Friday, January 27, 2017

Why your vendors loan you money.

Please enjoy our latest blog post:
Why your vendors give you credit and how to use it to your restaurants advantage.

Check out past blog posts at

“Remember that credit is money” - Benjamin Franklin.

In life we usually pay for things at the point of sale. Think about it. It would be really weird to leave the supermarket with your groceries and be expected only to mail a check for the purchase sometime in the future. Imagine walking out of the Apple Store with a brand new laptop while leaving only a signature as a form of payment. Of course, you can use a credit card to pay for the laptop later, but in the case of credit cards, the bank is providing the credit. In contrast, when your vendors leave food, beverage and supplies at your restaurant, you are not expected to pay for a period of time usually ranging from 10-45 days. In essence, the vendor placed the product on a truck, drove the truck to your restaurant, unloaded everything and drove away without being paid. Why and how do your vendors extend credit, and what does trade credit really mean for your business?

First, there are some technical reasons why vendors provide trade credit. Paying for product on delivery is difficult. For instance, credit card fees are expensive so either checks would need to be cut or cash would need to be ready for the drivers to collect. In addition, giving cash to the driver presents all kinds of security issues. These technical issues aside, the main reason your vendors provide you with credit is so you can buy product from them when you do not have the money up front to pay for it. Restaurants are largely a cash flow business. Companies that supply restaurants know that they will sell more product if they extend credit to the buyer and allow them time to pay for it. Restaurant vendors also know that if they do not extend credit to their clients, then someone else will.

There are numerous benefits of gaining trade credit for your restaurant. For example, let’s say a steak, which you paid $10 for, was delivered to your restaurant on Monday and needs to be paid for in thirty days. When you sell the steak on Tuesday for $30, you will have that $30 in cash without paying anything for the product. So, for the next twenty nine days you can use that $10 you owe for the steak on anything else you need; payroll, insurance, rent.

Using trade credit to manage cash flow is part of the restaurant business. This is why the vendors extend credit, and it is how the business (for most operators) works. The challenge is to be sure that the use of trade credit is not obscuring larger problems within your organization. Restaurants can run up very large trade credit balances. Your financial reporting should include a balance sheet showing your short term liabilities with a section for “Accounts Payable.” Regardless of your P&L, your cash flow or how you feel about your restaurants’ financials, your short term liabilities (and how they change over time) is perhaps the most important indication of how your business is performing. You want this number to be stable or, if your business is seasonal, to reflect the seasonal swings. If your short term liabilities are growing, and it is not an off-season or a slow time of year, this may be a problem. If, at the end of the year, your short term liabilities are greater than they were at the start, there is a problem.

In general, your credit relationship with your vendors will be in-part based on a written agreement and in-part based on your relationship with the vendor. When you begin using a vendor, you will often be asked to complete a credit application. The credit application is really two things; 1) an application detailing the business which the vendor will review and 2) a contract spelling out how the vendor will be paid. In a business as kinetic as a restaurant, things like a credit applications are often done on the fly. It is important to be cautious and thorough when completing credit applications and to make sure you know what you are signing. It is also crucial that you are clear as to who within your organization is allowed to sign these credit applications.

Perhaps the most critical part of any credit application is the continuing personal guarantee. Most small restaurant groups are formed as a limited liability entity. When you sign a personal guarantee, you are agreeing to be personally liable for the debt that the business does not pay. It’s in your best interest to ignore this personal guarantee section until/if the vendor requires it. Some vendors will insist on a personal guarantee, some won’t but may grant longer payment terms with a guarantee, and some will not notice. The question you need to answer is what is the benefit of signing vs the benefit of not signing. Your restaurant may end up being passed through five generations of your family. It may grow to 100 units and go public or it may flourish for just another 10 or 20 years. How much is your accounts payable now and how much will it be in 10 or 20 years? If the business closes, vendors with a signed personal guarantee will have the right to collect any remaining trade balances from the signer personally. You must ask yourself, “what is this eventuality worth to me?”

A vendors’ credit application may also contain language allowing your vendors to maintain a first priority position or file a UCC1 statement. What this means is that your vendor can file a notice with your state’s Secretary of State declaring they have a lien on your assets. A UCC1 works in much the same way a home lenders position is secured. If you ever wish to sell your business (or assets of the business) a title company would first need to obtain a release from the vendor. These agreements can be hard to notice in a large credit application. We recommend you look for words like “security” and “first priority” throughout the application. Again, consider the value/risk of signing such an agreement.

Beyond the credit application, the vendors’ invoices will often spell out other parts of your formal agreement such as interest charges on late payments (which could jump as high as 18% a year). Many invoices allow the vendor to add interest the day the invoice is late. To keep track, consider adding a line item to your financial statement for “Trade Interest.” You may be paying more for vendor interest than you would imagine.
Your relationships with your vendors are very important. Vendors need to sell product as much as you do and are usually flexible if you maintain close communication. For example, if a vendor adds interest to an invoice, try asking them to remove it and then ask that they not do that again. If you’ve worked with a specific vendor for years, perhaps they would accept a letter from you requesting to withdraw a personal guarantee. If a vendor set you up with fifteen day terms, ask them to let you pay in thirty days and explain why this would benefit your business/relationship. Vendors want stability. What scares a vendor is when a restaurant consistently pays their bills on time and then suddenly skips a check without notice or a conversation. Even if things get a bit ‘unpredictable’ for you, maintaining the personal relationship will help. A vendor with fifteen day terms and 2% interest may let you pay in forty five days with no interest if you explain your situation and try to work out a compromise. However, never forget that whenever the vendor decides that the personal relationship is not working out, they can quickly and easily revert to the written agreement; at which point you are thirty days behind and owe a lot of interest.

Trade credit is a powerful tool. It can allow you to make payroll during the slow times and prevent you from needing to write twenty checks a day. Remember that credit agreements can and should be negotiated, you should be cautious with personal guarantees, and never judge your businesses’ performance by cash flow alone.

- Go to to see other ways you can save money in your restaurant.

A new wage for a new year 2016

And then the holidays were over… Happy New Year from Chefsheet.

In this newsletter we will discuss the current changes in the minimum wage as well as the forces that are helping to bring about these changes. Most restaurateurs understand that increasing menu prices cannot simply pay for increased labor costs. As restaurant prices go up, people choose to order less expensive items, order less in general or just eat out less. For many, dining out is a luxury; it is not something a consumer must spend money on at any price.   

As your labor costs increase, know that Chefsheet was designed to help you reduce your cost of goods and increase your bottom line. With Chefsheet, you can see which of your menu items are the most and least profitable and how much you should be charging for them. Track your vendor prices and keep your vendors accountable for what they are charging you. Take comprehensive, clean, monthly or weekly inventories to know your true costs as they are happening. For help with any of this or any other Chefsheet features, contact support to schedule a demo or training.

With the start of 2016 many states and some cities will see an increase in minimum wage. Almost everyone who has a job in the United States must be paid at least the federal minimum wage of $7.25 per hour. Without discussing tip credits, the only people who can legally make less than the minimum wage are business owners, those who are self-employed, those covered by a union contract and/or people who are interning and receiving college credit for the work they are performing. If you own your own restaurant or bar, you are free to make less than the minimum wage.

Twenty-nine states have passed laws increasing the minimum wage above the federal minimum wage. A county or city may set up its own minimum wage provided it is equal to or greater than the state minimum wage. The federal minimum wage was last increased in 2009. Many state and local minimum wage laws have automatic annual increases. These increases may be scheduled in advance or may be indexed to inflation. Inflation indexes are generally set to the Consumer Price Index or CPI. The CPI tracks the prices of items such as food, energy and clothing in a geographical area. Indexed minimum wages will generally increase annually by the same amount as the CPI for the area increased in the previous year. Most indexed minimum wages can only go up or remain flat. This means that during an extreme recession or depression, when price growth is negative, the minimum wage can not go down.

A tip credit is a means of calculating a tipped employees tip income as part of the income needed to meet the minimum hourly wage. Federal law says that tipped employees must also be paid $2.13 per hour. Many states have two minimums, one for tipped employees and another for non-tipped employees. Seven states do not allow tips to be considered in minimum wage. In a state with no tip credit, a waiter making $40 per hour in tips will still be paid the state minimum wage, whatever it may be. For the purpose of taxing income all states and the federal government combine tips and hourly pay. Both the employees and the employers pay payroll taxes based on the combined earnings. All benefits such was workers compensation, disability and unemployment are also based on the total amount of tips and hourly income.

Since 1938 there have been different times when the minimum wage has been increased both federally and at the state level. Over the past couple of years there has been a great deal of energy around increasing the minimum wage with Seattle, San Francisco, Los Angeles, New York and many smaller cities all raising their minimum wage. San Francisco first divorced its minimum wage from the California minimum wage with an increase in 2004. The increases over the past few years largely began in Seattle.

In New York, Seattle, San Francisco, Los Angeles and many other cities and states, the primary group midwifing these minimum wage increase is The Service Employees International Union or SEIU. SEUI represents just below two million workers in fields ranging from health care to restaurants and hotels. SEIU, with partnership from other unions and community groups, funded the campaigns to raise the minimum wage in pretty much every city and state that has seen a recent increase. SEIU is a funder of the ‘Fight for Fifteen’ group and spent about $10 Million to organize employee walkouts at New York City fast food restaurants. 

Members of SEIU are very unlikely to be affected by the minimum wage increases regardless of which industry they work in. Unionized restaurant workers are mostly found in hotels, convention centers and large venues. Most union restaurant workers already make more than the new minimum wages. Further, many union contracts are exempt from elements of US labor laws which means that a union worker could be paid less than the minimum wage in some cases. 

Why are SEIU and other labor unions so interested in increasing the minimum wage? First, a rising sea lifts all boats. If non-union workers are paid more it follows that unions will be able to negotiate better contracts for their members. Also, for a long time, unionized restaurants have been at a disadvantage to independent, non-union restaurants. A unionized hotel bar needs to charge more than the independent bar on the corner as the hotel bar has much higher labor and benefit costs. Most understand that airports, stadiums and hotels charge a lot more for the same product then one would pay at a 'regular' restaurant. For SEIU’s part, they state that their members believe in bettering the working conditions of others, regardless of if they are in a union. 

A few things to know and consider:

Any wage increase is only to be paid from the date it went into effect. If your payroll does not start on the 1st of January, make sure you are calculating your minimum wage employees pay based on the effective rate before an increase multiplied the hours before the increase plus the effective rate after the increase multiplied the hours worked after the increase. Minimum wage employees may have two pay rates on a single check for the pay period that covers the New Year.

Is there another way? The tips paid to waiters may represent an amount of about 18% of your restaurants sales. Currently all of this money is going to just the tipped employees. Some restaurants in high minimum wage markets have already begun switching to a ‘service charge model’ where the guests are asked to or are required to pay a service charge so the cooks and servers are all paid higher wages. The challenges with a service charge model may be attracting front of house talent and committing to a higher rate all for your employees all the time.

Automation and outsourcing – The restaurant business is a pretty analogue business, but there may be ways to accomplish daily tasks more efficiently. There are answering services, services that can take reservations and orders online, bookkeeping services that process your books off shore and more. Every restaurant is different but there are ways to downsize labor if necessary.

What to expect in the future – Local and state increases in minimum wage in cities such as San Francisco, Seattle, Los Angeles, New York and other places where these increases have passed are popular with the voters and the public. Many large cities have become very expensive places in which to live. Politicians and voters see people struggling with higher rents, higher home prices and generally higher costs of living and wish to do something, perhaps anything, to help. Options such as increasing the minimum wage are popular as they cost the government very little, do not require tax increases or money to be transferred from other government programs, etc. Following a successful minimum wage increase in San Francisco, SEIU supported other initiatives such as paid sick leave, fixed scheduling to avoid last minute changes to a workers schedule, employer sponsored health care and other legal mandates that offer new benefits to employees. 

While higher minimum wage may help many Americans, it will affect the efficiency and bottom line of restaurants everywhere. Are you ready?

See how Chefsheet can help you organize, plan and save in 2016!

How gift cards work

How Gift Cards Work
At Chefsheet, our business is selling tools to help you count, order and gain valuable data from your inventory. In this newsletter, we will discuss a matter that has nothing to do Chefsheet. We hope learning about gift cards will help you make your holidays as fruitful as possible.

If you use Chefsheet for counting inventory, we would love to help you check out Chefsheet for ordering too. If you use Chefsheet for ordering, we would love to help you use Chefsheet for counting your inventories. As always, please contact Support, follow us at Twitter and Facbook

In the US alone, people spend over $115 Billion per year to purchase gift cards. Department store gift cards are the most popular kind, followed by restaurants and other retail and services. Of the $115 Billion spent to buy gift cards, ninety percent will be redeemed in about 60 days. However, $1 Billion worth will NEVER be redeemed. 

When someone buys a gift card, they, in effect, become an unsecured creditor of the business. So, when you sell a gift card, you owe money to the person who owns the gift card. There is some risk to the purchaser of any gift card. Due to this fact, the federal government (and most state governments) has many laws related to the sale and use of gift cards. Some of these laws can be a bit counter intuitive, and often restaurant staff can make statements about gift cards that are not correct. Going into the holiday season, it may be a good idea to make sure your staff understands how to correctly answer gift card-related questions in accordance with the law and perhaps your own policies.

Before discussing the laws around gift cards, it’s important to note that not all gift cards are actually ‘gift cards.’ Many restaurants will offer a complimentary gift card to regular guests as a gesture or to invite a guest to return to the restaurant after a less than favorable experience. If you provide “comp gift cards,” it is very important to use a different form or format than your “paid gift cards.” 

Comps are not regulated; Therefore, they can expire at any time, they can have limits placed on when or for what they can be used, and they have no cash value. We suggest providing comps using a different color card or form clearly marked No Cash Value. Since most gift certificate users can get some or all of the unused value as cash, it is extremely important that your staff not return cash for the unused portion of a comp gift certificate. You may also want to require that the entire value of a comp’d gift card be used in ONE VISIT (Note: this is not allowed in the case of a cash gift card). Make sure that the comp certificate looks nothing like the normal certificate. Include “No Cash Value” clearly on the comp’d card, and include any restrictions as well. You may also want to set your computer system to not allow gift certificate payment without a manager or supervisor first approving the transaction.

Can a gift card expire? Gift cards are regulated by the Federal Trade Commission (FTC). The FTC allows gift cards to expire only after five years. Oddly you can print an early expiration date on the material, however within five years you are federally required to either honor the card or exchange it for a new card. If you are in California, Connecticut, Florida, Maine, Massachusetts, Minnesota, Montana, New Hampshire, Oregon, Rhode Island or South Carolina, your gift cards can never expire. 

Can you charge a fee for using a gift card after a certain date? According to the FTC, you can charge an ‘inactivity fee’ after a card has not been used for one year since purchase. Most states do not, however, allow merchants to charge an inactivity fee (and some limit the amount). For a complete list by state, visit www.consumersunion.org . It seems that most guests would not react well to an inactivity fee regardless of the law, and the amounts which can be charged or negligible.

Can someone exchange a gift card for cash? Most states require that change be given/cash be returned only when a small amount of money is remaining ($5-10). In most states, if a guest has a $100 gift card and wants to purchase a diet coke and receive change, you can explain that you can return the value in gift cards only. See your states specific laws at

In the old days, people would buy and use gift certificates. Gift certificates were a piece of paper, which itself was almost like cash. From gift certificates we made a transition to the plastic gift cards, which are now being replaced by more virtual methods such phone apps with scan-able codes. 

Selling gift cards around the holidays is great for restaurants. Each gift card sale is like a referral; one of your guests is telling someone else, “I think you will like this restaurant.” Each gift sale is really a chance to gain new, repeat business. People often buy gift cards in bulk. An office may buy dozens of gift cards for holiday gifts, and assistants everywhere may fill their bosses holiday list with just a few quick bulk purchases of gift cards. In most cases, gift cards can be sold for very little or no work, and the money arrives in your bank account just like any other sale. When the card is redeemed, 27% of the time the guests will spend more than the value of the gift card. Also, remember, nearly 1% of all gift card sales are never used at all. Gift cards are good business.

The first step in maximizing your gift card sales is to make it as simple as possible for someone to buy them. The most difficult case may be for a guest to drive to your restaurant, park, arrive before opening, wait for the hostess to find a manager via the intercom and then pay with a credit card. If you do not want to sell gift cards online, consider making the process of purchasing in person as streamlined as possible. Create a number of ‘ready to go’ certificates of different values to empower your host or bartenders to complete the sales. 

In general, the best way to maximize your gift card sales is to sell gift cards online via your website. We have no relationship or affiliation with any gift card company but The Gift Card Café is clean, simple and does everything you may need. Generally, you would install a big, clear link on your website, which would direct users to a gift card app. Many of these can be designed to match your own website. These services can collect payment via credit card, Paypal and even BitCoin. Users can then print a gift certificate with a unique code or email the certificate to the recipient. Most services have some sort of an app for redemption, which can track the unused portion of the certificates as well. If a guest spends $50 of a $100 gift card, you can simply return the gift card and invite them to use it for the balance the next time they return.

Many gift card services will allow you to offer discounts and promotions to incentivize greater sales. Many group certificate purchases are done on behalf of an office or some type of organization. One person may be tasked with finding gifts for the group. You can offer the person buying the certificates a certain value back to them in the form of their own certificate. For instance, buy $100 in gift cards and get $10 for yourself. With this type of promotion, the office manager or person responsible can ‘enrich’ themselves at no cost to their employer which may just tip the scale to buy all of their gift cards from YOUR restaurant. Most online gift card services can manage this for you.

Most gift card sales do take place online, but you should also try to sell as many gift cards to the guests visiting your restaurant as you can. A healthy competition between staff members on who can sell the most gift certificates may be helpful and fun. If you have the space and the volume, consider setting up a dedicated gift certificate sales area (maybe at a host podium or even a table in the dining area). Guests coming or going may pop over and purchase some last minute gift cards for stocking stuffers or a holiday party.

Tis the season – Due to the popularity of deal sites, such as Groupon, many people have discovered how to take advantage of the challenges restaurants face managing gift cards. It is extremely important to have a consistent set of systems to track redemption by card. Again, there are many services that can manage this. Most POS systems have some degree of gift card functionality, and even a simple excel sheet with numbers can work as well. Groupon warns its merchants that certificate holders will often call to check if the certificate has been redeemed. They do this when they have already used the certificate and are checking to see if the restaurant redeemed their certificate online. Very often, restaurants don’t take the time to redeem these through sites like Groupon, and the guest can then use it more than once. It is very important to remove the value of whatever has been used as soon as the guest leaves the table.

Services such as The Gift Card Café can be set up in quickly. Whatever system you use preparing to sell gift cards for the holiday can help your business a great deal.

Linen in the New Year

Happy New Year from Chefsheet. 

Moving your inventory online with Chefsheet may be the easiest resolution you will ever keep. Import your order guides or old inventory sheets and start counting on your mobile device today.

In the most general sense, linen companies provide restaurants with items such as uniforms, towels, linen napkins and tablecloths. Linen companies also usually offer ancillary services such as area rugs, deodorizers for the restrooms, first aid kits and cleaning supplies. In order to contract a linen company, the restaurant is required to sign a service agreement which will set terms such a pricing, payment terms, replacement costs and length of the contract term.

The linen you use in your restaurant may be owned by you but cleaned by the linen service or perhaps the linen service both owns and services these items. In fact, some restaurants may own some items but source and service other items through a linen company - which may actually be cost effective.

Cleaning linen is not easy. The process to remove grease, wine, lipstick and other food stains that accumulate on restaurant linen takes industrial strength. Restaurateurs (like myself) who have tried to bypass this process/expense by doing it at home know just how smelly and ineffective this can be. Restaurant linen requires strong chemicals, tough machines and a lot of energy to launder, and it's expensive to do this.

There are a few operational ways a restaurant can control linen costs. Staff training may be the most important and effective one of these. Put simply, the fewer rags a cook uses in a shift, the less you spend on linen. Also, ensuring that the linen received is usable, clean and not torn is very important. All linen companies are prepared to credit your account when their product is faulty. Just be sure to separate the damaged or unusable linens and contact the company to let them know. Finally, outside of operational issues, negotiating your linen contract is an important way that you can control your linen costs.

IMPORTANT: Most linen contracts will commit the restaurant to rent linen for a set term. This term may be for a year, 18 months, two years, etc., and most of these linen contracts are set to auto-renew at the end of the contract period. When this auto renewal happens, prices can be adjusted unilaterally by the linen company. So, basically the process is this; you find a linen company you like, agree on pricing and sign a contract to lock this pricing for a year. At the end of the year, the contract will renew and commit you to another twelve months while the prices are adjusted as the linen company sees fit. The contract often states something to the effect that the restaurant must notify the linen company in writing thirty days before the end of the contract if they wish to terminate the agreement prior to the auto renewal. In practice, with a contract like this, a restaurant would need to remember the date to write a letter to the linen company and cancel the agreement or, otherwise, see the prices change and be committed to another contract term. The good news: when negotiating a new linen contract most companies will allow you to remove this auto renew clause. If your linen company won’t let you remove this clause, then you should find another company that will. What you want your contract to allow for is for the agreement to only be expressly renewed. This means that if you do nothing, the agreement will end. In the event the contract ends you are then free to start a new contract with new pricing.

Another challenge in controlling linen cost is how you pay for lost product. Every restaurant will see some linen lost to the garbage, torn or even walk out the door in someone's bag. Your contract with your linen company spells out how this lost product is paid for by you. In most contracts, the lost product is paid for at the end of the contract term. It may sound good to not pay for lost product until the contract is over, but really consider what this means. Perhaps you have worked with the same linen company for several years. You remember to terminate the contract at the end of the term as you have found a cheaper linen company. Your current company then bills you for all the linen which you lost over the entire period you have worked together. Of course you have no records of this and no way to verify the losses. The good news: they will usually negotiate with you by offering you a discount if you sign with them again, and then the process repeats. You can even ask that your contract specify the losses must be calculated before the agreement can be renewed and since you now have opted out of auto renew you have all the leverage to get a good deal on lost product. When negotiating your contract, be sure and check the prices for replacement, lost product and know you will be paying for these at some time in the future. It's best to agree on that before signing anything.

Signing a linen contract, or any contract, is a big responsibility. We highly recommend making clear rules within your organization as to who can sign a contract. This will ensure that a chef or manager does not commit you to a linen contract without your knowledge. It happens more than you think!

Be sure your linen contract does not auto renew. Insist that your contract be negotiated at the end of each contract period and consider not allowing these periods to be more than the standard twelve months.

Check the costs for replacement product in your contract and be sure you are billed for these replacements before your contract renews.

Don’t wash restaurant linen at home. It will make your house stink and destroy your washing machine!

- Go to to see other ways you can save money in your restaurant.