Why Most Chains
Use a 4 Week Accounting Period
(& why you should too)
In my financial
management seminars I often ask how many of the participantsí
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 restaurantís 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 yearís sales included 5
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
Four-week reporting periods
usually makes sense in a restaurant environment for a number of
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
isnít all that accurate. If a month ends on a busy night like
Friday, when thereís 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, thereís 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 theyíre able to do some pre-inventory
organizational work during the day or early evening. Also, Sunday
night is when inventory should be at itís lowest level of the
week. So thereís less product to count.
3. Compliments a weekly cycle
for the preparation of weekly reports. Itís no secret that
most of the really successful restaurantís in the country know
what their prime costs (cost of sales and labor costs) are every
week. If youíre calculating food and beverage costs weekly, then
youíre 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. Itís 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?
Itís 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 thatís
paid monthly? Many states will allow you to pay sales taxes 13
times a year instead of 12 monthly payments. If not, itís still
not difficult to keep sales tax payments on a monthly schedule.
4. Our accounting software
wonít accommodate a 13 period year. Then update your
accounting software. Nearly all accounting software packages
priced above $50 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.
is the founder and
RestaurantOwner.com. He has a diverse 25 year career in the
restaurant business as a server, bartender, restaurant manager,
controller and CFO for a regional restaurant chain. Over the past 15
years, he has been an advisor to literally hundreds of independent
restaurants in the U.S. and Canada primarily on issues dealing with
profit enhancement, financial controls and business management.