Money Talks: Financial Projections for New Restaurants

Mapping financial projections through solid research and planning

I was recently approached by newcomers to the industry with a puzzling question. They asked why the bank did not buy into their financial projections for a new pizza parlour.

They were planning a 42-seat operation with a take-out window (not a drive-thru) and were projecting sales of $1.2 million. They were not happy with me when I told them I understood the bank’s position.

I didn’t see the business plan, so I don’t know whether their concept was brilliant and unique, or how much better their pizza and take-out window concept could be, but if experience tells me anything, few 42-seat restaurants (or restaurants of any size) can generate $30,000 per seat in sales.

It was clear these entrepreneurs were new to the industry by the type of questions they asked: Why is the $1.2-million projection unacceptable to the bank? What is the split between food and beverage? And, on what basis should they be making projections?

In short, when developing financial projections for a new restaurant operation it’s all about research and planning. First, you need to develop a strong, sound and sensible business plan. To do this, consider creating a detailed concept outline. Explain unique selling points. For instance, what separates it from the competition? What should the exterior and interior feel and look like? Provide an outline of the menu so you and the reader know what is going to be served. If you’re really ambitious, you could provide standard costed recipes so you know what your food and beverage costs will be. Don’t forget to factor in waste, condiments and discounts you plan to offer guests.

Next, try to determine the economic outlook in your area. Is the economy growing or shrinking? A shrinking economy does not usually bode well for new restaurant development (although rents should be much cheaper). Is there higher than normal unemployment in the area or less-than-normal unemployment? Both will have an impact on what can be achieved in the marketplace.

The third step will be to examine the population make-up of the market you are entering to establish the type of clientele you will attract. Are you catering to an upscale market in a blue-collar neighbourhood, or are you serving basics to those looking for more? A consumer profile should include the age of the population, education, income levels, household values and depth of mortgages.

“When choosing a site for a new restaurant, determine whether it’s a high visibility location — is there adequate parking, access and exit points?”

The fourth step requires you to do a good self-assessment of the chosen site. Is it in a high-visibility location? Is there adequate parking, access and exit points? Is there ample walk-by traffic, public transit and transportation to bring guests to the restaurant? Determine whether the community has sufficient daytime and evening traffic. I recently bypassed a Future Shop for a Best Buy because parking was inconvenient. You may think you are opening a destination restaurant, and if you are, you may not need to be close to the amenities suggested. But, if not, in this particular case study, the next pizza joint with better parking and more convenient service will steal your business. As a result, your market is usually limited to an area three or four kilometres around your site.

Finally, include a marketing plan, highlighting how you differ from the competition, which, in this case, would be Pizza Pizza in the QSR segment, Boston Pizza in the family sector and other Toronto independents in the casual segment. 

Armed with this information, an operator can compare their operation to the most similar business in the neighbourhood and honestly assess how it will perform relative to the competition. Will you generate the same customer counts, same average check, have the same visibility? Or will you perform 20-per-cent better than your strongest and most relevant competition with the same or similar pricing? Such competition will extend beyond pizzerias to include eateries with a similar style of service, be it QSR or family or casual.

Aside from asking an owner or server to determine the competition’s average check — conduct exit interviews of their guests, or estimate the average check by dining in the restaurant and watching what other guests are eating. Figure out their check total and divide it by the number of guests at the table to get an average check. You need to do this at lunch and dinner to get a reasonable idea of an overall average to use in projections. You can extrapolate this data to estimate daily sales and annual sales. Keep in mind that not all restaurants are open seven days per week, and it’s common that 60 per cent or more of a restaurant’s business is generated on Thursday, Friday and Saturday.

Once you have your competition’s estimated traffic, average check and annual revenue, divide this number by the number of seats in the restaurant to assess the average sales per seat for the restaurant. Do this for six to 10 similar restaurants in the neighbourhood — subject to an assessment as to whether you will do the same, better or worse than the competition — and you will have an average sales per seat for similar restaurants in the area. It is likely you will experience the same range of sales per seat.

Once you have a sense of the average check, you can multiply this number by the average turnover you expect at your restaurant. Remember, single- guests will sit at a table for two, and three may dine at a table for four or five people, so a full restaurant turn, is not necessarily the same as turning every single seat at every dining room turn. Usually it means a dining room of 42 seats may see 35 guests as a full-turn.

“There is no question, restaurants vary in their degree of success, but sales per seat and sales per square foot are key ratios that can benchmark a potential neighbourhood and restaurant.”

Once you’ve established the turnover and know the average check, you can establish annual revenue. Next, divide the results down on a sales-per-seat basis so you can verify that your initial calculations make sense.

There is no question, restaurants vary in their degree of success, but sales per seat and sales per square foot are key ratios that can benchmark a potential neighbourhood and restaurant. The Toronto-based Canadian Restaurant and Foodservices Association has national and provincial averages of sales per square foot and sales per seat in some of its databases, while “The Bottom Line,” produced by FHG International and Foodservice and Hospitality magazine, offers an accurate assessment of cost of sales by province, location and sector. Using these ratios against the estimated sales will provide a sense of the likely outcome of a new and well-executed concept.

Doug Fisher is a foodservice and franchise consulting practitioner, with a practice focused on franchise development, operations assessment and litigation support. In business since 1984, Fisher is author of four industry related books, including the national accounting standards, published by the Canadian Restaurant and Foodservices Association. He can be reached at [email protected]. For more information visit fhgi.com.

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