business looks easy but it is probably the furthest thing from that."

Laube spent two years with a Big Five accounting firm before becoming chief financial officer at the Luther’s brand barbecue chain.

His clientele, which consists of some 150 restaurants, ranges from a single "mom and pop," to a 55-unit publicly traded company.

"One of the top reasons for failures in this business is under-capitalization," said Laube. "When people are doing their opening budgets they often have just enough to get the place open and nothing left. You usually need to have about three to four months in reserve."

Dale Hoyer, CPA, president and co-founder of Franchised Services Co. LLC in Wichita, Kan., said that what restaurants are lacking most often are good point-of-sale and accounting systems.

A former accountant with Ernst & Young and later, controller at the massive Pizza Hut chain, Hoyer said his company provides outsourced accounting and payroll services to a total of about 1,800 restaurants and nearly 20 different brands including KFC, Pizza Hut, Applebee’s and Hardee’s.

"Ultimately, accounting is not a restaurateur’s core competency," noted Hoyer. "They’re more concerned with growing their businesses and improving operations. After a while, accounting becomes a distraction to them and that leads to higher overhead. And that’s one of the reasons we started this business."

In 2001, the four-year-old Franchised Services was acquired by eMac Digital LLC, a foodservice technology concern whose investors include venture capitalist Accel-KKR Co. and global quick-service conglomerate McDonald’s Corp.

Hoyer’s company performs a number of back-office functions for his clients, allowing each access to the company’s general ledger, which posts such information as sales, product mix and guest-check data. He said his one-stop shopping accounting services can usually trim unit-level operating costs anywhere from 20 percent to 40 percent.

Hoyer pointed out that when a restaurant decides to outsource their finance and accounting functions, he assigns a transition team to the potential client in order to familiarize themselves with the client’s everyday processes.

Augmenting the difficulty of operations, is the epidemic-like problem of theft, which pilfers roughly five cents of every sales dollar generated by the restaurant. In quick-service restaurants, where transactions are primarily cash, losses at the unit level can accumulate up to 5 percent of sales.

Firm executives and restaurant consultants say that theft stems from a variety of causes - from bartenders failing to ring up sales, kitchen employees stealing food to customers taking flatware from the tables.

Levy of J.H. Cohn said he once had a client whose bookkeeper created a fraudulent employee and put that fictitious person on the payroll.

"You need to look at their cash controls and ask if each sale is getting rung up," Laube said. We use spotters and mystery shoppers to watch bartenders and counter people to see how they handle the cash."

Laube said it’s crucial to for operators to have sophisticated point-of-sale systems which record the sale at the point of order. That way, he explains, the kitchen cannot process an order unless they receive a POS ticket. A good POS system will also have automatic inventory control which keeps an ongoing tally on the most costly of food items such as meat, and cheeses and automatically backs out the requisite inventory each time an entrŽe is ordered which uses those items.

Brad Saltz, director SSG Financial Services in Cincinnati, has a personal client list comprised of nearly 100 percent restaurant clients for whom he performs tax and audit work.

Saltz, who spent six years in tax and audit at Touche Ross, is a former chief financial officer at the Phoenix-based Houston’s dinner house chain.

At SSG, Saltz’s clients include franchisees of TGI Friday’s, Cooker, Subway and hot pretzel concern Auntie Ann’s.

"We really know this industry well," he said. "We have a set of tools and checklists for the clients. On occasion, I found that clients had their financial statements in alphabetical order instead of order of importance, so for instance ‘food purchases’ were further down the list. For a restaurant you just can’t do that."

Saltz said he’s seen an industry trend toward more client demand for consulting and outsourcing services.

"At one time outsourcing your accounting function was using Quicken in your basement. But now there are a half-dozen big companies that specialize in outsourcing restaurant accounting."

Saltz added that until recently, restaurants - particularly the smaller ones - carried reputations as quasi fly-by-night businesses.

"Mom and pop restaurants were especially notorious for leaving a trail of creditors," said Saltz. "But now I think the industry is much more professionally run."

Laube agreed. "Over the past several years, restaurant operators are much more business savvy than they used to be. Before this, they were just flying by the seat of their pants."

Accountants say it also helps to have people on your staff intimately familiar with the business as does John Wheeler, CPA of Wilmington, Del.-based Wheeler, Wolfenden & Dwares P.A.

"It’s a service-oriented business and we’re a service-oriented firm," he said. It helps that we have a former restaurant owner on our staff. It’s a stressful business but also a fun business. It seems to fit our firm’s philosophy."

Wheeler’s clientele includes country clubs, private dining clubs, and many of the landmark nightspots in the Newark, New Castle and Wilmington areas.

His client services include ensuring tips and salaries are handled correctly, examining the operation’s internal controls and of course, tax planning.

But like any established niche, there are speed bumps along the way. Wheeler said one prospective client came to his office with grandiose plans to open a restaurant and on paper, his business plan looked good. "So we incurred some costs helping him secure financing and in the end he never opened the restaurant and of course never paid us either. I think if a similar situation came up, we would ask definitely ask for a retainer."

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