Transcript: Restaurant Accounting Tips to Build Cash Flow and Security
DSP: Hey there, restaurant pros, it's David Scott Peters and welcome to episode five of The Restaurant Prosperity Formula. I've been coaching restaurant owners since 2003 and the Restaurant Prosperity Formula™ is based on what the most successful restaurant owners I've worked with do on a daily basis to achieve their success. The basic premise of the formula centers around achieving prosperity, freedom from your restaurant and the financial freedom you deserve. To achieve prosperity, you have to follow a very specific formula made up of leadership, systems, training, accountability and taking action. Today's topic centers around the principle foundation of knowing your numbers.
Now, I want to tell you about our guest today, Anne Gannon, founder of The Largo Group, a restaurant accounting firm. Anne started the business to specialize in restaurant accounting because she saw too many accounting firms taking on small business owners as clients, but not providing them with the support and guidance to help them grow their businesses. Her mission is to transform the way accounting works with restaurant owners. We had a really great conversation. Anne reviewed what the most important numbers restaurant owners should be paying attention to, especially now during the COVID-19 pandemic. She shared how cash flow budgets are critical to your success and the importance of verifying your numbers so you can trust them above all else.
I want to welcome Anne Gannon to the show today. But first, a word from our sponsor.
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Hey, Anne, I want to thank you so much for joining me on The Restaurant Prosperity Formula. It's really great to see you.
ANNE: Thank you so much. I'm really excited to be a part of the podcast. So, thank you very much.
DSP: I hope so, because we do an awful lot together. I want everybody know, full disclosure, Anne and I have done a cash flow webinar together. It started as how many weeks we're supposed to do?
ANNE: We're supposed to do. I think two at the beginning. And then we had to four.
DSP: Yeah, two, four and then it went to like sixteen. Yeah, something like that.
Now I've not participated in every single week, but probably half of them. And one of the things that you and I have done is COVID hit and we wanted to do everything we could to help restaurant owners. Now, let's kind of go backwards, full disclosure, Anne and I've been working together, gosh, now for three years. Started with my last company where I met her as a speaker and thought, hey, you're a restaurant accountant, and realized that she really did know her stuff and did incredible things. And I, I got about half my members from my old company to work with her. Now my new company is DavidScottPeters.com creator of The Restaurant Prosperity Formula™. I'm on the same path that I know that if somebody wanted to know their numbers, they need to have a good accountant and man, I'm a tell you Anne's probably among the best. And that we'll go into some reasons why I think that. So, do know that as I'm talking to Anne, we're friends, we know each other and most of my members work with her and so, Anne, do my favor tell everybody just a little bit about how you got into accounting, because really it's kind of been a long road for you.
ANNE Yes, no so, I actually started off thinking I would be a professional golfer. That didn't work. And so, I went back to school for accounting. I worked in a big firm and then very quickly realized that in a big firm, the business owner, entrepreneur. It just doesn't really work because there's a lot of red tape. And by the time you get to doing the tax return, you're really not able to provide any useful information because you're, you know, 18 months removed from when that actually happened. So, I decided to go out on my own and that's where The Largo Group came. And really from the very beginning, our goal was to be different. I was always kind of told in the big firm that I wasn't a traditional accountant. So, the goal was to not be a traditional accounting firm, to do it the way we wanted to do it. And that's really been our mission, is to, you know, break down accounting into not just the annual tax return, but now we're to the point where we do weekly so that there is a constant communication between the business owner and the CPA. So, we all know what's going on. Right. The numbers are, you know, accounting is the language of business. So, you need good numbers to really understand your business and that's our goal.
DSP: And that's more important now than ever. I mean, you and I did the things on COVID. I mean, it's something all of us have to understand that COVID, COVID, COVID. There is no post-COVID at this point in time. We're in COVID. There was pre-COVID and you and I have had discussions about how restaurant operators pre-COVID were making mistakes. And maybe it wasn't as urgent for them to make a change. But COVID changed that. Talk a little bit about why it's even more important to change what you've done, because you see people's numbers, you know their profitability, you know their tax liability. You know, their liabilities when it comes to PPE or EDIL money and things like that. So, talk, why is it really changed? What's changed?
ANNE: Well, I think pre-COVID, you know, I joked that, you know, we were doing cash flow planning pre-COVID, but nobody wanted to get on the phone.
It's like, oh, yeah, yeah, I'll deal with that. Yeah, whatever.
Because everyone was so focused on revenue growth. Right. We were in a really good economy. So, if you were hitting a million, you wanted to get to one point five and if you were at one point five, you wanted another location. Like everyone was just, you know, and that wasn't anything wrong, but that was where the mentality was and efficiencies were good and like, yeah, that's great I could save a little bit, but I'm okay and I just want to get bigger. And then COVID hit and I think anybody who went through the last few months knows what the end of March felt like. Right, because you have all these bills you can't pay because people just all of a sudden stop coming into your door and your business is half of what it was, a third of what it was. And all of a sudden, cash flow is important and it's a totally different ballgame. And I think what a lot of people had to do in the last four months is this reset of what is my business at its core, you know, what can it be going forward and how do I keep it from bleeding? And so, cash flow is like where we start. But what's funny that we're seeing now is as you get into kind of more stabilized. Right. Not always back, not always what it was, but at least three weeks of consistent revenue, which is kind of where we start, we're like the last three weeks where the same that's a win.
ANNE: But, you know, now you're kind of like, hey, I'm actually doing a better labor percentage than I did before, or, hey, I'm actually doing better, you know, cost of goods than I did before. Maybe not with the same sales. So, obviously not, maybe the same bottom line. But it's interesting to see that, you know, people have to be more efficient now and they have to pay attention to these margins now. And so, you know, I think that's where the core going forward is. Let's keep these good numbers and this good process in the systems. And all of you know what you teach especially. And then when you get back to the same sales, it's a home run. Right. It's even better than it was. So.
DSP: Well, a lot of that happens, you know, because not everybody you work with, I work with vice versa it seems to be the other way around. Right. If they work with me, they're somehow finding Anne Gannon. Why? Because I put my name on Anne, because what you do is extremely important, because for me, I often tell people if you had one dollar to spend and I've told this to you and I tell people in sales calls all the time. If you have one dollar to spend. Anne costs a dollar and I cost a dollar, depending on where you are in your financials, I'ma tell you to spend the dollar with Anne first, why? Because without good numbers, we can't do these systems. We can't possibly know where we were or where we need to go. We need good numbers. They're incredibly important. Now, a lot of restaurants, as you alluded to, didn't pay attention to the numbers before. Like most CPAs, most bookkeepers get people their P&Ls, 30, 60, 90 days. You and I both have seen worse. Right? Days later. And that's a rearview mirror. Now, you and I come from the cloth, cut from the same cloth of proactively manage your business, starting with a budget. Now, we attack it two different ways. I talk about an annual budget. You talk about a cash flow budget. And if there's one thing COVID has done is it has magnified the need for understanding your cash flow. So when we talk about some of the numbers, you need to know, talk a little bit about the cash flow process and why you go out of your way to actually meet with each one of your clients on a weekly basis, especially now, but always. But especially now with COVID. What is cash flow? Why is that number so important?
ANNE: Well, I think a couple of things. First of all, I really think focusing on cash flow can catch and make sure you have controls. Right? Because I always joke that, you know, in the past, it's like, you show a P&L to someone and they say, oh, well, you know, I think your numbers are wrong there's no way I made five grand.
Well, my number could be wrong on my P&L if not all the cash got deposited into the bank or, you know, stuff goes out the back door. Like, there's a lot of efficiencies there or even control, you know, things that aren't good that could go on in our restaurant and we wouldn't see it on P&L. So, a cash flow, from an accounting standpoint, that's why even pre-COVID this is always something we would do internally is, if I can check your cash flow and say, well, your cash went up by four grand and you're P&L shows five grand. All right. I think I think we're good. Right. I think we've captured everything. But now with cash flow, you have this other thing of, well, you know, your revenue might be there for the last 30 days. Your net income might be there for the last 30 days, but you have no cash. But at least understanding, well, that's OK, because you're paying down the stuff from five months ago. Or there's a plan of attack for what you owe or, you know, different debt that was still there. But that's where a cash flow picture can show everything that's in your business. And then as a peace of mind to the owner, you know, one thing that we're really working on with cash flow now with a lot of, especially the David people, is to say, OK. Right. As a middle of July, it's stabilized. Let's start a 12-week cash flow budget and say I'm going to watch my bottom line for the next 12 weeks. So, if I've earned a thousand dollars a week at the end of twelve weeks, I'm going to put that in a separate savings account. And that's your money as the owner because the thing with COVID is it'll never feel like we have enough cash. I mean, you'd be amazed at the conversations I have with people who feel like they don't have enough, and they got a lot of money in the bank. Right. I mean, Pre-COVID you guys would have been gone on vacations and be like Anne, I'll see you later.
You know, but it's different. It'll never feel like enough. Because in one day your businesses were gone. And I get that. So that's where like a cash flow plan moving forward should also be, hey, that twelve thousand dollars that I earned in the last 12 weeks. That's mine. As the owner, like I'm going to put it here and not just keep it in this comingled mess, because if stuff comes back, you know, you as the owner, you do have profits.
DSP: Well, I think the other part is and you and I talked about this. you're the eternal optimist. I'm this this guarded pessimist. I always want people to be better, but I look at it and go, what are the struggles we're facing? And COVID came out in the first two weeks I predicted 25 percent of all independents were gonna be closed because of cash flow. Because they didn't, they're running just on cash flow. Sales have to come in to pay the bills that I accrued from last week. The food I just bought, the booze I just bought, the labor I just had scheduled. And the truth is, most people were depleting their revenues and were making mistakes in and out of their business, but they were making enough to keep paying their bills. And I think that what COVID did was shine a light on you have to run a good business. You can't just spend the money and hope that cash flow covers it because there are things that come out of nowhere, like a COVID. And this has really rocked our world. In fact, I read an article on Restaurant Business magazine that said 33 percent of restaurants said they're not going to make it, independent restaurants, through October. And so that's amazing. That is just our industry is in flames. But the truth of matter is one of the things that you do when you work with them on a cash flow basis, forget about budget, but cash flow basis. They truly understand what numbers they need. And often I think, tell me if I'm wrong, that you see a lot of their stress level lower because they have a plan. Even if it's I've got to push a bill off two months, they can literally see when the revenue's coming in and how they can attack, have a plan to survive or even thrive in this in this crazy time. Is that correct?
ANNE: Yeah, because I think the one thing that, you know, as a business owner, it is incredibly stressful, especially for a restaurant owner, because you have so many ins and outs. You have when the credit cards hit. You have when payroll hits, you have when rent hits. I mean, it's just I mean, there's a ton that goes in and out of your bank account. So, I think one thing that we try to do is, you know, predict what the cash balance will be in your bank account weekly. So at least as the owner, if I tell you, hey, you know, next Monday, expect to see 20 grand in your bank account.
You know, that's part of our plan. When you log in on Monday and you see it's 22, you're like, ah look at that, you know, but it has a benchmark. Right. It means something. Otherwise, you log in and you see 20, and especially now with COVID, it's a panic. Well, you know, my payroll two weeks from now is going to be 20. So, I have no money. And all of a sudden it can be this huge mental thing that you carry with you every day. But it's a revolving door. There's always a bill that has to be paid. So, that's where having that benchmark for the cash balance, like you said, even if it's not what you want it to be, at least it's like, OK, our decision is it's 20 so we're not going to pay these three bills because we don't want it to get to 15 and because we know this is coming, then we'll revisit it next week and we'll have a revised plan next week.
DSP: And even if you're doing well, I mean, I was just on a call today with a restaurant that before COVID was doing two and a half million dollars in sales. As of the middle of August they're already at one point one. So, you know, maybe they're down 30 percent, which is unbelievable. Unbelievable when you're that that kind of volume. Well, the truth of matter is, even for somebody like them. All right. I was hit a little bit. Often, we kind of see the retraction in sales and think I've got to hold on to my cash. When the truth of matter is a cash flow budget doesn't stop you from making an entrepreneurial decision. If you sit there and say, I want to add this piece of equipment because I think it will increase my revenue, it'll increase my efficiencies, or I gosh darn just want to you still have control of your business, but you're going to see the financial impact and plan for it. Right? I mean that's, cash flow budget shouldn't be scary. They truly should be your crystal ball, if you will, to your plan. Yes?
ANNE: Oh, definitely. And I think that's you know, that's the whole goal, is that you then can project out, you know, even down to repairs. I got to tell you, someone last weekend that was saying, well, you know, with this repair and that repair. But I think, you know, being realistic, you'd actually set a budget for repairs to say, you know, I'm probably going to spend like a thousand dollars a month on repairs. So, when it happens, it's like, OK, well, that was part of our cash flow plan. We knew you were going to have to spend a thousand sometime. So, it just happened to be this week. So, we did say the budget word, but it's true.
DSP: Well, you know, that's me. What are the two most important systems any restaurant should have? Budgets and recipe costing cards. By the way, what are the two systems they almost never have, Anne? Budgets and recipe cards. Why? They're too hard. Boo frickin hoo. Right. And this goes back to, you know, numbers, numbers, numbers. When I create a budget with somebody, when I teach them how to create their own budget, when you create a budget for them. The numbers we get from them, they're very important. So, talk a little bit about what do you think some of the key numbers are that you pay attention to? We know cash flow is one of them, but what other numbers are significant to you when you're looking and working with one of your clients?
ANNE: I mean, first, I would say I think the weekly. I think looking at your numbers at least as much as you can weekly helps just to make sure that you do have everything.
So, you know, obviously, you know, one of the things the best things I think that we give in the cash flow sessions was create that template that we shared with everyone to have the weekly check in. So really, what I try to do is kind of go through any piece of information that we have for the business weekly and then check in with the owner to say, is there something we're missing? Right. So, sales obviously, you know, does everything go through your point of sale system? Right. Because if I'm pulling from Toast, which happens a lot, it's like, oh, here's your Toast numbers. Then I get an email back. Well, those are wrong. Well, because you have like an ezCater or there's something else that we are not seeing. So, there's so many ins and outs that that weekly check in to be like, OK, are we all in agreement? Right. These are the weekly sales, you know, and then cost of goods, same thing. You know, do I have every invoice? Because if I'm turning to you and saying you are killing it, on cost of goods. And then you find out that your manager doesn't scan his invoices right away and scans it two weeks later. Well, then that's not good either. So definitely kind of getting the buy in do we think we have everything? You know and payroll same thing like hopefully everybody's going on payroll, but if the owner is doing an owner's draw, that's not there either. So, you know, just going down the list of do we have all the pieces of the information that's out there? Because there's so many systems, you know, third party delivery, same thing. You know, is that in your POS? Is it not in your POS? I mean, that's where it's like it can become this like, you know, your voice is ringing in your head type of thing.
But I really think trying to do it every week, whether it's with our team or just on your own, you get better every week. Right. The first week you're like, oh, my God, that took me an hour and I have a headache and this was awful. But then by the time you get to like week three you're like, all right, I'm in a better shape. Like, I see my numbers. It's all starting to make sense. I kind of see a trend or a pattern, because even if you're not taking like an inventory, if you do three weeks of your cost of goods, you start to see some pattern. So.
DSP: But we, of course, want to work towards taking inventory weekly.
ANNE: Well, the funny thing is they start to do it. Then it's like, oh, I should take an inventory. You're like, yes. Because, otherwise, you go from 15 to 40 and we have no idea why. But you know.
DSP: So cash flow is important. And part of that cash flow statement with the numbers important is verifying sales, multiple streams of revenue coming in if they're different systems than everyone made it. Next one is checking your cost of goods sold. Making sure every invoice hits on time that you're inspecting that. And if you're buying on credit cards or other means of payment, that that's in there. What about labor? Is labor important to you? What do you what do you look for when you see labor?
ANNE: Yeah, so, the really important thing on labor is I think, drilling in to how to track the labor categories. So for us, it's you know, I firmly believe and I think, I learned this from David, you know, labor categories are so important because otherwise you have big dollars that go in labor and you can't really see any trends. But the minute you start to have labor categories, actually had a great call today with the client who has like fifteen different categories.
Now, if you were to look at it, you know, you not being David, collective you a non-David. David would be like this great. But, you know, a non-David might say, oh, my God like fifteen labor categories come up.
But it's so good because we can see variation. Right. You can see that your prep cook went up by five hundred dollars. So, for us in labor, those categories are so important.
DSP: So to make sure everybody understands category, we're really talking chart of accounts, those general ledger chart of accounts that that it's not categorized as front of house, back of house labor. Management hourly labor. They've got to be bussers, servers, you know, cooks, prep cooks, dishwashers, everybody separate. Hourly management versus salaried managers, because how the hell do you know if there's a problem. And you as their CPA, as their bookkeeper accounting service that's important because you can see when there's a red flag. Right. I mean, you it's glaring to you because it's just numbers.
ANNE: Well, yes, but I'll go one step further, because this is what we see a lot of times. We see labor categories in accounting that are not the same as what's in your schedule.
So, if I'm going to. So, I had this last week, right. It's like, all of a sudden, I'm being told to put it in like back of house, front of house again. I'm like, no, no, no. We've come so far, you know, but really what we want is I want to be able to turn my P&L over to your manager and it is information they need. Right. So, if I only have front of house, back of house on the accounting side, it doesn't do any good. So, we need. However, you're scheduling is how it should show up on the P&L. So, it's one universal category.
DSP: And I'll even go one step further. Sometimes they're scheduling front house, back of house. It needs to be expanded. So, you and I have always worked with people and give them our suggested chart of accounts, which here's the deal, kind of what you're saying, I say in a different way, is that when we create this budget, we need to audit your timekeeping, that your POS system, everybody set up on the right job codes, right pay rates. That it matches your payroll reports, which then matches your profit and loss statement. Because when those numbers don't match, we're always we're playing the game. Well, I think that's because this that the other and you tell me if I'm wrong, but and I'm never wrong. That's from Princess Bride. But anyway, the fact the matter is what? They start to distrust the numbers. So, what you provide the means nothing to them. Oh, thanks for the report. This is worthless. And that's not what you're going for.
ANNE: No, and that's where you really all have to be, like you say, communicating and checking in, especially on those labor categories. Because like you said, if you have two categories in there, each four thousand dollars, it doesn't give you as much as information as if you can break it down further. And I think too, you know, a lot of systems have come a long way. So, it may not have been the case a couple years ago where you could have one person clock into different codes. For the most part they can now. So, you know, checking, even if it is a pain to ask the employee to clock in differently, the information is so much better if they can. So, I think, you know, sometimes that becomes, you know, a little bit of a fight. But I think it's worth it in the end if everyone can buy in to getting as specific as we can with these job codes. Because the other thing that's happened with COVID is, some of the jobs have changed. So, what you might have had before as hostess might be more of a COVID position. So, even revisiting those categories now, renaming them to what they are, will just give you better information going forward.
DSP: OK. So now there's one of the reasons why, amongst the many of why I always send people your way. I was taught on the accounting side of things that you need to tie out your balance sheet, which means most of us know on a personal level whether you understand accounting or not, how to balance your checkbook, your personal checkbook. Well, imagine balancing your checkbook is your literal checkbook, your bank account, your checking account, your savings account or your insurance account, your credit card account, your accounts payable, your accounts receivable. Like, everything is this bank account that you've got to reconcile. And I was taught that if you reconcile your balance sheet, every chart, every one of those accounts on your balance sheet. Your profit and loss statement is perfect. Now, maybe you have bottled beer in draft beer category. That's a whole nother story. But when you go to pay taxes, your profit and loss is exactly what it's supposed to be. And you go through that process. That's one of the reasons why I love your accounting company, what your services provide. But talk about what are some of those important numbers on the balance sheet we've got to pay attention to. And just to feed you one of the places I absolutely want you to go to is gift cards, but make sure we talk about gift cards. But what are some of those key numbers up there on the balance sheet that you're looking for?
ANNE: Yeah, so I think for a business owner, you know, a few big ones are. I mean, obviously, cash, you know, we want to make sure the bank account is reconciled. You know, a lot of people who use like a QuickBooks, QuickBooks Online, you know that that is pretty straightforward, but definitely something that you want to do every month. And really what you're doing there is just making sure that all the transactions came through and then that, you know, everything has been captured. The big one that I see a lot of times people missing is actually in the fixed assets. So, so many times I have seen a case where, you know, you started a business and then three years later you switched into a different QuickBooks file or a different accountant and you didn't have the prior information that came through.
And you would be amazed at, you know, times where, like the building is missing. And, you know, the equipment is missing. And that doesn't really matter to our day to day. Right. And it's easy to overlook or be like, oh, I'm going to deal with that eventually. But if you're going for financing or you go to sell the business, I mean, those assets are what the business is valued on. So we really want to make sure that, you know, you kind of do the historical work now, because I literally had the case a couple years ago where someone sold their business, got to their tax preparer who didn't know anything about the fact that the business how it had been accounted for. They all of a sudden owed the IRS like a hundred thousand dollars because they had no basis in their busines. Like it didn't show any costs.
So, we really need to make sure as the owner, you guys know best the history, you know how you bought it, you know how you financed it at the beginning. How much money you put in. But even this year with COVID, you know, if you feel like, hey, five years ago, I put in, you know, 200 grand to get this thing started and I don't think it ever got captured. Now is the time to start digging into that because you may have losses that you aren't able to take if that basis is wrong, carrying forward losses that were never captured. And this is going to be a crazy ride on the 2020 tax return. That's what I'm telling my team. Like, we thought 19 was fun. Just wait 'till 20. Right.
ANNE: So, we kind of all need to be thinking about this now. So, it doesn't get forgotten at the end of the year when we start to look at our 2020 tax returns.
DSP: Well, as we go down those things and the assets and liabilities and so on. But one of the liabilities, when I talk about the gift cards, why I want to feed you back there... no, no I want to get there. And the reason being is a lot of people... We're gonna finish up and we're gonna talk about the future. One of the things that your new philosophy on not giving up on your business. So put that in the back of your brain. I'm to going to bring that to the forefront when we're finished.
ANNE: OK. But, no, so on the liability side the big thing is payables. Right. I think in COVID if you just bury your head in the sand for three months, which is fine, right? No judement. We all went down those roads. Just making sure that you have all those bills accounted for. And what you owe outstanding because that's all going to be important. And then, you know, and like you're saying, gift cards it's a rabbit hole with the way some of these POS systems account for gift cards and how it's even feeding into your accounting system. Is that how you want it to be feeding in? And the big thing there, I think, is couple of things is future value. Obviously, no matter what state you're in, if your state, you know, thinks it has value or not. That's a state rule. And the other one is if it's a promo. Right. Cause sometimes people give a gift card because they screwed up the meal. Well, that has a whole different accounting for it than a gift card that someone bought. So that's whereas the owner, again, you guys know best on your gift card rules.
DSP: But they don't. And that's my challenge. That's why I went why I'm harping on it is people got to understand that all too often we sell these gift cards or gifts certificates on paper, not even the cards. And there's no accounting for how much liability is there, because when you go to sell your company, you've got to disclose to the buyer how much liability is out there for these gift cards. It's going to devalue your business. And when you can't say to a penny there's seventy-five thousand dollars in gift cards, there's three hundred and fifty dollars in gift cards. They're gonna say, we don't know, we're gonna devalue your business because we're afraid that we're going... there's this all this liability out there that we're gonna have to pay out. And you're gone. You've got our money. You're gone. The other is, as Anne alluded to in some states, a gift card if it's not collected under a certain period of time is revenue for you. You've now, it's gone from an accounts payable to revenue. And you owe sales tax. You owe income tax. You've got taxes due. And, in theory, in some states, you're supposed send that money to the state as undeclared money. I mean, there's all these rules. But the biggest thing is when you look at it is. When you're looking to say, I look at my balance sheet, I know where every penny has been. That's critical because now every number we have down below. It may not be in the right category, but because you've been meeting with Anne or your accountant on a weekly basis, not monthly, not quarterly, freaking weekly basis, you would know, oh, that's in the wrong category because I've been paying attention to these numbers. That's a blip. Hey, I didn't buy three thousand dollars in beer. That's food. Oh, look, let's go find the error in our chart of in our in our general ledger. And so, it's really important, no, to really pay attention those numbers on the balance sheet as well, because most people don't ever look at it, right?
ANNE: Oh, definitely. And I think you're right on the gift card because it just you know, there could be a lot of digging there, even if, you know that it wasn't done correctly in the past. That's okay. We just want to get it to what it actually is. What do you currently have outstanding? You know, as of today, as of this year, and then have a good starting point and just make it something that you check every month just to make sure that it's flowing in correctly, because I think there's a lot of people who stress about it and worry about it. I know my gift cards are wrong. But, you know, when you really start to dig into it, you do have data in most of your POS systems.
ANNE: Where you at least could see, you know, here's how many gift cards I sold this year. Do I show that on my balance sheet?
DSP: We hope so anyway. Right.
ANNE: So, they've gotten better.
DSP: I've seen people. It's been pretty bad out there.
Let me ask you this before I take you down the path on your new COVID philosophy when it comes to people struggling and having a challenge. That's a little seed. Everybody hang in there. Is there any other number that you think by goodness we haven't talked about? I want to make sure we touch on or have we covered all the bases on those key numbers they got to pay attention to, especially now because of COVID.
ANNE: No, I would just say I think the one other thing that does relate to cash flow and does relate to the balance sheet is owner compensation. Right. I think pre-COVID it was one of those like, yeah, you know, I bought dinner on a Friday night and I used the company card. No problem.
Amex for points, right?
ANNE: You know, that was a thing and that was fine. Right. That's not... you're the owner and you work incredibly hard. I mean, I think, you know, even pre-COVID, we all knew being an entrepreneur is tough. But I really think defining the compensation that you get from your business, whether it's a draw or salary, is so important because so many times we forget, you know, the business pays your cell phone or the business pays your car payment. And those are lifestyle things that you do get from the business. So, while it's never fun and a lot of times, you know, I think the entrepreneur wears the hat of I work for free, which is not wrong. Right. I'm not saying you're wrong by any stretch. And we want to see you make more. But the for free also includes the car payment, the cell phone and some of the other things. I think quantifying those amounts helps us to understand what the business provides to our personal life.
DSP: And even making that reasonable compensation argument, right? To talk with you, your CPA, about, hey, how much compensation should I take a salary, not just draw. Because why? Retirement, lower self-employment tax. But hey, when COVID hit, what happened in the beginning of PPP? Oh, you didn't pay yourself. You don't get money. We can't include you as an owner. So, it's kind of like the server that that doesn't claim all their, their tips. They're screwing themselves out of a car loan, a student loan, a house loan, you know, going to the bank and asking for money because they're hiding income. Well, these things can bite you in the ass. You don't want to just wing it. You want to talk to somebody like Anne and say, what are my tax ramifications? What is it? What's the big picture of looking at how I operate my business and my exit plan? Am I missing anything on that?
ANNE: Well, and I would go one step further. I think, like you said at the beginning of COVID, the biggest slap in the face was how hard it was for an entrepreneur or business owner to get part of PPP and the people who are partnership owners who had guaranteed payments. I mean, they fought with their banks to even get a little bit of PPP.
And I've seen, right or wrong, partnerships who say, you know, you know what it... I'm going on payroll. Like I'll deal with what the IRS says at of the end of the year, but I'm not playing this game anymore.
But I think the big lesson going forward is as PPP is behind us again, you know, you should pay yourself like you work harder than anybody else in the business. And why? You know, I think everybody got in this mentality pre-COVID of like, oh, it's fine, like they're just profits at the end of the year I'll just take a draw or when I need it, I'll take it. But you should be collecting money, a reasonable compensation every month. And that's part of the business.
DSP: And that's part of the psyche, too, that you're not working for free. You are being rewarded for your time. And that's where, you know, I talk about you have to have a responsibility to run properly for your guests, because that's you're providing a service that they want and need. Your employees, how they're gainfully employed... feed their families, but you've got to take care of you, your family, and any investors you have. And you come first, not last. My social working friends. Why? Because you've got to take care of you. If you don't take care of you and you run out of money and you close your business, there is no restaurant for your community. There are no jobs for all those people. So, it is opposite thinking from hospitality. You take care of everyone. Well, believe it or not, by taking care of you, you do take care of everyone.
Which brings me to kind of our closing thoughts before I go into a little bit about what you do and ask you about that. And that is this, I joke around with everybody, as they're listening to us, that you're the eternal optimist. Oh, my God. You guys have no idea. There's always, it is shiny on the other side of a shitstorm like, oh, can't you see through that? It's beautiful. We're all going to come through this kumbaya. Where I'm a little more realistic going yeah, I will find a way to get through there and here's a freaking umbrella we'll make it through that storm. The truth of matter is I'm a little more pessimistic and realistic on how we do things. The beautiful part is we compliment each other. But you have a very distinct philosophy on people who are looking to give up to close their businesses because you've seen them. Some of have been extremely successful. Like they just like, I don't want to deal with COVID and went out of business and they had money. There's people and maybe that was just the excuse to get them out of the business. And then there were people who were, man they're struggling, but you saw hope with the cash flow budget. And you said you don't want to give up. Why? Why don't I want to give up, Anne? What is it that you see that most of us don't?
ANNE: So, I think the main thing that people tend to forget is that for most entrepreneurs, your business is your largest asset. Right. That even in COVID, you have this business that has historical information that has a value to someone. And you might say, well, it's not cash flow positive so who would want to buy it. But in business valuation terms. Right. How we will look at it as is if I walked in and I bought your restaurant today. Right. I'm buying time. Right. If I buy your restaurant vs. start one from scratch down the street, I'm, you know, getting two years in. Right. I didn't have to build the building. I didn't have to the build out. Didn't have to introduce myself. So, at some value, even without cash flow positive, you know, things to show. There's that value of time. So that, first of all, I think gets forgotten in the entrepreneurial world because you think, well, I'm not them down the street or I'm not this so therefore, it's nothing. And that's not the case.
You know, the second thing to think about and this is where it's so important for entrepreneurs, like I was saying with the owner's draw is, if you turn the keys in and walk away, what needs to be paid for in your lifestyle? That is not getting paid now. Right. Business might not be cash flow positive, but it's paying my car. It's paying my insurance. It's paying my cell phone. So maybe that adds up to three grand a month. Well, if I turn the keys in, how am I going to earn the three grand a month?
ANNE: And what am I going to do? Because I still need to pay three grand a month. So that is a really important thing to look at, because what I find in cash flow and where I think all of us need to collectively go is. All right. We know 2020 is a wash, right? It's not fun. Nobody's gonna want to look at this. But if I have to pay 30 grand to get out of 2020. Right. I'm going to, you know, just choose to lose three grand a month, two grand a month, whatever it is. But in 2021, my business might be worth hundred fifty thousand dollars. Right. There's valuation's out there depending on your sales and your historical information, location potentially. I mean there's all these different factors. Right. So if I know I might have to put in 30 grand, but I have this asset of 150 and maybe it's an asset that I'm gonna listen to David, after watching on YouTube for 15 years and maybe even make cash flow positive, right?
DSP: Yeah. Yeah.
ANNE: But maybe in a year of work, I could get it to be worth 200. Or maybe it stays at 150. Right. That it's 150 that I would have to replace in a job. Or, you know, that three grand a month is still there every month forever. And I don't have this carrot. So, that's my thing in just, again, an objective accounting valuation tax thing is you have this asset that doesn't feel like an asset. And I get it. Right. It feels like it's worthless, but it's truly not worthless. So maybe the decision is my rent is just too high. There's no way. But maybe the decision also is, hey, landlord, guess what? We're going to talk and we're going to talk for a long time until we see things together. Because being the squeaky wheel could get you out of this thing without giving up everything. And that's what I hate to see. I hate to see, you know, it truly saddens me to see the turning the keys in because there's a lot of money in these places. And I just think while that might be it, we have to look at it as if we turn the keys in what do we do next? And that's a really important question.
DSP: And that's where the tag team, the way we work together is. I'm working on the business side as far as, hey, what systems do we put in place? Hey, you can't run a 38 percent food cost anymore. In fact, we need a brand-new menu. It might even be a concept change if you want to live, continue to operate because we need a 22 percent ideal, 24 percent actual, because that's what you have to do. And it's amazing when you know your numbers, whether it's on the accounting side or budgeting side, where I play on, the truth is they tie together. And that's why I really wanted to bring you on and talk about why numbers are so important and even more now today than before COVID hit us because the rules, they've not changed they've gotten harder. Meaning, hey, man, you needed to run efficiently pre-COVID. But now with sales dropping in many locations, 50, 60, 75, a hundred percent. Right. Completely out. And labor costs going up. Oh, food costs going up like we're seeing record everything. And the truth of matter is when they've worked with you and they've put that cash flow budget, they've gotten hope. When they've jumped on with me and they've created their plan for success. You and I are both seeing some people who are actually not only surviving, but they're actually doing better than they ever have because COVID has made them throw out all their bad practices. Am I missing something? I mean, you're seeing the same thing, right? We have a lot of the same people we work with.
ANNE: No, it's true and that's where I think, you know, it's not going to be fun. And I think there is an element of fatigue out there, you know, people who just are done with it and I get it. But I think if you had an opportunity to take the next three months and I use it, I mean, you have great systems, and I'm not just saying that because I'm on your podcast, but you do. I mean, they truly work, but it takes time.
Now, the good thing of COVID is, you have nothing but time. Right. You have half your customers, and you can't have people in your dining room, so let's go. Right. Like, you know, a year from now how happy would you be if you turned it around and you made 2021 what your business should have been doing all along? Because if you can do that, you will have a business that five years from now, 10 years from now, has an amazing value or you're able to go to a second location. But I mean, that's where it's like, yeah, it's fun to do recipe cards. Or it's not fun to do systems or hold my people accountable. But you know what? It's a lot more fun to see the result of that. And that's where I just think, now more than ever, everything's on the table. Right? Everything that we did is on the table to get it better than it was before so we're not in this position again.
DSP: And the urgency has us not just thinking about change, but you've got to frickin change. Now, the key is taking action. So, if we look at my Restaurant Prosperity Formula. Restaurant prosperity is freedom from your business and the financial freedom you deserve. Well, the last piece of that is taking action. And I'ma tell you right now, whether you listen to Anne and myself and you're seeing in your brain the things you've got to make changes, especially when it comes to your numbers, I'ma tell you right now you need to reach out to Anne. Now, I tell you, I wholeheartedly and she can tell you because whenever I when I'm pushing, she knows because all of a sudden, her phone starts ringing. She gets phone calls people say, David said to call me. I don't know. OK, well, cause, dammit, she's going to help you.
So, you're different. So, I'm going to plug you a little bit. You're a flat fee accountant, which means what I hate about accountants most of the time is if I've got a question, I pick up a phone call it's a five hundred dollar question because I've spent an hour on the phone. Then they spend an hour researching. Then they spend an hour emailing back and forth. And I see on this bill, this itemized bill, every time they thought just thought about it, if they were driving in their car, thought about the idea, they were billing me and it drives me nuts. You have a very specific flat fee accounting system that is more than reasonable. In fact, I yell at you to raise your prices all the time. Everybody, you're probably not happy with me. But the value you provide is amazing. And in that they get a year-end tax return for the corporation, they get their monthly bills paid for them. They get their sales tax filed for them and paid for them. They get payroll if they want to have that part of the service at a very discounted rate. Flat fee as well. No new hires, no W-2, no new hire reporting and all the things that you get nickeled and dimed on. You have invoice systems that take pictures of the invoices that it automatically goes in their QuickBooks. You know how to work with systems like a R365 so you're not you're not dependent on one piece of accounting software. Like, it is pretty amazing what you guys do. If somebody wants to learn more about what Anne Gannon does and if there's anything I missed that you want to share with them, like, how would they contact you, Anne?
ANNE: So I think, you know, I would say the one thing that we really strive to be is real people behind the numbers. I think that's, you know, more than anything what sets us apart. I mean, there's other services that, you know, claim to do that. But I think what really sets us apart is being part of your team. And I think that has helped, you know, a lot during COVID is being able to have these real conversations of, hey, how can we do this differently or what do we want to change? What do we want? And just constantly getting better. And you, the owner, feeling like you have this team of people behind you, which I think is, you know, invaluable now, especially during these times. So, the one thing I would say is, you know, we'll send out a link, but to set up a time for a consultation because we are remote, you know, it isn't, you know, we're not down the street. But like I said, I think you'll find that our interaction and our team approach, you know, you do feel like we are truly part of it.
DSP: So, I know by the time everybody's listen to this, it'll be live there's gonna be a website, a link. Largo, the, no it's, thelargogroup.com. The Largo Group, L-A-R-G-O, group dot com. Dot com and then forward slash DSP for David Scott Peters. So, this is very special just for you guys listening to us right now. Anne and I talked before we got online together and to have this this discussion and that is she's creating this page for you to go to thelargogroup.com/dsp. There's going to be an opt-in form there, really a scheduling thing, that you can get on your calendar, right? They can have a free consult with you just because they listen to us on the show, talk about, you know, what that free consult really all entails.
ANNE: Yeah, so, I mean, it's definitely something that we've been trying to offer, you know, in COVID especially is, even if you just have questions about, you know, setting up something that's weekly, how do I check my numbers weekly, like what we've covered on this call, whether you end up using us or not? I mean, this is vital. And, you know, especially on the valuation side if you have questions like, hey, I'm thinking of throwing in the towel, what do you think? I mean, I'd be happy to take a look, because, like I said, that is a huge decision that is hitting so many people when they are just over it.
And I get it. It's a terrible time. But if you just want that sounding block and want to talk through it, you know, I'd be happy to help. Like I said whether you're a client of ours or not, I just think this is a tough time and we're happy to be there for you.
DSP: And I want people to understand, I mean, this is true. I mean, I've got people who have been on the phone with Anne and not use their services, but had spent time, an hour on and Anne has answered the question and helped them. Even helped their other CPA who didn't understand restaurant stuff because they didn't want to change. Because why? Anne understands, I understand, we've got to help our industry become better. But in the same respect, if I call you and you've got my email list, you got my phone number, are you calling me every day going, hey, you need to sign up with us, you need to sign up with you to drop your other people. Does that happen?
ANNE: No. I mean, we truly want what's best for your business, right? I mean, like David says, you know, we're not for everybody. So, you know, definitely wanted to be something that works for you. But I truly think in COVID what we've realized is you need that interaction, you know, to get the numbers right you need that person to talk to and that, you know, working together. Because there's so many different numbers. Right. It's certainly not intentional if your CPA isn't recording something, but if you're not telling your CPA it's wrong.
ANNE: Then it's always gonna be wrong. Right. We have to communicate and talk to each other. So, we're all looking at the same set of numbers every week. And that goes back to the, you know, David things, too. And I think that's where, you know, people joke like, oh, David always recommends Anne, but really, it's because our team, we take it very seriously if you have a budget put together by David. Because that tells us that these are the numbers that your budget, your financials need to show. Right. And we value that incredibly, you know, above everything else. So, if there's a line that David's put in, then we try to make sure that it's there every month. So, you know, you need to have that accountability of, hey, I've invested in these systems. Well, let me make sure that we're now having that universal naming and that universal chart of accounts, because otherwise it doesn't. It's just harder to implement. So, I think that's also where the two systems work well is the budget to actual.
DSP: Amen to that, amen to that.
Hey, in closing, is there anything else you want to share with people before I let you go?
ANNE: No, I would just say, you know, I mean, that David's systems work. I said that pre-COVID if you read the foreword. Like I have, you know, I've said it, but now is the time, right? It's the where am I going to be four months if I have to do all this work versus where am I going to be four months question. Right. And that's, and let's do it. Right. Go through the system. It's not fun. It's going to be work. David says he creates work, but you're gonna be so thankful you did. And I can tell you, even the people that we, you know, signed up with at the beginning of COVID to now are, you know, two, three months in. I mean, you're seeing results. Right. You're seeing like, oh, my God, my food cost just went by five points.
I had a call this morning it was like, I think these are right. I actually think these are the food cost numbers you're running like I've checked it three times guys. Like, you know, but it's like so hard to believe because they're like, well, pre-COVID we were in the low 30s and now we're in the mid-20s. I'm like, but we have every invoice. Like, this is legitimately, you're doing it. Like it's happening in front of your eyes. So, it's so valuable. I would just encourage everyone try it. Right. Why not get better?
DSP: Amen. That which we measure improves. I want to thank you so much for being on today's talk. We're gonna do this again routinely because I want to, I'm sure there's eight million other topics we can help people with. And I love talking to you all the time. I love what services you provide. And again, I'm an evangelist. If anybody wants a third-party endorsement of Anne and The Largo Group, you can't get any bigger one than me. I want to thank you again, Anne.
ANNE: Thank you so much.
DSP: Hey, that was an awesome episode. I want to thank you for taking the time to take action on building a better, more prosperous restaurant. Before you go, I want to give you these three thoughts. One, by combining leadership and taking action with systems, and training being checked by accountability. You are on your way to creating prosperity for you and your restaurant. Two, I have something I need from you. Please leave a review on Apple Podcasts, Spotify or wherever you happen to listen to podcasts. By leaving us a review other restaurant pros seeking out this information are able to find it. I read the reviews and hearing how this information has benefited you does wonders for me. And three, if you find any of the discussions helpful, share them. The more restaurant pros who have access to them, the better we become as an industry. For more restaurant resources or to get in contact with me. Connect with me at DavidScottPeters.com. Be passionate about what you're doing. Be persistent. But more importantly, become better and help everyone around you become better. And your restaurant is going to kick some ass.
I hope you enjoyed this episode of The Restaurant Prosperity Formula. If you want to learn more restaurant solutions like these and how to get your managers to do the work. Sign up for my free four-part video learning series where I go into all this in more depth. The link is in the description below. Also, be sure to subscribe to this channel to get my weekly tips and check out these two videos to learn more restaurant solutions.