Our Client’s Restaurant Sold $40,000 in Gift Cards. But That Money Wasn’t All Revenue.
By ProfitWise - a Visa Business Plans company
An upscale restaurant owner came to ProfitWise after a particularly successful holiday season. In December alone, the restaurant had sold about $40,000 in gift cards, bringing in a welcome amount of cash during one of the busiest times of the year.
The owner considered using some of that money to improve the restaurant, including replacing kitchen equipment and updating the dining area.
Before making those investments, however, we wanted to understand how much of the cash was actually available.
The restaurant had collected $40,000 from customers, but it still owed them $40,000 worth of future meals and services.
That distinction was important because the gift card sales had improved the restaurant’s bank balance without necessarily increasing its earned revenue or profit.
Gift Card Sales Aren’t the Same as Restaurant Revenue
When someone purchases a $200 restaurant gift card, the restaurant receives the money immediately. However, it generally hasn’t earned that revenue yet because it still needs to provide the meal or service.
For accounting purposes, the amount is ordinarily recorded as a liability until the gift card is redeemed, subject to applicable accounting rules.
This matters because recording the entire amount as revenue when the gift cards are sold can make the restaurant appear more profitable than it actually is.
In January and February, the restaurant may serve thousands of dollars in meals paid for with gift cards purchased during December. Those meals still require ingredients, employees, and other operating resources, even though the associated cash was collected weeks earlier.
If the owner has already committed that cash to other expenses, the restaurant could experience unnecessary financial pressure.
We Needed to Know How Much Was Still Outstanding
Our first priority was to reconcile the restaurant’s gift card records with its financial statements.
We wanted to know how much had been sold, how much had already been redeemed, and what balance remained outstanding.
With specialized bookkeeping, we ensured gift card purchases and redemptions were recorded correctly and that the restaurant’s financial statements reflected its remaining obligations.
This also helped us see whether gift card redemptions clustered in certain months.
For a restaurant that sells substantial amounts during the holidays, those patterns can be particularly useful when planning for the beginning of the following year.
Could the Owner Still Make the Improvements?
The restaurant didn’t necessarily need to postpone every planned investment.
But before deciding how much to spend, we needed to consider the cash required for normal operations, the expected timing of gift card redemptions and the cost of serving those customers.
A $200 gift card redemption doesn’t mean the restaurant will spend $200 in cash to fulfill it. However, the associated food, labor and other expenses still need to be covered.
Through our Fractional CFO analysis, we could evaluate the restaurant’s projected cash flow and determine whether the planned improvements were affordable without putting unnecessary pressure on its operating funds.
We could also consider whether spreading the improvements over several months would be more manageable than completing everything immediately.
The goal was to help the owner use the restaurant’s cash responsibly while continuing to meet its obligations to customers.
What Happens to Gift Cards That Are Never Used?
Another issue restaurant owners sometimes overlook is what happens to unused gift card balances.
Some customers never redeem their cards, while others use only part of the available amount.
In accounting, these unused balances are commonly referred to as breakage.
However, restaurants can’t simply assume that unredeemed gift card balances become profit after a certain period. The accounting treatment depends on applicable revenue recognition rules, and state laws may impose restrictions or unclaimed-property obligations.
For our client, maintaining accurate records of outstanding balances was essential, regardless of whether every card would eventually be redeemed.
Cash in the Bank Doesn’t Always Mean Cash Available to Spend
The restaurant’s holiday gift card sales were good news. They brought customers into the business, generated cash and created opportunities for future visits.
But they also came with obligations that needed to be reflected in the financial records and considered when making spending decisions.
At ProfitWise, our specialized bookkeeping services help restaurant owners accurately account for transactions like gift card sales and redemptions. During our monthly financial reviews, we explain how those transactions affect the business, while our Fractional CFO services help owners plan major expenditures and manage cash flow.
For this restaurant owner, understanding the difference between collecting money and earning revenue made it possible to evaluate the planned improvements with a clearer picture of the restaurant’s financial position.
