Xero for Restaurants: Managing Your Finances

Running a restaurant means juggling food costs, staff wages, supplier payments, and VAT – often with thin margins and unpredictable cash flow. Xero helps restaurant owners get control of their finances without needing an accounting degree.

Why Restaurants Choose Xero

Restaurants have specific accounting needs that Xero handles well:

  • Daily bank feeds – card payments from your PDQ machine or payment provider (SumUp, Square, Zettle) appear in Xero automatically via bank feeds
  • Supplier bill management – track invoices from food suppliers, drinks distributors, and service providers in one place
  • VAT on mixed-rate sales – restaurants deal with 20% VAT on most food and drink, but zero-rated cold takeaway food. Xero handles mixed VAT rates per line item
  • Staff costs – integrate Xero with payroll to see your true labour costs alongside food costs and overheads

Connecting Your Till System to Xero

Most modern EPOS (electronic point of sale) systems integrate with Xero:

  • Square – direct integration. Daily sales summaries sync to Xero automatically.
  • Lightspeed Restaurant – syncs sales, tips, and payment data to Xero
  • TouchBistro – integration via third-party connector
  • Zettle by PayPal – bank feed integration through your connected bank account

The integration means you don’t manually enter sales figures. Your till records the sale, the payment processor deposits funds to your bank, and Xero picks up the deposit via your bank feed. You reconcile by matching the bank deposit to the sales summary from your EPOS.

Tracking Food Costs and Cost of Goods Sold

Food cost percentage is the most important metric for any restaurant. The industry target is typically 28-35% of revenue spent on ingredients. To track this in Xero:

  1. Create a “Cost of Goods Sold” account code for food purchases
  2. Enter all supplier invoices for ingredients against this code
  3. Run a monthly P&L and divide total food costs by total food revenue

If your food cost percentage creeps above 35%, something needs attention: portion sizes, waste, supplier pricing, or menu pricing. Xero’s monthly P&L gives you this number every month without a spreadsheet.

Managing Multiple Suppliers

Restaurants typically work with 15-30 suppliers (fresh produce, meat, fish, dry goods, drinks, cleaning, linen). Xero’s bill management keeps track of who you owe and when payments are due. Set up each supplier as a contact, enter their invoices as they arrive, and use the Aged Payables report to manage payment timing.

For restaurants paying suppliers by direct debit or standing order, set up repeating bills in Xero so these are recorded automatically each period.

VAT for Restaurants

Restaurant VAT is more complex than most businesses realise:

  • Hot food and drink consumed on premises – standard rate (20%)
  • Cold takeaway food – zero rated (0%)
  • Alcoholic drinks – standard rate (20%) whether consumed on or off premises
  • Service charges – standard rated if compulsory, outside scope if voluntary/discretionary

Xero handles mixed VAT rates per line item, but your EPOS system needs to categorise sales correctly. Make sure your till system splits sales by VAT rate so the data flowing into Xero is accurate for your VAT return.

Payroll and Staff Costs

Staff costs are typically the largest expense for restaurants (30-40% of revenue). Xero integrates with payroll providers to give you a complete picture. Include payroll journals in your Xero accounts to see true staff costs alongside food costs and overheads in your monthly P&L.

If you use agency staff or have tipped employees, make sure these are recorded correctly. Since the Employment (Allocation of Tips) Act 2023, tips must be fairly distributed and recorded – your payroll and accounting system needs to handle this.

Cash Flow for Restaurants

Restaurants typically have good cash flow timing (customers pay immediately) but thin margins. The danger is supplier payments bunching up – especially if you’re on 30-day terms with multiple suppliers who all invoice at month-end.

Use Xero’s cash flow features to see your projected position. Pay particular attention to VAT quarters and annual insurance renewals, which can create sudden cash dips.

How JacRox Can Help

We work with restaurants and hospitality businesses across Manchester. From Xero setup and EPOS integration to monthly management accounts and VAT returns, get in touch and we’ll take the accounts off your plate so you can focus on the food.

Related guides: Managing supplier bills | Expense tracking in Xero | VAT returns in Xero