Where do you put comps at the restaurant on your profit and loss statement? Is it an expense?
– Nick Hill, Owner, Qdoba, Casper, Wyoming
In competitive environments, operators increasingly rely on promotions and comps to attract guests and increase sales. To be effective operationally, these comps need to be measured against their return on investment and also be kept to a budget so you don’t run the proverbial risk of losing money on every check and “making it up in volume.” There needs to be a balance, too, between empowering employees to make a situation right by comping an appetizer to apologize for a long wait, for example, and giving them free reign to give food away.
It is important to correctly account for comps to create an accurate picture of what’s happening, and to be sure that tax implications and ratios are observed. For example, if you are offering free happy hour appetizers to drive drink sales, improper accounting will knock your food cost out of whack and could have significant implications like a misevaluation of the chef’s performance. The promotion is an expense and should be properly accounted as such. Clear coding on the POS to manage promotions and comps helps with accounting, but it is important that operators and employees understand what happens to the books behind the scenes when that key is pressed.
David Pierce, a partner at WeiserMazars, says, “POS systems report the comps separately and they are usually shown in a separate expense account. This helps to make sure restaurant personnel adhere to their limit of complimentary food and beverages. It also prevents restaurant personnel who are observed not ringing up a sale from claiming that it was complimentary. It is usually shown as a separate expense line item on the internal financial statements. Some adjust the comp from retail value down to net value after estimated COGS so the gross profit margins aren’t distorted by comps, if significant. And they leave it out of gross margin. … If comps are not significant they are sometimes just netted against sales, but this distorts gross margin. In any case, you want to make sure they are separately identified so the restaurant does not remit sales tax on the comps (unless required in some states—for example, for some beverage comps in some states, etc.).”
More on properly accounting for comps and promotions here.