A New Restaurant

I’ve probable written dozens of times that if you want to run a successful restaurant, you need to control your food cost.  This isn’t an area that you can afford to take lightly.  Food cost and labor cost are the two biggest expenses on a restaurants budget.  If you let your food cost get out of control, your entire operation is at risk.

That being said, you need to have a clear understanding of what food cost is, and how to calculate it.  In a nutshell, it is the material cost of producing the items your restaurant serves.  That means (more…)

It’s funny how your perceptions change as circumstances change.  This especially true with the severe downturn in the economy.  Time like these require taking a hard look at how you are spending your money, and where you can make changes to cut costs.

The two biggest costs on most restaurant budgets is food and staff.

Cutting either of these can be a little dicey.  Cutting food costs many times results in either less options for your customers, smaller portion sizes, or lower quality.  When the market is so competitive, any one of these could be the nail in the coffin for your business.  If a customer starts to question the value of coming to your restaurant, they will start looking for where the value is better.

That leaves you with cutting staff.  Again, not an easy decision, but one that may need to be made.

When times are good, and cash flow isn’t an issue, it is easy to justify staffing decisions.  After all, you need to make sure you have enough people to cover the rush, and to keep the place clean.  An extra cook or bus person on Friday and Saturday night is a small price to pay for keeping your guests happy.  But now, cash flow is an issue.  In fact, for some restaurants, it is a huge problem.  Suddenly those extra people are a burden you can no longer afford.

Now is when you need to look at everyones jobs, to see where you can operate more efficiently with less.  Can the servers side work be changed to cover the jobs that the bus person was doing?  Can 3 cooks do the job that was done by 4 cooks?  Can you still get enough coverage with some people working 1 less hour each day?

It’s unfortunate to have to let people go, but sometimes the survival of your restaurant requires hard choices.

I write last week about rising prices, and how that can have a negative affect on your business.  That does not mean that it is time to panic.  They say every dark cloud has a sliver lining.  For you, that means that even in a down economy there is opportunity for growth for those that are prepared.

There is the potential to gain new customers as struggling restaurants close their doors.

It is inevitable that there will be a slew of restaurants closing in the near future.  They do it often enough when the economy is good.  The upcoming price increases will force many of them to close.  As they do close (more…)

I wrote about the steady rise in business costs in the past, but the problem has gotten a lot worse since then, and it seems to be accelerating. As a restaurant owner, you need to come up with a game plan that will get you through the difficult times that very likely lie ahead.

It’s a deadly cycle for all businesses, but restaurants really feel the brunt of it. As the cost of living goes up, people start making cuts, and the first area that gets cut is the entertainment budget. That means less movies and restaurant visits. It’s a lot less expensive to stay at home and watch pay-per-view and order a pizza.

That leaves restaurant owners with a huge dilemma: (more…)

I just wanted to do a quick post today to talk about designing your new restaurant.  If you are not buying an existing facility, and you are designing a new establishment, hire someone who specializes in designing restaurants.  Any mistakes made during the design of your restaurant will haunt you for years to come.

While you may end up paying a bit more for a specialist, it will actually save yo money in the long run.  If I was going to have surgery on my foot, I would go see apodiatrist .  If I had electrical problems in my house, I would call an electrician.  It’s the same with designing your restaurant; hire an architect that knows how to design kitchens.

One thing you need to understand about architects is that at heart they are artists.  Many times aesthetics play as much a role in their design decisions as functionality.  What you end up with is a restaurant that looks beautiful, but traffic and work flow problems are an ongoing headache for the staff.  There are areas of congestion that slow the food coming from the kitchen to the tables, and longer routes to and from the kitchen than are necessary, resulting in the staff becoming more tired.

There are also work flow considerations in the kitchen.  You will face higher labor costs because the design does not allow for efficient food prep and production, thee is an increased risk of collisions and food waste because the flow of production doesn’t move the way it should.

Unfortunately, once the restaurant is built, it becomes a nightmare to try and correct, both in terms of cost and time.

So, make sure the person designing your facility knows how to design a restaurant.  Once the initial design is given to you, take the time to really think through work flow and traffic patterns.  If you don’t feel comfortable doing that yourself, hire a consultant to do it for you.  Make sure the design works before the first brick is laid.  It is an investment that will pay huge dividends in the long run.

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.

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.