As a restaurateur, you probably have a general idea how your menus and prices have changed over the last few years. Unfortunately, only having a “general idea” can land you in a big pot of trouble when your restaurant is audited. This post reviews a few of the methods of documenting key changes to your menu and prices. When the time comes, you will have accurate, credible information to support your actual margins and document the reasons for variances from the expected margins.
Please note that we only need to track alcoholic drink menu items (wine, liquor & beer). Auditors focus, almost exclusively, on alcohol sales, because they are able to verify alcohol purchases much more accurately than they can for food purchases. Of course, you can track all other menu items, if you need this information for managing your restaurant (as opposed to auditproofing your restaurant).
Most restaurants have a POS system that maintains a list of menu items. Reports can be prepared from time to time showing all menu items and their related prices. However, they don’t usually maintain a history of menu prices, which you will need when you are audited. I recommend that you maintain an Excel spreadsheet of menu items and prices at various times during the year. At this point, I would suggest a monthly tracking of prices, however, in a future post, I will recommend that this be done every four weeks, rather than monthly.
Thankfully, most alcoholic drink menus stay the same from one period to the next. Most POS systems allow you to export your menu (with prices) to a file that can be opened in an Excel spreadsheet. Once you have done this, we want to track all subsequent price changes and the effective dates for each menu item. Typically, price changes will be implemented for an entire category of menu items about once a year. For these items, it is important to document the exact date of the change. When the auditor performs a mark-up analysis, average prices will be used. If the exact date of the change in prices is known, along with the actual sales mix, you will be able to support an accurate weighted average price to be used by the auditor, instead of a rough average price. The difference can be significant.
While most alcoholic drinks stay the same, wine lists usually change much more frequently. In many higher end restaurants, wine represents a majority of all alcoholic drink sales. Accordingly, more care and attention should be paid to maintaining an accurate weighted average selling price for this sales category.
For higher end wines, when the vintage (year) sells out, the wine will be removed from the list or a new vintage of the same wine will be added, usually with a new price and a new cost. Some wines will not be replaced after they sell out, for a variety of reasons. The point, here, is that a typical wine list can (and will) change drastically during any year. Unfortunately, when the auditor tries to calculate an average wine price, there is almost no possible way that it will reflect the actual weighted average wine price experienced by the restaurant during the year. When the auditor’s average price is higher than your actual weighted average price, there will be a finding of unreported sales of wine, which will result in a reassessment for unreported sales tax and income tax on the unreported sales.
This is one of the main reasons that we find drastically different unreported sales from one year to the next during a typical audit. The actual sales mix of wines does change, but the auditor’s method of determining an average price of a “typical” wine does not reflect the sales mix accurately. Instead, the auditor uses the restaurant’s menus to calculate an average price of “wine” during the year.
As we all know, higher priced wines usually have lower markup percentages. When the auditor calculates an average price, every wine used in the auditor’s sample is given equal weight. This will tend to inflate the average wine price, because higher priced wines do not sell as frequently as the lower priced ones do. However, higher priced wines sell less frequently than lower priced wines. This is reflected in the actual purchases of wines. As a result, the cost used in the auditor’s calculation will approximate the average cost of a bottle of wine purchased during the audit period, but the price of a “typical” bottle of wine will be inflated. This will cause the auditor’s calculation to show unreported wine sales, even when there were none. Consequently, it is crucially important to maintain an ongoing analysis of the sales mix and price changes for all wine sales.
One final note of caution. If you wish to defeat the auditor’s use of rough average prices in the mark-up calculations, you will have to continuously and meticulously keep track of all sales by item and all price changes. Infrequent or inaccurate analyses of sales and prices will not help you. Unless you are able to demonstrate that your figures are more accurate than the auditor’s “average” figures, the auditor will rely on his or her own figures as being at least as good as yours, and you will run the risk of an inaccurate projection of sales by the auditor.