Effective bookkeeping helps coffee shop owners manage finances, monitor cash flow, and track profitability. Key components include recording sales, managing expenses, and preparing financial statements.
In this article, we’ll explore essential bookkeeping terms, best practices, and tips to help you streamline your financial processes, headache-free!
This guide is also related to our articles on how to do expense reports for small businesses, accounting for startups, and understanding inventory for small business owners.
This list includes:
- Coffee shop bookkeeping tips
- Essential financial statements
- Managing expenses in coffee shops
- Cash flow for small businesses
- Understanding profit margins
Let’s get started!
Financial statements: understanding the basics
Financial statements are how you keep tabs on your coffee shop’s performance, position and overall financial health, and the two main ones you’ll focus on are the balance sheet and the profit and loss statement.
What is the balance sheet (BS) for coffee shops?
The balance sheet provides a snapshot of your coffee shop’s financial position at a specific point in time. Its three main sections are assets, liabilities, and equity, following the equation: assets = liabilities + equity. When you look at your balance sheet, you want your assets to balance out with your liabilities and equity.
1) Assets: These are what your coffee shop owns and include cash, equipment, inventory, and any property. Your espresso machine and coffee beans are assets, for example.
2) Liabilities: These are your shop’s obligations or debts, and could be loans, unpaid bills, or credit card balances.
3) Equity: This is the residual interest in your assets after deducting liabilities, or in simpler terms, what’s left over for you as the owner. This can include your initial investment plus any retained earnings.
What is the profit and loss statement (P&L) for coffee shops?
The profit and loss statement, also known as the income statement, summarizes your coffee shop’s revenues and expenses over a specific period, usually monthly or annually, so you know how much money you are making or losing.
Revenue: The money your coffee shop makes from all sales–coffee, pastries, and any other items you offer.
Cost of Goods Sold (COGS): Includes the direct costs related to producing your products, like the cost of coffee beans, milk, and baked goods.
Gross profit: Calculated by subtracting COGS from revenue and shows how much money you have left after covering the direct costs of your products.
Operating expenses: The day-to-day costs of running your shop, like rent, utilities, and staff wages.
Net profit: What’s left after all expenses (including operating expenses, taxes, and interest) are deducted from your gross profit. It’s your bottom line, showing you how profitable your coffee shop really is.
Typical line items in coffee shop financials
On the balance sheet:
Current assets: Cash, inventory, accounts receivable.
Fixed assets: Equipment, furniture, and any property.
Current liabilities: Accounts payable, short-term loans.
Long-term liabilities: Mortgages or long-term loans.
Owner’s equity: Your initial investment and retained earnings.
On the profit and loss statement, focus on:
Sales revenue: Total income from coffee and other products.
COGS: Direct costs associated with the products sold.
Gross profit: Revenue minus COGS.
Operating expenses: Rent, utilities, wages, and other overhead costs.
Net profit: Total profit after all expenses.
Cost of goods sold (COGS) vs operating expenses
Understanding the difference between cost of goods sold (COGS) and operating expenses can be challenging at times. Both relate to costs, but they serve different purposes in your accounting.
Here, COGS refers to the direct costs associated with producing the goods you sell. In a coffee shop, this includes the costs of items that become part of the products you serve. Key components of a coffee shop’s COGS include coffee beans, milk and cream, pastries and baked goods, and other ingredients like syrup, flavorings, and other items directly tied to your menu offerings.
To calculate COGS, add up all these costs for a given period, typically monthly or annually, to later determine your gross profit.
What are operating expenses?
Operating expenses are the costs incurred in running your coffee shop that aren’t directly tied to producing the goods sold. These are essential for daily operations but do not include COGS. Common operating expenses include rent, utilities (water, gas, internet) labour (wages and benefits for your staff, including baristas and support staff), marketing and advertising and supplies and equipment maintenance.
Operating expenses are typically tracked separately from COGS, so you can see the broader costs of running your business.
How to accurately categorize and track COGS vs operating expenses
Some tips to help:
1. Create clear categories: Set up distinct categories in your accounting software for COGS and operating expenses.
2. Use inventory management software: Implement software that tracks inventory levels and costs. This simplifies tracking COGS by automatically calculating costs based on what you sell.
3. Update records regularly: Make it a habit to enter costs and expenses regularly, whether weekly or monthly.
4. Review monthly reports: Generate monthly financial reports to monitor your COGS and operating expenses. Study them for trends and to identify areas where you can reduce costs.
5. Train your staff: Make sure your team understands the importance of tracking inventory and costs, and can recognize what contributes to COGS and how it differs from operating expenses.
Inventory management
Effective inventory management involves tracking the products you have on hand to help you maintain balance, reduce waste, and meet customer demand, and also know exactly what you have and when you need to reorder, helping prevent stockouts and running out of popular items, reduce waste by identifying slow-moving products, help with cost control, and last but not least, accurate financial reporting.
What are some common challenges in managing coffee shop inventory?
- Perishable items
- Seasonal fluctuations
- Supplier reliability
- Time-consuming
- Complex product mix
How inventory impacts financial statements
Inventory affects both the balance sheet and the profit and loss statement:
Balance sheet: Inventory is considered a current asset, so it’s recorded as part of what your coffee shop owns.
Cost of Goods Sold (COGS): The inventory you sell directly impacts your COGS. When you sell a product, the cost associated with that item is moved from inventory to COGS.
Net profit: Your inventory levels affect your net profit as well. If you have high COGS due to overstocking or spoilage, your net profit decreases.
Cash flow: Inventory management influences cash flow. Buying too much inventory ties up cash that could be used for other expenses. On the flip side, not having enough inventory can lead to lost sales and cash flow issues.
Cash flow management
Cash flow is the money coming in and going out of your business, which you’ll need to track regularly.
Here’s what to focus on:
1) Daily sales tracking: Record your sales each day. Note peak hours and the busiest days, so you can anticipate cash inflows.
2) Expense management: Keep an eye on daily expenses, including labor, supplies, and utilities, to spot trends and prepare for fluctuations.
3) Real-time cash monitoring: Use a cash flow management tool or spreadsheet to monitor cash positions daily, to see at a glance how much cash you have on hand and what’s going in and out.
4) Cash flow forecasting: Create a forecast based on historical sales data and seasonal trends. This helps predict future cash flows, expected income and potential shortfalls.
Cash reserves and planning for slow periods
Cash reserves act as a safety net for your coffee shop, helping you weather slow periods or unexpected expenses. Aim to set aside a percentage of your earnings each month as a cash reserve to cover essential expenses during lean months, such as rent and payroll.
Identify slow periods throughout the year, like summer months or post-holiday seasons, and plan for these. Make adjustments to your inventory and staffing levels ahead of these times to minimize costs.
Creating an emergency fund specifically for unforeseen expenses can help avoid cash flow disruptions when unexpected costs arise, like equipment repairs or supply price increases.
Regularly review your cash reserves and adjust your savings plan based on sales trends. If you notice a pattern in slow periods, consider building a larger reserve to accommodate.
Tracking and reporting cash inflows and outflows
Record all transactions, including daily sales, tips, and any other income. Also, record all cash outflows, such as purchases, payroll, and bills.
Invest in accounting software designed for small businesses to automate tracking, making it easier to generate reports and monitor cash flow in real time.
Create cash flow statements, that summarize cash inflows and outflow, periodically—monthly or quarterly, and review them for trends over time. Look for patterns and identify areas where you can improve efficiency or cut costs.
Keep your staff informed about cash flow management, too, and encourage them to be mindful of costs.
Tax considerations for coffee shops
No one wants surprises when tax season rolls around, so here are the key tax obligations you’ll likely encounter.
Sales tax: Most states require you to collect sales tax on items sold, including beverages and food. Make sure to register for a sales tax permit and regularly remit collected sales tax to your state. The rates can vary, so learn the specifics for your location.
Income tax: Your coffee shop’s profits are subject to income tax. Depending on your business structure (sole proprietorship, LLC, corporation), your tax responsibilities may differ. Keep detailed records of your income and expenses to accurately report earnings on your tax return.
Payroll tax: If you have employees, you’re responsible for payroll taxes. This includes withholding federal and state income taxes, Social Security, and Medicare taxes from employee wages. You’ll also need to pay your portion of Social Security and Medicare taxes.
How to handle tips and gratuities
Employees must report tips received as part of their taxable income. Make it clear to your staff that they are responsible for declaring their tips, as required by the IRS.
If you have a tip pooling system where tips are shared among staff, establish clear policies. Document how tips are distributed and make sure everyone understands the process.
Tips are considered taxable income, both for employees and the employer. Make sure your payroll system accurately reflects tips so that proper taxes are withheld.
Preparing for tax season and working with an accountant
Here are steps to help you get ready:
Keep accurate records of all income and expenses throughout the year. Use accounting software to track sales, purchases, and payroll. This will make preparing your tax return much easier.
Gather essential documents before tax season, including sales tax reports, income statements, and payroll records.
Consider hiring an accountant who specializes in small businesses or the food and beverage industry. They can help you navigate tax laws, compliance, and maximize deductions–and with preparing your tax return, making the process smoother.
If you work with an accountant, schedule regular check-ins throughout the year to review your financial status and tax obligations.
Familiarize yourself with common deductions available to coffee shops. These can include costs related to inventory, equipment, rent, utilities, and marketing, and being aware of them can reduce your taxable income.
Managing growth and expansion
When considering growth, whether through additional locations or new product lines, financial planning is key.
Determine how much funding you’ll need for expansion, including costs for leasing or purchasing new locations, renovations, equipment, and initial inventory.
Explore different funding sources, such as loans, investors, or personal savings. Each has pros and cons, so consider which aligns best with your business goals and financial situation.
Before expanding, research the market for new locations or product lines. Look for areas with high foot traffic or demographics that match your target audience.
Finally, develop a financial model that projects revenues and expenses for your new locations or products. This model should include best-case, worst-case, and likely scenarios to help you anticipate challenges and opportunities.
Scaling bookkeeping processes as business expands
As your coffee shop grows, so too will the complexity of your bookkeeping. Here’s how to scale effectively:
1. Invest in accounting software: Choose one that can handle increased transaction volumes and multiple locations if needed. Look for features that allow easy integration with sales systems and inventory management.
2. Standardize processes: Create standard operating procedures for bookkeeping tasks, including how to record sales, manage inventory, and track expenses. Consistency makes it easier to onboard new staff and maintain accuracy.
3. Hire or train staff: As operations expand, consider hiring dedicated bookkeeping staff or training existing employees so you have the necessary expertise.
4. Regular financial reviews: Schedule regular reviews of your financial statements to monitor performance across locations or new product lines.
Forecasting and budgeting for future investments
Start by creating a detailed budget that accounts for all expected revenues and expenses related to expansion. Include costs for marketing, staffing, and supplies for new locations or product lines. Analyze past financial performance; historical sales trends can help predict future revenues and identify seasonal fluctuations.
Set clear and specific financial goals for your expansion efforts, like revenue targets for new locations or sales projections for new product lines. Then, as you implement your growth plans, regularly monitor your actual performance against your forecasts. Be prepared to adjust your budget and strategies based on real-time data.
Conclusion
We’ve covered the essentials for managing your coffee shop effectively, including understanding financial statements, COGS vs operating expenses, inventory and cash flow management, tax considerations, and managing growth and expansion.
If you ever feel overwhelmed, don’t hesitate to seek professional advice. An accountant or financial advisor can provide valuable insights and support as you grow your business.
Next, check out our articles on the essentials of business budgeting, understanding debits and credits, and understanding contra revenue.
Bookkeeping Essentials for Coffee Shops
Here’s some answers to commonly asked questions about bookkeeping essentials for coffee shops.
What are the essential financial statements for a coffee shop?
The balance sheet, profit and loss statement (P&L), and cash flow statement. The balance sheet shows your assets, liabilities, and equity at a specific point in time. The P&L summarizes your revenues and expenses over a period. The cash flow statement tracks the inflows and outflows of cash. Together, these statements give you a comprehensive view of your financial health.
How do I manage inventory effectively?
Start by keeping accurate records of all items. Use inventory management software to track stock levels, sales patterns, and reorder points. Regularly perform physical counts to ensure your records match actual inventory. Establish a system for monitoring perishable items to minimize waste and spoilage, and analyze sales trends to adjust your inventory based on seasonal demand.
What should I consider when planning for taxes?
Understand your obligations, including sales tax, income tax, and payroll tax. Keep detailed records of all income and expenses for accurate reporting. For tax purposes, tips must be reported as income. Consider setting aside a portion of your earnings for tax payments to avoid surprises during tax season. Working with an accountant can help you navigate complex tax laws, maximize deductions, and prepare your financial records efficiently.
