A New Restaurant

I’m sad to report that the restaurant that I have written about in the past has closed it’s doors.  Just when success seemed to be within his grasp, the owner decided to call it quits.  After losing another round in an ongoing battle with the city over a noise ordinance, he decided that it wasn’t worth the trouble, and that the city would never allow him to run his business the way he wanted to run it.

I understand both sides of the issue: The owner wanted the noise ordinances applied  equally to all of the restaurants in the city (it’s not), The city wants to be able to apply more restrictions on businesses taht are located closer to residential districts.

Bottom line is, the failure was the owners fault.

I wrote in my post Top 5 Reasons Most Restaurants Fail, you gotta know the territory.  The owner of his restaurant knew that there were special variances put in place to allow him to open up his restaurant where he did.   He knew the rules, but thought once he got his doors opened he would be able to convince the city to change the rules.  That wasn’t the case.  He had the option to turn down the music, and focus on the restaurant, which was beginning to build a good reputation.  Instead, he decided to focus attention more on the bar side, and allowed his frustrations to get in the way of running a successful business.

I’ve said it before, you have to do your homework.  When starting a restaurant it is absolutely critical that you understand fully what you’re getting into.  You have to do your research into the market, the location, any rules or regulations that could affect your business.  Knowing that up front will allow you to either make adjustments to your business plan, or find a new location.

He chose to ignore the realities of the situation, and it cost him his business.

I liked the owner, and I really wish he could’ve succeed this, but he chose to take on a battle he could not win.

There’s a lesson to be learned here; do your homework, and know what you are getting into.  Starting a restaurant is risky enough without taking unnecessary chances.  You can succeed in his business if you know what your getting into and make smart choices.

I wish the owner the best in whatever is next for him, and hope that whoever moves into this location has better luck succeeding.

One fact of restaurant survival, or any business for that matter, is that you have to control your production costs.  For a restaurant those costs are mainly food and labor.  If you let those get away from you, your profits will disappear before you ever get a chance to worry about how you will use them.  If you’re running your business for the tax write-off that would be OK, but most of us are more interested in making some money off of our business.

So, what should your food cost be?  like so many other things in the business world, that really depends on what type of restaurant you are running.  The industry average is around 30% – 35%, but that might not be the right number for you.  Higher end restaurants can get away with running a lower food cost because the items on their menus are priced higher.  People expect excellent presentation, ambiance, and service, and they are willing to pay more to get that.  Fast food and casual dining restaurants need to set their prices lower, so their food cost percentage will be a bit higher.

When you were putting together the financial projections in your business plan you should have given serious that to what your food cost needed to be for your restaurant to survive.  That is the number you’re going to use to set your menu prices.

Your first step is to know what it costs to produce the items featured on your menu.  List out every menu item, and make sure that you have accurate recipes for every single item.  Next you will have to make a list of every ingredient that is in that recipe.  I have worked with managers that have used differing approaches to costing out their menu.  The first approach was to cost out every item down to the last detail.  Every herb and spice was considered for each dish.  If you are putting a frill pick through your sandwich, include it in the cost.  The second approach was to cost out all of the items that you can determine a price for an individual serving, but small items that cost less that $.01 are lumped into a “misc.” cost that is added on at the end of the cost list.  I tend to favor the second approach.  It is quicker, and trying to track individual costs that are a fraction of a penny is just too frustrating for me.  Just make sure your misc. costs are set high enough to cover the actual cost.

Now that you know how much food cost goes into each dish, you can determine how much you need to charge in order to reach your desired food cost percentage.  It takes a little bit of basic math to figure this out.  Let’s assume you want to run a 30% food cost, and the item on the menu uses $3.00 in food to produce.  Start by determining your “Food Cost Multiplier.”  Take your food cost percentage and multiply it by 10. The divide that number into 10. For our example, here is the formula:

.3 x 10 = 3   10 ÷ 3 = 3.33

So our food cost multiplier is 3.33  We said that the menu item used $3.00 in food to produce, so if you multiply $3 x 3.33 you get $9.99.  That is the minimum you will need to charge in order to achieve a 30% food cost.

That $9.99 assumes that there is no waste in the production process, which is nowhere near the reality of restaurant life.  Despite your best efforts to control waste, it is one of the necessary evils of the business.  Make sure when you are setting the final menu price you are taking into account the possible waste of food thatoccurs, otherwise you will find your food cost percentage is skyrocketing, and your profits are taking a dive.

Control your food costs.  Do regular inventories, make sure your staff is tracking any waste in a “Food Waste Log,” set production pars so your cooks are not over producing items that will get thrown away if they aren’t used.  It takes constant attention, but not taking the time to watch it will lead to financial disaster.

I have been asked if using business plan software is a good idea when writing a business plan for your restaurant.  My answer would be, “Yes and no.”

Business plan software is a great way to automate the process of writing a business plan, and there are some very good ones out there.  BPlans from Palo Alto Software is an excellent program.  Once Once you fill in the information the program formats it, and puts it all into a presentable form.  It definetly saves you a lot of time there.

Where you have to be careful with business plan software is that it allows you to get lazy.  BPlans comes with hundreds of templates and examples that make it possible to “borrow” from the template for your own projections.  Bad idea!

Think back to what the purpose of your business plan is.  While most people focus on it as a tool to get financing, the bigger job is to make you focus on your business, and make a plan about your restaurants future.  That can only happen if you do your homework, and focus on all of the nitty-gritty details.  It means doing your market and competitive research.  It means looking at the economics of your location, and making realistic projections based on what is going on in your area.  No software or template will be able to do that as accurately as you can.  It takes hard work, but if you want your restaurant to succeed it is a necessary process.

If you are doing your homework to collect and analyze the information all along the way, then by all means use a good business plan software program.  The key to success is doing your due diligence, and knowing your business inside and out.

Starting a restaurant is only the tip of the iceberg. There are tons of details to keep track of, and issues to deal with. If you want to own a successful restaurant, you must keep your eye on your finances.

I’ve written in the past that if you don’t know what you are doing with the accounting part of the business, you should hir it out to a professional. That doesn’t mean you are off the hook with all things financial. Quite the contrary. If someone else is doing your books for you, it is all the more important that you spend the time to thoroughly understand your restaurants financial position. One way to do that is to make sure you know how to read your restaurants financial statements, and understand what they are telling you.

There is a lot of information that will be available to you. Over time you should learns as much as you can, but for starters there are three basic reports that you should be able to understand:

Income Statement – Tells you good your restaurant is at making money.
Cash Flow Statement – Tells how your restaurant is paying for it’s operations, and shows you future growth potential.
Balance Sheet – This shows you what your restaurant owes, and what it owns.

Income Statement

When people talk about the “bottom line,” they are talking about a businesses net profit. The income statement is where you find the bottom line.

In it’s simplest form, Profit = Income – Expenses. The income statement is a detailed list of that formula. It starts by listing all of the restaurants income. Every way your restaurant has to make money is listed, along with how much was made. This is totaled on the line called Total Income or Total Revenue.

The next section is the Cost of Goods Sold (COGS) or Cost of Sales. This is the direct cost of the things that you sold. If you sell a steak dinner for $15, and the food cost $5 and the labor cost $5, then the cost of selling that steak dinner was $10. Subtracting the cost from the income will give you Gross Profit.

The next section in the income statement is Operating Expenses. This is the cost of running your business. This section is where you account for building lease, maintainence and repairs, insurance, marketing, etc. This is totaled to give you Total Operating Expenses.

When you subtract Total Operating Expenses form Gross Margin you are left with Earnings Before Interest and Taxes (EBIT). When you subtract out interest and taxes you are left with Net Income, which is located on teh bottom line of the income statement.

Again, this is a very quick overview of the Income Statement. Look for future posts that will go over the Cash Flow Statements and the Balance Sheet. After that I will try to get back to looking at each of these areas in a little more detail. There is a lot that you can learn from these if you take the time to figure it out.

You can take a lot of the risk out of starting a restaurant if you do your homework and really understand what you are getting yourself into.

The restaurant graveyard is littered with the bones of businesses that have died because they didn’t have adequate cash flow.  The pieces for success were in place, but the restaurant died because it didn’t have enough cash to keep going until it could become profitable.  Steps that would have guaranteed success were not made because there wasn’t enough cash on hand to implement them.

Your restaurants survival is dependent on controlling your cash flow.  These 5 suggestions will help.

1. Know your balance

It is amazing the number of business people that don’t have an accurate grasp on how much money they have available.  They can tell you how much butter is in thewalk-in, or who is scheduled to cover tonight’s shift, but when you ask them about their restaurants cash flow, their eyes glaze over and they begin to mumble incoherently.  If you want to guarantee that your restaurant will not succeed, then don’t pay attention to your cash flow.

I success is something that you are striving for, make sure you have a plan to keep track of where your money is going and how much you have available.  This is something that should be in place from the very beginning when you are starting a restaurant.

To survive in this, or any other industry, you must be able to make wise business decisions regarding your finances.  The only way to do that is know your financial position.  Overestimate the cash available and you will make decisions that will leave you short of funds.  Underestimate and you will not make decisions that could improve your profitability.

2. Keep up with your accounting

One way to keep on top of your cash position is to make sure you keep up with your financial paperwork.  I once worked for a man who felt like God didn’t put him on earth to do paperwork.  He kept that attitude right up until the bill piled up so high that he had to declare bankruptcy.

The sad part is that it happens far too often, and it is so avoidable.  While doing paperwork may not be the most fun part of your day, if you keep up with it the time it takes is pretty short, especially in light of how much is at stake.

If you don’t feel like you can do an adequate job with it, hire someone to do it for you.  The main thing is to make sure it is done, and that it is accurate.  If you stay on top of it, you will always have an accurate figure to work with.

3. Manage from your books, not your bank statement

It is confusing to me that people will do things that they know aren’t right, but they do them anyway because it is more convenient.  Managing your finances from your bank statement is one of those areas.

Here’s a tidbit of information that should be common knowledge, but far too many people choose to ignore: bank statements are not relevant to your financial position.  Bank statements are a snapshot of the transactions that have occurred with your account at some given point in the past.  There is a lag between the time the check is written and the time it clears the bank.  Even though you have already spent the money, it does not show up on your bankstatement right away.  It is not an accurate reflection of where things are right now.

Remember the previous tip about keeping up with your paperwork?  If you are doing that you will have an accurate picture of your cash position.  You will know who you have paid, what money has come in, and how much is available.  That is handy information to have.

4. Project your needs

It is very easy to get caught up in the here and now.  After all, that is what you are dealing with on a daily basis.  That doesn’t give you an excuse for ignoring the future of your business.  To be successful you always have to be looking ahead and planning for the future.

This isn’t a crystal ball look into the future kind of thing.  This is about making projections based on factors that affect your business.  Your restaurant may be affected by the seasons, or there may be events or conventions that will affect your sales.  You should be able to look out at least 6-months to project what your needs are going to be.  You may needcash to survive a slow spell, or you may need to spend cash on marketing for a big event.

By knowing what your needs are going to be, you can make decision that will still give you the cash on hand that you may need.  It may mean the difference between making a wise investment in the future, and leaving yourself so cash poor that you can’t survive a slowdown in business.

5. Keep the Flow Coming In

I written quite a bit in the past about the importance of keeping the customer happy.  Well, here it comes again.

Customers provide you with the cash you need to stay in business.  Without the customer there is no cash.  Without cash, there is no business.  If you want to keep the cash flowing, you have to keep customers coming into your restaurant.  That could mean needing to spend some on strategic marketing.  Without a doubt it means taking care of the customers you do have.

It is a fact that it takes more money to attract new customers than it does to keep your current customers.  You’ve already spent the time and money getting them in, now do what it takes to keep them.

Cash Flow = Survival

It does your restaurant no good to be asset rich, but cash poor.  Your suppliers don’t really care about how much you invested in new equipment.  What they care about is getting paid.  Ask your employees to choose between a new fryer and their weekly paycheck.  What do you think they will choose?

Your business needs money to survive; it is the restaurants life-blood.  Keep track of it at all times, and you will significantly improve the odds of your success.

Myths of Restaurant Ownership

I firmly believe that one of the reasons the failure rate is so high in restaurants is that there are a lot of people who start new restaurants that have no idea what they are getting into.  They hear the hype, often times promoted by someone who is selling a new book on opening a restaurant, and they blindly charge ahead with their business plan.  It’s only after they are into it up to their eyeballs that they learn the truth.

The hard part is, many of the myths may be true, but they’re not true for everyone.  In order to do my part in helping you avoid making an extremely costly mistake, I’m going to examine the truth behind a few of the myths about owning your own restaurant.

It’s a Fun Job

I love the food service industry.  When everything is clicking, it can be a blast.  However, there are a lot of times that everything does not click.  There are times when “fun” and “restaurants” don’t even belong in the same sentence, unless that sentence is dripping with sarcasm.

The truth is, running a restaurant is hard work.  You have to deal with complaining customers, complaining staff, the constant battle to control your costs, dirty restrooms, broken equipment…well, you get the point.

Part of the “It’s a fun job” argument is that some people see having a restaurant as a great place to hang out with friends and family.  In reality, most of the time you don’t have the time to hang out with anyone on a regular basis.  If you want to hang out with friends, you would be better off getting a nine-to-five job, then going to someone else’s restaurant to hang out.

Like any other job, running a restaurant is only fun if you like that kind of work  I have an acquaintance who is in accounting.  She loves it, especially when she can find a nice tax loophole for a client.  I worked for a while in the accounting field, and it brought me no joy.

So yes, running a restaurant can be a fun job, or it can be pure misery.

You’ll Get Rich

Is it possible to to do very well financially owning a restaurant? Absolutely.  Are the odds in your favor?  Not so much.

For every Emeril or Paula Dean or Bobby Flay, there are dozens of Joe Schmo’s who grind it out on a daily basis, making not much more than they would have made being in the corporate world.  If you are good at what you do, and you can build a string customer base, the possibility is there to do quite well, but success is not guaranteed.  There are a lot of factors that play into financial success.  It is a product of steady cash inflow, and controlling your costs, some of which you don’t have a great deal of control over.

You’re a Good Cook, You Should Open Your Own Restaurant

I’ve heard this so many times it makes my head spin.  People who know nothing about me will make this suggestion based on what, my ability to saute a chicken breast?  Those that know me will point to my ability to run an operation, or my understanding of the business, along with my ability to cook.

Would anyone suggest you should open a bank because you can balance your checkbook?  No.  Nor should you get into the restaurant business, or any other business, if you don’t understand the industry.

The truth is, you don’t even have to know how to cook in order to run a successful restaurant.  You can hire good cooks.  It is more important that you understand what it takes to run a restaurant.  It takes understanding the need for consistent quality, cleanliness, excellent customer service, and controlling your finances.  Being a good cook is just icing on the cake.  Depending on the size and scope of your restaurant concept, you might not even be doing any cooking.

The key to success is to know in detail what you are getting yourself into.  Talk with other restaurant owners.  Unless you are opening in their neighborhood, most of them are very open about the business.  It is an expensive business to get into, make sure you know whether or not it is right for you.

I was talking with a friend, and we were comparing busy schedules.  Between work, social activities, and teenagers heavily involved in sports, we were always running.  His comment was:

“Busy people get things done.”

While on the surface this seems like it makes sense, it isn’t always true.  Some busy people are just…busy.  This is true in your personal life, but it can also be especially true in your restaurant.  Between staff issues and customers, it is easy to let the day slip away without ever spending as much time as you should on the things you need to do to make your business successful.

Time is a precious commodity, and if you don’t budget for the important activities, you will find yourself rushing to get through everything.  This usually means not giving your critical tasks the attention they deserve.  Budget your time daily.  Look at the things you know you need to accomplish, and get them on your daily agenda.  Be careful not to over schedule your day.  If your are doing any business at all, I can almost guarantee that something will come up that demands your attention.  Make sure you leave enough time to handle those issues, but be self-disciplined enough to get back to the task at hand.

Issues like inventory are very easy to let slide for one day.   You can always get it tomorrow, right? Just remember, food costs can eat your business alive.  It is one of the areas you absolutely have to keep under control to be successful.  Every day you put off tracking is one more day that a potential problem can be cutting into your margins.

Stay on of your critical tasks and you will greatly increase the chances that your restaurant will be a success.