Mike Rowan, Author at Kickfin

Paying Tips Through Payroll

Posted on October 17, 2023October 17, 2023 by Mike Rowan

Paying tips through payroll can be a simple way for employers to distribute tips they collect on employees’ behalf. It eases the burden on both employers and employees by ensuring tips are appropriately taxed and recorded. However, it’s also much more involved than paying tips instantly, as we’ll explain below.

What Is a Tipped Employee?

A tipped employee is any employee who regularly and customarily receives at least $30 in monthly tips from customers. These employees often work in industries where gratuities are common, including restaurants, bars, hotels, and other hospitality or service businesses. Many tips employees interact directly with customers who provide tips as a reward for good service.

In many cases, tipped employees receive lower base hourly wages than non-tipped employees, expecting their tips to supplement their income to at least meet the federal minimum wage. This lower direct wage and the tips received constitute the employee’s total earnings.

How Do Employee Tips Work?

Employee tips function as a direct, voluntary payment to service workers by customers in appreciation for the service they receive. Customers typically determine the tip amount based on the service quality, and it is often a percentage of the total bill. In many industries, customers usually tip 10% to 20% of their total bill to reward employees for good service.

The process of handling tips varies by industry and by business. In some cases – including cash businesses – employees often keep their tips individually. In other cases, tips are pooled and then divided among the staff, including servers, bartenders, and back-of-the-house workers.

Most often, when employees receive cash tips, they’re entitled to keep those tips (minus any portion they’ve agreed before to share with support staff). Additionally, employers are responsible for distributing tips they collect on behalf of employees, including through credit or debit card transactions.

What Is a Tip Credit?

A tip credit is a provision in the Fair Labor Standards Act (FLSA) that allows employers to count a portion of their tipped employees’ gratuities as a component of their total wages. This means that in states where tip credits are allowed employers can pay tipped employees a lower direct wage if the amount of tips received is sufficient to bring the employee’s total earnings to at least the federal minimum wage.

Paying Tips Instantly vs Through Payroll

In most businesses, employees receive their tips instantly in cash at the end of their shift. This immediate form of payment gives employees instant access to their earnings. Still, it can also lead to management headaches and potential inaccuracies in record-keeping. Handling large amounts of cash can pose risks to a business, and reconciling tips reported by employees with sales data can be a time-consuming task.

Paying tips through payroll involves collecting the tips earned by employees and adding them to their regular paychecks. While this method ensures accurate tracking and reporting of tip income, it will delay employees’ access to their earnings. Over time, employees can also grow skeptical that tip calculations are accurate.

This is where Kickfin comes into play. Kickfin is a platform that solves these challenges by enabling instant tip payments directly to employees’ bank accounts. This eliminates the risks and hassles associated with handling cash and ensures accurate, real-time tracking and reporting of tips. Employees benefit from immediate access to their earnings, improving financial security and job satisfaction.

How To Pay Tips Through Payroll

Collecting and tracking tips throughout a pay period can be a headache, but it also ensures accurate reporting and tracking of tip income for employees. In this section, we will walk through the basic steps of how to pay tips through payroll.

1. Collect Non-Cash Tips on Behalf of Employees

Non-cash tips, such as credit and debit card tips, are typically included in the customer’s bill at the point of sale (POS). To collect these tips, businesses must integrate a tipping option into their POS system. That way, when a customer pays with a card, they can add a tip to their total bill amount. Most modern POS systems offer an option to add a tip to the bill.

Collect the total amount of non-cash tips from the POS system at the end of each shift or business day. This should be a simple matter of running a report or checking each employee’s accumulated tips in your POS system. Add the collected tips to each employee’s payroll for that period. In some cases, you might be able to integrate your POS system with your payroll system to automate this step.

2. Transfer Funds from Merchant Account to Payroll Account

Once customer transactions for a given shift settle and funds are deposited into your merchant account, transfer money from your merchant account to your payroll account to ensure you have the funds necessary to cover employee payroll.

Keep in mind that transfers may not be instantaneous, depending on your bank’s policies and procedures. Therefore, scheduling these transfers well before your payroll processing days is recommended to ensure the funds are available when needed.

3. Separate Tips by Employee

Once you have money in your payroll account, process payroll as you would normally – by multiplying each employee’s hourly wage by the number of hours they worked in that pay period. Then, add the calculated tips to the corresponding employee’s payroll. If you process payroll manually, this could mean adding the tip amount to the employee’s regular wage for that pay period. If you’re using a digital payroll system, there may be a specific field or feature where you can input the tip amount.

At this point, you should ensure that each employee’s pay meets state and federal minimum wage requirements. If one or more employees’ total compensation (wages plus tips) does not meet minimum wage, you’ll need to supplement their wages for that pay period to compensate for any shortfall. (Note: This would only apply in states that allow restaurant operators to take a tip credit.)

4. Incorporate Tips into Scheduled Payroll

Once you add each employee’s tips to their pay amount for a given pay period, you’ll need to calculate taxes and other deductions based on their total income. Typically, both federal and state income taxes, along with the employee’s share of social security and Medicare taxes (FICA), are calculated and withheld from this total income. Any other deductions or withholdings that the employee has authorized should also be deducted.

Remember to clearly itemize each of these deductions on the employee’s payslip, showing the specific amounts deducted for each category. This helps employees understand how their total income, including tips, is calculated and where their money is going.

5. Pay Out Tips as Part of Payroll

After calculating each employee’s income (including tips) and deductions, process payroll – paying out net wages and providing employees with copies of their paystubs for that pay period. Most payroll systems generate these statements automatically. Otherwise, you’ll need to generate itemized pay stubs manually.

What Is the Difference Between Cash Tips and Paycheck Tips?

Cash tips and paycheck tips represent two different methods of tipping in the hospitality industry. Cash tips are the traditional and most common form of tipping. They are given directly to the service provider, often immediately after service has been rendered. This method allows service staff to receive gratuity instantly, providing immediate access to their earnings.

Paycheck tips, on the other hand, are tips that are added to an employee’s regular paycheck. This method involves collecting non-cash tips (credit and debit card tips) through a POS system and adding them to payroll for distribution. Paycheck tips provide more accurate tracking of tip income for tax purposes but also delay employees’ access to their earnings.

Do Employees Have to Pool Tips?

Pooling tips, also known as “tip pooling” or “tip sharing,” is a common practice in the hospitality industry. It involves combining all or a portion of employees’ tips into a shared pool, which is then divided among a group of employees. The aim of tip pooling is to promote a collaborative work environment where all staff members share in the business’s success.

In the U.S., an employer can require employees to participate in a tip pool or share tips with other employees. However, this is only allowed among employees who customarily and regularly receive tips, such as servers and bartenders. Back-of-house staff, such as cooks and dishwashers, can’t be forced to participate in a tip pool unless the employer pays the full minimum wage and doesn’t take a tip credit.

If you’re thinking about having employees pool tips, first familiarize yourself with local laws to ensure your tip pooling policies are compliant. You need to create a written tip-pooling policy, make employees aware of this policy from the outset, and effectively communicate any changes.

Digital Tip Jars: What They Are & How They Can Help Your Business

Posted on October 11, 2023October 12, 2023 by Mike Rowan

A digital tip jar is a cashless tipping solution that enables customers to give staff gratuities without using cash. In an increasingly cashless economy, many business owners struggle with how to reward staff members with tips when fewer and fewer customers carry currency.

What Is a Digital Tip Jar?

A digital tip jar is an app or online platform that lets customers give gratuities – often to entertainment or hospitality workers like musicians, baristas, or valets – without the need for physical cash. Digital tip jars offer a seamless, cashless tipping experience that aligns with the growing trend toward digital payments. They can be utilized through various methods such as QR codes, links, or embedded buttons on websites, making them convenient, safe, and efficient for customers.

How Do Digital Tip Jars Work?

In practice, a digital tip jar works very similarly to tip jars of old. However, instead of dropping in spare change or bills, customers can send tips electronically either through a payment app or a dedicated digital tipping platform. These platforms – including ours – support various payment methods, including credit/debit cards and mobile wallets. They let business owners generate QR codes or links that can be shared with customers, making it easy to scan or click to tip.

Though still relatively new, digital tip jars can be a boon – particularly to staff in the hospitality and entertainment industries. These apps offer an easy, low-cost way to collect tips and can be particularly beneficial in businesses with multiple service layers or those with a significant delivery component. Customers, who increasingly favor cashless transactions, appreciate the convenience and simplicity of digital tipping. They can show their appreciation for good service with just a few taps on their smartphone.

Digital Tip Jar Fee Structure

Digital tip jars typically charge a percentage fee on each tip received – often around 8.9% – plus a flat fee – usually $0.30 per transaction. In contrast, Kickfin provides a digital tip jar service for a 5% fee, plus $0.20 per transaction. This fee is primarily used to cover the operational costs of the platform, including transaction processing fees.

It’s important to note that while some platforms might not charge the businesses directly, they may charge the customer a surcharge. However, this is prohibited or restricted by many payment processors, including Visa.

Benefits of a Digital Tip Jar

Digital tip jars aren’t just a trend – they’re a solution to a modern business challenge. They provide a seamless and hassle-free way for customers to show their appreciation for excellent service. But their advantages go beyond convenience. Digital tip jars can significantly impact your business’s bottom line, boost employee morale, and improve customer service.

Increased Tips

Digital tip jars often lead to an increase in tips. With more and more people going cashless, having a digital gratuity option allows more customers to tip, and the ease of tipping digitally often results in larger tip amounts.

This benefit is particularly advantageous for businesses in the service industry where tips contribute significantly to staff income. Higher tips can lead to happier staff and less employee turnover.

Improved Customer Experience

In many industries, tipping forms part of the overall customer experience. When customers find every aspect of their interaction with your business easy and convenient, it contributes to their overall satisfaction and increases their likelihood of returning.

Increased Transparency

When you set up a digital tip jar for your employees, all tips are tracked and recorded, eliminating any disputes or confusion about how much was received. It also eliminates the chances of tip theft or discrepancies and the need for you to stock a cash drawer to help employees make change for tips.

Having a clear record of tips can also help with managing employee performance. By tracking the amount and frequency of tips, businesses can identify their top-performing employees and reward them accordingly.

What Kinds of Businesses Should Use Digital Tip Jars

Digital tip jars are a game-changer for any business where employees rely on tips as a significant portion of their income. Here’s a look at what types of businesses can benefit from incorporating digital tip jars:

Bars/Restaurants: Servers and bartenders at bars and restaurants often rely heavily on tips. Digital tip jars make it easy for customers to tip, even if they are paying with a card or mobile payment. They also ensure that employees receive their tips immediately, rather than having to wait for cash-outs or paychecks.
Hotels: Hotel employees like bellboys, housekeepers, and concierge staff often receive tips as a token of guest appreciation. A digital tip jar allows guests to tip without the need for spare change or cash.
Valets: A digital tip jar makes the process of tipping valets seamless, eliminating the awkwardness when customers don’t have cash on hand.
Pet Groomers: Many pet owners appreciate the services of pet groomers, and a digital tip jar allows them to reward good service easily.
Car Washes: Employees at car washes often go the extra mile to ensure cars are spotless, making them prime candidates for tip-based income. Digital tip jars streamline this process.
Tours/Events: Tour guides and event staff often provide exceptional service that warrants a tip. A digital tip jar allows customers to tip these individuals easily, regardless of the payment method they used for the tour or event.

How to Get the Most from Using a Digital Tip Jar

Promote Digital Tipping: A digital tip jar won’t do much if nobody knows about it. Start by communicating its presence to your customers. Use signage, menu mentions, or verbal reminders from staff to encourage customers to tip digitally.
Train Your Staff: Your employees are on the front lines of promoting a digital tip jar to customers. Make sure they know how it works and the benefits it offers, so they can confidently explain the system to customers.
Offer Multiple Payment Options: Different customers are comfortable with different modes of payment. Ensure your digital tip jar accepts a wide variety of payment methods, from credit cards to mobile payment apps, to cater to all your customers’ preferences.
Ensure Compliance: Make sure your digital tip jar system is not surcharging customers as this can lead to problems with payment processors. Regularly review your compliance status to avoid unforeseen issues.

Staying Compliant with a Digital Tip Jar

While digital tip jars offer a host of benefits, it’s important to use them properly.

Adherence to State Laws

Each state has its own set of laws pertaining to tips, including how tips are taxed, who can receive tips, and how tips can be distributed. It’s crucial to ensure your digital tip jar adheres to the specific laws of the state(s) in which your business operates.

Compliance with Payment Processor Rules

Digital tip jars are often facilitated by third-party payment processors. These processors usually have their own set of rules and requirements, which businesses need to abide by. Some processors may have specific policies about how tips are processed and recorded. For example, digital tip jars that surcharge customers on debit card transactions or more than 3% of the tip on credit transactions violate Visa network rules. As a result the merchants run a high risk of Visa turning them off their processing network.

Following Tax Regulations

Tip income is taxable. Digital tip jars track and record all tips, making it easier for businesses and employees to report tip income accurately. However, how this income is reported may vary depending on the tipping platform you use and the flow of funds from customers to staff. Check with your accountant to make sure you report tips properly.

Fair Labor Standards Act (FLSA)

Under the FLSA, tips are considered the sole property of the tipped employee. While tip pooling is permitted in some cases, employers must follow strict guidelines. A digital tip jar needs to be set up in such a way that it adheres to these regulations.

Using Kickfin as a Digital Tip Jar

We’re proud to say that we’re one of the most popular cashless tipping options available on the market. We offer a flexible platform for businesses to collect and manage employee tips, streamlining the process and ensuring that employees receive their tips quickly and easily.

Here are some things you should focus on when you’re looking for a digital tipping solution for your employees:

Easy Set-Up: We help business owners set up cashless tipping in minutes with no technical skills required.
Multiple Payment Options: Customers should be able to tip using credit or debit cards, as well as popular mobile wallets like Apple Pay and Google Pay.
Instant Tip Distribution: Employees should receive their tips immediately after a transaction is processed, eliminating the need for cash-outs or waiting for paychecks.
Customizable Tipping Options: You should be able to set up custom tipping options, such as percentage or dollar amount.
Real-Time Reporting: A digital tip jar should track tips and let you view real-time reports on employee tips.
Secure Transactions: When you’re collecting tips for employees, security is paramount. Any platform you consider should ensure all transactions are safe and secure.

Digital tip jars offer a convenient and efficient way for businesses to manage employee tips, making it easier for customers to show their appreciation while also ensuring that employees receive their tips promptly. With platforms like Kickfin, implementing a digital tip jar has never been easier. Schedule a demo with our team to learn how digital tipping can motivate your employees and improve your customers’ experience.

FSTEC Recap: Tip Management 101 Forum

Posted on September 28, 2023September 28, 2023 by Mike Rowan

Restaurant operators and tech companies descended on Dallas to meet at FSTEC, the premier conference to learn about exciting new solutions for the quickly-automating restaurant industry.

Our very own Brian Hassan, co-founder and co-CEO of Kickfin, joined a panel to talk about everything tip management — including employee buy-in, legal compliance, and profit growth. Brian discussed the importance of creating a tip management strategy and how to execute on it alongside Mike Manley (Senior IT Director, Dave & Busters), Ken McGarrie (Founder, Korgen Hospitality), and James Fessenden (Partner, Fisher Phillips).

Watch the full video or check out our key takeaways from Brian’s conversation.

Building a Tip Management Strategy

Things are changing in the restaurant industry — and fast. A unified tip management strategy should be a key component of your restaurant’s operations.

Why?

Fewer cash transactions at restaurants
Servers still want daily tip payouts
Changing IRS policies for claiming tips
Competition in the labor force

Forward-thinking restaurateurs are already investing in tech to automate many aspects of their business, so your tip management strategy shouldn’t be left in the past.

For restaurants looking to scale, having a single strategy across all your locations is the best way to simplify operations, ensure compliance with tip pooling laws, and prevent theft. You’re going to have growing pains, but paying employees efficiently should be priority number one.

So how do you create a tip management strategy?

Choose a tip pooling system
Decide how you’d like to pay out tips to employees
Monitor for compliance with tipping laws

Tip Distribution Models

85% of our customers are currently sharing tips, one way or another, but there isn’t a one-size-fits-all tip distribution model.

For QSRs, it’s pretty simple: pool tips and divide them by hours worked. At QSRs, you’re all working as a team to serve customers quickly, whether you’re running the cash register or manning the drive-thru window. It feels fair for employees to share tips based on how long each team member’s shift is.

Things start to get tricky when splitting tips at FSRs, especially in fine dining. Servers provide the majority of direct service to guests, but there are a lot of key people involved in the entire dining experience (hosts, runners, bartenders, and bussers).

Many FSRs will use a “points” system to assign a share of the night’s tips based on their role, or servers will “tip out” the other supporting staff members based on a percentage of their sales. Beware: splitting by percentages can often veer into non-compliance without proper management.

>> Learn more about tip distribution models here

Once you’ve chosen the right tip distribution model for your business, communication is key. Employees should be notified in writing about the tip pooling policy, but you should also be talking to them about why you have this policy and how it will work.

Pay-out Methods

Once you’ve split up the tips, how are you going to pay them out to employees?

Cash

Cash has ruled the restaurant industry for decades, and most servers have come to expect an envelope of dollar bills at the end of every shift. But does it still make sense?

While 90% of hospitality outlets are still paying out in cash, some restaurants are seeing as low as 1% of transactions paid in cash. This creates a logistical problem for restaurants who have to order cash deliveries or send a manager out to withdraw thousands of dollars just to pay servers.

Cash also opens the door for theft. Servers leaving work with a wad of cash in their aprons are easy targets, putting their physical and financial safety at risk. Owners also run the risk of employee theft. Since cash isn’t traceable, that money is gone.

Now that the IRS is planning to use POS data to estimate tips, cash could also cause major issues for servers at tax time. The POS data might show that a server likely earned $200 in tips (claimed or not), but it doesn’t account for how much a server had to tip out. If you’re only left with $150 after tip out, why would you want to be taxed on $200?

Payroll

Putting tips on payroll is probably the easiest option for restaurant managers. It makes for straightforward compliance and takes much less time than counting cash.

But (and it’s a big but), servers are used to an influx of cash on the daily — not every two weeks. You run a big risk of losing veteran servers and struggling to hire new staff when you move their tips onto payroll.

Digital Tipping

The innovative tech we mentioned earlier? This is it. Rather than cash or payroll, you can look into digital options that will free you from cash without alienating employees.

But there are still options in the world of digital tip outs: Prepaid cards and instant, direct payouts. Prepaid cards were the earliest iteration of digital tip outs, offering employees their tips instantly on a card provided by their employer. They come with some major drawbacks though, including fees, restrictive ATM networks, and questionable legality.

Direct digital payments send the tip right into employees’ bank accounts. No one needs to add another card to their wallet or spend time transferring funds from a prepaid card to their normal bank account.

The Digital Tipping Landscape

Ready to try digital tip outs? You have a lot of options — including Kickfin!

When choosing a digital tipping partner, you have some things to consider. First and foremost, solve problems one at a time, in order of importance. Seek a solution that best fits your pain points without overcomplicating things.

Here are some things to consider when choosing a digital tipping solution

Does it send payment instantly?
Does it have a payroll option for unbanked employees?
What does the implementation and onboarding look like?
Can it integrate with your POS?
Does it manage compliance?
Will it make employees’ experience better?

If you choose wisely, the impact of your tip management system will go far beyond paying employees. For one, your employees will stick around for longer. Our survey found that Kickfin was the top reason that servers decided to stay at their current restaurant. And with more time on their hands, managers can do their most important job — creating more profitability for your restaurant.

Compliance

Remember: tipping laws are no joke. Here’s a quick refresher (but always ask an attorney for personalized legal advice).

The Tip Credit

If your employees are earning more than $30 every month in tips, you are allowed to take the tip credit. According to federal law, you can pay employees $5.13 less than the state’s minimum wage per hour, as long as the employee is making up the difference in their tipped earnings. This only applies in states where the tip credit is legal (sorry, California restaurant owners).

Tip Pooling

As we mentioned before, tip pools are a great way to reward FOH staff for their part in creating excellent guest experiences. But, when not carefully monitored, tip pools are one of the easiest ways to get in legal trouble for wage theft.

Depending on your state, mandatory tip pools may not be legal, but employees are always welcome to create a voluntary tip pool. Where mandatory pools are legal, BOH employees and managers are not allowed to participate in the pool.

As a general rule of thumb, California is leading the charge as tipping laws evolve. Look to their current laws as a blueprint for what other states will be putting in place in the near future.

Tip Management Best Practices

As you’re creating (or recreating) your tip management system, follow these tips from the panelists.

Keep It Simple

There’s no need to have a complex tipping system if you don’t need it. Come up with a single system that will work at all of your locations. Same goes for your tech stack — don’t add tools that you don’t need. Only bring in technology that makes your life easier without overcomplicating it.

Be Transparent

You’re making changes to your employees’ livelihoods, so keep them in the loop. As you develop your tip management strategy, have an open-door policy where employees can come to you with concerns or with pain points they’d like a solution to.

Also, always give written notice of your tip policy to your employees and have them sign it. This goes for changes to your use of the tip credit or for tip pooling.

Know Your Market

To retain staff as you make these changes, you need to know what other restaurants in your area are doing. If it’s common practice to pay tips on payroll (as it is in New York City), then you may not need to worry about losing employees to daily pay restaurants. But if your competitors are handing out cash daily, make sure you have a solution that is just as enticing for servers.

Thanks to FSTEC for giving us this opportunity — we can’t wait to see you all again there next year. In the meantime, if you’re looking for a first step to overhauling your tip management strategy, check out our FREE tip pooling templates.

Hot Tips & Takes: Revenue Forecasting & Financial Planning for Restaurants w/ Stephanie O’Rourk, CohnReznick

Posted on July 12, 2023August 22, 2023 by Mike Rowan

Meet Stephanie.

Stephanie O’Rourk co-leads CohnReznick’s National Hospitality Emerging Concepts, and Operational and Financial Consulting Divisions. Everyone from small, family-run restaurants to nationwide franchises can benefit from her insights into budgeting and forecasting. We sat down with her to learn the ins and outs of revenue forecasting and get the details on CohnReznick’s Restaurant Planning & Forecasting app.

Why is revenue forecasting so important for restaurants?

Revenue forecasting is the basis for the major line items in your overall forecasting cash flow — cost of goods, labor needs, and operating supplies. Therefore, whenever you start to model and do financial planning, revenue is an appropriate starting point.

Cashflow is the lifeblood of any business, enabling business continuity; the ability to invest in itself and future growth; as well as the ability to satisfy both short- and long-term debt obligations. It’s vital to understand how your business needs to perform in order to achieve your desired free cash flow and liquidity.

How does planning improve the resiliency of your restaurant and position you for growth?

To improve resiliency, you need real-time visibility into your business to make fiscally responsible and financially fluent decisions. It’s vital to the continuity of your business to understand where your cash flow is currently, and where it’ll be in the future. This can’t be done without measuring, forecasting, and monitoring the performance of your business on a consistent basis.

Another valuable tool is scenario forecasting, which allows operators to model how operational decisions affect their overall cash flow and financial performance. For example: You’re expecting a cost increase for a key ingredient utilized in numerous menu offerings from one of your main suppliers. If you utilize scenario forecasting, you can address menu prices based in a more thoughtful manner rather than just increasing prices by 5% across the board.

Planning provides an operator real-time forecasting and monitoring that will change as the business evolves. Monitoring your forecast and projections is what enables you to better monitor cash flow and, quite frankly, leads to operational success or failure.

What makes revenue forecasting difficult for restaurant owners?

It’s really a lack of understanding of their revenue and menu mix — the in-dining, to go, online orders, and food and beverage mix.

“If you’re utilizing the prior year as a baseline without understanding what some of those outliers were, and not adding relevant information for this year, you’re not forecasting.”

Another issue is understanding fluctuations in menu pricing and projected average checks. If you are reviewing year-over-year — comparing February to February, and then notice a big increase in May, you cannot assume that the increase is a result of menu price changes. That’s not a good enough. You must understand what caused the increase. It could have been more covers, it could have been increases in pricing. Not digging into the details to understand what happened in prior years is what can potentially produce a faulty forecast.

What are some of the common forecasting mistakes that you see operators make?

For a mature operator, one of the mistakes we see often is having a very siloed approach in terms of forecasting — that is, not incorporating all team members that affect all of the lines on their cash flow, financial modeling, and projections. You need to incorporate each important team member’s knowledge of the business for an accurate picture.

A big one is relying too heavily on historical data and just applying percentages across the board, stating: “I think we’ll grow 5% this year.” As we just talked about, utilizing straight year-over-year increases from the prior year without accounting for outliers doesn’t work. I see that a lot due to lack of understanding of menu mix and theoretical costs. Without menu analysis done on a regular basis, you don’t really have a true understanding of your costs for your various menu items.

Another mistake includes no consideration given for inflation as it pertains to expenses outside of the core prime costs. Everything in this world goes up in price. You’re seeing your G&A expenses, consulting expenses, office expenses, and paper supplies go up.

And then, there’s focusing on only P&L (profit and loss) items, but not incorporating balance sheet items that need to be considered when forecasting cash flow. That includes debt service, tax and profit distributions, and other long-term liabilities such as customer deposits. These are the things that affect current and future cash flow.

New operators are a little different, right? One huge miss we see a lot is failing to build the founders into their own model. How are they going to pay themselves? Another issue is they have no true North Star— no definition related to what successful growth means to them.

Finally, failure to execute on lessons learned.

“In the restaurant industry, we always concentrate on the bad when it comes to financial performance. Rarely do companies say, what did we do right? And how can we repeat that?”

That takes looking at your forecast and comparing it to your actuals. We must update the forecast as the business evolves, otherwise it becomes a useless piece of paper that we’re not able to utilize to make the decisions needed to be successful.

How do new restaurant concepts forecast when they have no historical data to rely on?

They must develop a menu. That’s number one.

Number two, they must cost that menu. Then they must understand their business model and revenue streams: Will it be in-dining or primarily delivery?

Next, determine the number of seats, projected table turns and covers, as well as the projected average check to generate the information you need to forecast for revenue and costs of goods sold.

You’ll need to develop a labor schedule, which is based upon your FOH and BOH needs, which ultimately is based on your covers. It’s not all about revenue; it’s covers and the minimum amount of labor required to successfully execute those covers. From a BOH perspective, whether you’re doing $100,000 in sales or $1 million in sales, sometimes you need the same number of cooks in the kitchen to successfully execute your concept.

Then, you base controllable expenses (expenses that are driven by revenue) on your revenue and business model. For example, if your model is to do a good deal of delivery, then your third-party delivery fees and paper supplies are going to be higher based ony our business model.

You also need to know the price per square foot of your restaurant space to determine your rent and occupancy costs as an industry standard percentage of revenue. These costs will only increase over time and are fixed in nature. An operator’s business model needs to support whether a space is an affordable long-term option for their future business needs.

For G&A, marketing, and the rest, you can use industry standards. These costs are typically fixed in nature and are not typically driven by revenue.

What are the implications of variables like a competitive labor market and high turnover?

Understanding the cost of turnover is critically important because it affects other aspects of your business. With turnover comes the loss of institutional knowledge, which in turn means a potential loss in revenues and increase in costs. A new employee isn’t as familiar with the menu, needs time to be trained, and might not be able to upsell as well. Those are the things you need to and build that into your financial model.

Any conversation about the cost of labor also includes retention and that takes rethinking how you pay and incentivize employees. Operators always think it’s too expensive to offer the benefits that everyone wants, but you don’t know that until you model it and see how it will affect your financial performance. The model will show you how employee retention could mitigate some of the risks associated with turnover.

Operators may find that they can afford most of those benefits that haven’t traditionally been provided by the restaurant industry. With the proper financial planning and analysis, an operator can see the potential increase in revenue that could come with providing such benefits

Operators always think it’s too expensive to offer the benefits that everyone wants, but you don’t know that until you model it and see how it will affect your financial performance.

You might find that you can afford all those benefits that haven’t traditionally been given in the restaurant industry, but the people who are doing financial planning and analysis can see how they could potentially increase revenue.

What kinds of tools/resources are important for restaurants to have as they’re building a forecast?

You should have the technology in place to obtain the information needed to perform budgeting and forecasting. The data you need will come from your POS, inventory management system, reservation system, general ledger, labor management system or any other business intelligence tool within your organization.

Integration is key when you’re trying to connect all the dots and connect the varying platforms. For instance, CohnReznick has a restaurant planning and forecasting application that provides instantaneous visibility into your business performance. It uses real-time data from all in-house sources to create both traditional and scenario budgets and forecasts.

“It’s important to understand what you’re going to do next year and what you should expect in cash flow, but what’s really more important is the real-time visibility that enables you and your team to make those quick, real time decisions.”

Information is power, and connecting platforms to provide real-time visibility into operational performance is key.

Back to my example from earlier: Suppliers told me that there is going to be a dramatic price increase on a key ingredient that runs across many menu offerings. So how do I pass that along? Do I pass the entire increase along to my customer? How is that going to affect my potential marketability? I might have to think about other revenue streams that might mitigate some of these additional costs that maybe I can’t pass along.

If you have the information at your fingertips and you can compare actual to theoretical, you’re going to be able to pivot in real-time. You’ll also able to identify operational trends, remediate risk, and forecast performance impacts.

Anything timely that restaurant operators should take into consideration in 2023 and 2024?

Again, lack of employee retention remains a challenge in the industry. It’s wise to rethink pay and incentives and understand how you will be able to pay for that. Many operators will be seeing significant increases in labor rates for some states in the next few years. Putting pen to paper, computing to quantify the financial impact on your business, and incorporating scenario planning into your future budgets and forecasts will put operators in a position to be ahead of the curve.

Commodities are also always a factor. For example, with egg prices — everyone talked about them and now they’re back down. There’s always something — like acts of nature — that cause a crop to underperform, resulting in demand outweighing supply and therefore higher prices arise.

We are still in a competitive market and understanding your market in your segment and geographic territory in relation to your menu pricing is key — because if you are above market, there has to be a value proposition that keeps customers coming through your doors.

Knowing your customer base and ensuring that you are catering to your bread and butter is everything. While there’s a lot of technology out there to help manage customer relations, it isn’t a substitute for real, face-to-face interactions and a human touch.

Stephanie leads the National Hospitality Emerging Concepts and Operational and Financial Consulting Divisions at CohnReznick. Learn more about her and CohnReznick here.

Guide to California Tipping Laws

Posted on January 23, 2023January 23, 2023 by Mike Rowan

We’re obviously pro-tipping around here — but even more so, we’re pro-tip-regulation-compliance. With each state having their own unique laws regarding tip pools and minimum wages, it can get confusing.

For our California restaurant owners, we took a deep dive into your specific tipping regulations that you might not know about. Take a look at how California tip pooling laws differ from federal regulations and how you can stay on the up-and-up.

What is Tip Pooling?

Tip pooling is when employees who receive tips collect and share their tips with other members of their team. For example, servers can put their tips into a collective “pool” and then divide them among cooks, dishwashers, bussers, bartenders, etc. This practice promotes team spirit and collaboration among staff, as they all rely upon each other for success.

California Tip Pooling Laws Explained

The Fair Labor Standards Act (FLSA) allows employers to require non-exempt employees (i.e., those eligible for overtime pay) to participate in tip pools, provided that employers follow strict regulations.

California takes it a step further to protect employees’ earnings. Here are a few key differences to pay attention to:

Tip Pooling for FOH Staff Only

Tips must only be shared among front-of-house staff such as servers, bartenders, bussers, and hosts. Back-of-house staff like cooks and dishwashers cannot be included in the pool unless they provide direct table service (so your expo can still earn their share of tips).

Making Tip Pools Fair

While California does not ban mandatory tip pools, the law requires that pooled tips be distributed in a “fair and reasonable” manner. You must set a formula to determine tip distribution — and it’s up to the California DOL Standards Enforcement to determine what’s fair on a case-by-case basis.

Say Goodbye to the Tip Credit

Whether you pool tips or not, this is one to pay attention to. California’s legislation no longer makes a distinction between tipped and non-tipped workers — so there is also no tipped minimum wage. Restaurant owners cannot claim a “tip credit” and must pay their servers the full minimum wage of $15.50.

California Allows “Double Tipping”

In California, mandatory service charges do not count as tips, but they can count as wages. The employer has a right to keep service charges and distribute them as they see fit — so they can distribute them to servers if they choose. Often called “double tipping,” this allows the server to earn money from both a mandatory service charge and any tips that customers leave voluntarily.

In this case, the service fees paid to employees can count toward minimum wage and overtime pay, but employers are required to withhold payroll taxes when distributing service charges to employees.

What’s at Stake?

California’s DOL Standards Enforcement takes wage theft and illegal tip pooling seriously. Penalties for breaking any state tipping regulations include fines of up to $1,000, paying full restitution to harmed employees, and even 60 days in jail.

Knowing both state and federal tipping laws protects you and your employees from improper tip pooling practices and potential lawsuits. As always, consult with a lawyer to ensure that you’re in compliance with all federal, state, and local ordinances.

Looking for a partner that will help you comply with California’s tipping regulations? Kickfin’s digital tipping platform puts up guardrails to prevent improper tipping practices — and our digital tipping software is pretty cool, too. Request a demo of Kickfin today.

How to Comply with Tipping Laws in Texas

Posted on January 19, 2023January 19, 2023 by Mike Rowan

Like many other Texas restaurant owners, you were probably shocked when a Dallas barbecue joint was ordered to pay their employees nearly $900,000 in stolen tips and overtime. It may have even sparked a bit of anxiety about your own tipping policies and practices.

Illegal and unethical tipping practices not only decimate your restaurant financially, but can also tank your reputation. Avoid losing your business and the community’s trust by freshening up on Texas tipping laws.

Who Can Participate in Tip Pools?

In Texas, mandatory tip pools are perfectly legal, so long as you follow the guidelines laid out by the Fair Labor Standards Act (FLSA).

For one, only employees who “customarily and regularly receive tips”— namely servers, bartenders, hosts, and expos — can participate in a tip pool, and back-of-house employees cannot.

Owners, managers and supervisors are also barred from participating in tip pools. Tips belong expressly to the tipped employee, so an owner cannot take a cut of the tip pool, and neither can their agents in the form of managers. If you’re caught distributing tips to owners or managers, it will be considered wage theft, and you will be ordered to pay back the tips and subject to hefty fines by the DOL.

Learn to Properly Calculate the Tip Credit

The tip credit allows employers to pay tipped employees a lower hourly wage, with the idea that the server will earn at least minimum wage or more in tips. In Texas, employers can take up to $5.12 per hour in tip credit. But if used incorrectly, you could end up owing your employees back pay.

In order to take the tip credit, your employee’s hourly wages must be greater than or equal to the minimum wage for their hours worked — at least $7.25 per hour in Texas. Employees also must earn more than $30 per month in tips for the tip credit to apply.

And head’s up — the tip credit can still apply when your employees are earning overtime. Ensure that you’re properly compensating employees when their work hours exceed 40 per week.

Using the tip credit requires a good bit of math (especially when overtime is involved), and there’s room for human error in your calculations. Check out our primer on calculating the tip credit and then go double-check your math.

How to Protect Your Business & Employees

You don’t want to jip your employees — nor do you want to risk your entire business. Now that you’re more familiar with Texas tipping laws, here are a few ways you can comply with them.

Hire an Attorney

It’s best practice to consult with a lawyer with any legal questions. An attorney can give you detailed, personalized advice about what’s best for your business and how to stay on the right side of the law.

Choose Vendors that Protect You

At Kickfin, we partner with restaurants to revolutionize everything about their gratuity management systems — including setting up guardrails to comply with tipping laws. Request a demo of Kickfin today.