Just as even the most successful recipes need tweaks and refinements, so do sound financial plans, whether you just opened your business or are giving it a full-on update.
“If you are opening a business for the first time, note that it takes at least a full year to fully understand what your cash flow will look like,” advises Nate Tomforde, Co-Founder & COO of Crafted Community Concepts and owner of Southernside Brewing Co. and Warehouse at Vaughn’s in Greenville, S.C. “You’ll see how your business does beyond the ‘honeymoon’ phase right after opening, how your community responds, and what different months or seasons look like for your business. After you’ve been open a full year, it will be easier to know what to expect and to plan ahead since you can compare your profits seasonally and year over year.”
Doug Radkey, president and project manager at KRG Hospitality, Inc., a hospitality start-up and development consultancy, reminds owners and managers to ask themselves the hard questions, such as what cash flow looks like during the down periods, and if they are prepared for any sudden drop in business.
“Daily, weekly, monthly, and quarterly projections along with contingency plans and a strong visibility of your cash flow through the use of real-time technology is the number one guideline in the management of this important aspect of operating a restaurant or bar,” he says. “[As] the net amount of cash being transferred into and out of your location, you should understand that this industry is very rarely stable throughout any given calendar year.”
Plan on It!
Radkey has long recommended owners review financial projections with 10, 20, 40 or even a 60% or more drop in traffic and revenue, and to be prepared mentally and financially under any circumstances. While having a three-month financial cushion set aside to initially weather the storm (something all of the sources interviewed for this story encourage), he also advises reviewing inventory, payment obligations for each vendor (“are they COD, 7-days, 15-days, 30-days, etc.”), and labor requirements for those individual scenarios. He also advises dedicating another percentage of sales (1-3%) for future upkeep and emergencies as well as an onboarding/training budget for new staff separate from the traditional labor cost category.
“This all comes down to having strategic clarity for key performance indicators, or ‘KPIs,’ within this industry,” affirms Radkey. “You have to use the data that’s available through your point-of-sale system. What recipe and cost controls do you have in place for your cost of goods (COGs)? What are your prime labor, food, and beverage costs? Property costs in relation to sales? Does your labor scheduling reflect daily sales and productivity requirements? Having theoretical projections along with updated actuals will help develop strategic plans around your cash flow.”
Caroline Schmidt, vice president of Silver Chef, a Mountlake Terrace, Wash. commercial kitchen and restaurant equipment finance company, stresses that as restaurant margins are notoriously narrow, it is important to assess how the cash coming into the business and the costs of running its operations impact the profit margin. Regularly reviewing fixed expenses like overhead and variable costs (such as the cost of ingredients) helps pinpoint exactly how much a business needs in sales to cover costs and ensure profitability.
“First, look to finance fixed items, such as your restaurant equipment,” Schmidt says. “This ensures your cash isn’t tied up in your equipment and you can meet your financial obligations that cannot be financed. Second, keep a buffer in your budget of at least 10%, but ideally 20%, to project for unexpected expenses [such as] repairs/maintenance, replacement of small wares, food waste, and inflation. Finally, look at staffing as overstaffing and understaffing negatively impact wage costs, whether it be paying out overtime or too many people on shift.”
The best way to be sure you can always cover employee salaries, utilities, and other monthly bills, is to add up all of your fixed costs for the month, according to Tomforde. “Maintaining a reserve fund as ‘dollar zero ' assures that you will be able to pay employees and keep the lights on, even during hard times, or at least until business interruption insurance kicks in,” he says. “Think of this like your personal emergency fund…and only use it when you absolutely have to.”
While a successful restaurant owner is not typically involved in daily operations, Tomforde says it is important to understand what the “day-to-day" looks like and what is needed to keep things running smoothly. He adds business interruption insurance can be a worthwhile investment, though there are often many stipulations about how and when you can use it.
“While many may feel they cannot afford this, they can with the right financial systems, management, and mindset required for collateral towards operations that can still generate 15% or more in profit margins,” Radkey, a proponent for preparing several budgets, says. “You need a training budget to ensure new team members are given the time they need to learn and provide the hospitality your guests deserve. You need technology to streamline your operations. You need R&D to keep your menu exciting, marketing to increase awareness and retention, and staff engagement to provide experiences and incentives for your staff.”
Schmidt, meanwhile, has observed that the cost of replacing equipment is often overlooked, as a breakdown can temporarily shut down a business until a new one is sourced, it and can impact cash flow greatly. Owners should consider the lifecycle of a piece of equipment and when it becomes too costly to repair.
The “Loan” Ranger
When making the leap to taking out a loan, Schmidt stresses the importance of learning what lending products are available. “Consider looking for a lending partner that understands hospitality and the needs of restaurant owners,” she says. “Operators need to understand what terms may be available, how much the lender is willing to fund, and what the repayments look like. The [terms should not only be] affordable but also address your business goals.”
If you are taking out a loan to open a new restaurant, Tomforde says it can be hard to tell how it will actually perform until it opens, even with planning and research. He adds that risk tolerance is often the biggest difference between taking out a loan when you first open a restaurant versus reinvesting in an existing one. “You’re already taking a big risk just by opening the new restaurant, so even though you will likely have to take out a large loan to get it started, you’ll want to aim for a goal with payments that feel as achievable as possible,” he says.
“When your restaurant has been open for a few years, you have insight as to how much money you need to make improvements, and because you already have a reliable cash flow, you may be willing to take a little more of a risk with faith it will pay off. Treat your loan payments like any other fixed costs, and be sure you can make every payment when it’s due, even when your sales are down in slower periods. If the loan payment is greater than the amount you know you can cover based on your monthly income, even on your slowest month, you should not take out that loan.”
Radkey, meanwhile, says owners should understand why they need to take out a loan, whether it is to stabilize or grow the business, pay for interior or operational improvements, or purchase or lease updated equipment. “Once you have a strong relationship with your accountant and an understanding of your business's financial health, ask yourself what you can truly afford in terms of monthly payments and interest, and if a line-of-credit is another option,” he says.
Hidden Expenses in Running a Bar/Restaurant
As costs can add up quickly, an unexpected expense can drain your bank account and derail big restaurant plans. Tomforde breaks down what some of these expenses are, how they impact a business, and how to keep track of them.
Taxes
“Whether they are payroll, state, liquor, or hospitality taxes, they can sneak up on you and increase your expenses significantly, especially if you don’t plan for them,"says Tomforde. "For example, you may pay an employee $1,000 a week, but a 20% payroll tax means you actually have to budget $1,200 a week.”
Tips
In some establishments, “Tips all go into one bucket and are not separated into each employee’s bank account, so you have to make sure you tip everyone out in your budgeting," says Tomforde.
Renewals
“Renewals of necessities like licenses and insurance also often have costs associated with them," warns Tomforde. "Be aware of when any licenses, rent, or insurance policies are due for renewal, and prepare for any costs so you aren’t caught off guard.”
Outside Factors
Be mindful of factors out of your control that impact your business, such as weather and holidays. “If you’ve been counting on a busy Saturday or have an event planned, and it rains all day, you can lose a lot of money," says Tomforde. "If Christmas falls on a Saturday one year, it can rob you of a whole weekend day of sales, but if it falls on a typically slow Monday, it’s business as usual.”
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