Coupon Accounting

When the economy went into a tailspin, a lot of restaurants experienced an alarming drop in sales.  Not only were guests spending less, fewer were dining out and those that were, dined out less often.  Pretty much every restaurant that I knew saw their sales drop by a minimum of 20% – some as much as 40%.  Understandably, this put severe pressure on the bottom-lines of a lot of restaurants.
Restaurateurs were willing to do just about anything to bring a customer in the door.  Many began offering coupons, some for the first time.  Done properly, coupons and other discounts can be a valuable marketing tool, but too often they seriously harm the restaurant’s brand.  Today’s article is not about whether they are useful.  Instead, I want to talk about how we account for discounts and what it means to our analysis of costs.

Basically, there are two ways to account for discounts:  Deduct them from sales or show gross sales and the discount as a promotional expense.  The generally accepted method is to show sales net of all discounts.  This is the method used to calculate sales taxes.  In fact, this may be the required accounting treatment when preparing your annual financial statements, but as the owner, it may not be the best way to look at discounts when making decisions about your business.
Why?  Since most coupons relate to food sales, this increases the chef’s food cost percentage, even when there has been no change in the chef’s ability to control costs.  Food costs will appear to be out of line with past standards and pressure will fall on the chef to fix the problem, especially if the coupons are accepted for a considerable period of time.  I have seen a lot of poor decisions made by normally smart restaurateurs, when this happens.  Portion sizes are reduced.  Lower cost ingredients are used.  Quality suffers.  Regular customers notice the consistency problem and come in less often, or stop visiting your restaurant all together.  The potential customers you bring in with the promotion don’t come back, because the value-proposition isn’t really  there.
Where the discounts are available to all customers (all of the time) or the discounts are continuously used to attract new customers, it is appropriate to use the net selling prices in the calculation of margins and take appropriate action to improve margins.  In these situations, the entire business model will need to be re-considered.  Lower margins will require higher volumes to make the same profit as before.
However, where the use of coupons and discounts is intended to be a short-term promotional effort, I prefer to analyze margins using the usual, or standard, selling prices.  This maintains the proper food cost (both dollars and percentage of sales) and separates the promotional effort, directed at increasing sales, from the production function.  Ideally, the financial statements should disclose gross (standard) sales and discounts, to arrive at a net sales figure.  A separate spreadsheet should be used to analyze the restaurant’s margins and support smart decisions.
The Bottom-line
Discounts can be used effectively, but when they “cause” poor decisions to be made, they can quickly destroy a strong brand that has been carefully built over a period of years.  Owners need to be aware of this issue and modify their analysis of margins to properly understand what is going on.

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