A healthy financial statement is key to a healthy business
Opening a restaurant often conjures up images of the chef’s latest creations being dished out to a crowd of hungry patrons seated in an opulent setting. But before any of that can be accomplished, there’s one key facet of the business that’s integral to success — a healthy financial statement.
After all, no restaurateur wants to be known for cooking the books, and red is only good news when seen at the centre of a rare steak or a wine list, not at the bottom of a financial statement. Running a viable and sustainable foodservice business or restaurant doesn’t only require precision in the kitchen but also prudent fiscal management for long-term success. It’s a complicated process, but below are five tips to keep your books in the black.
Cost Control // Costs can be broken down into two categories — overhead locked in for the mid- to long-term and day-to-day costs that are in a constant state of flux. Strong negotiating skills are necessary to set a manageable price for overhead, like rent and leaseholds, but once established, there is little that can be done to change them. Likewise, other overhead expenses such as utilities are largely beyond control.
As a result, restaurateurs need to focus on what can be controlled, like day-to-day costs such as food and labour. Such costs are fundamentally variable and, if managed effectively, can change with the revenue. On a high sales day, costs will rise as more food is used and more staff is needed to meet customer demand. This is acceptable, since every $1 of cost should generate more than $1 of revenue; if it doesn’t, then you have bigger fish to fry. On a slow day, however, it takes a nimble manager to ensure that too much food is not ordered and wasted and that just enough staff is on-hand to meet customer needs.
Daily planning and tracking of sales trends by the hour, week and month is essential to managing these costs. Once mastered, however, the standard will be set for ensuring consistent profit on the bottom line.
Benchmarking // In any business, it’s critical to determine profit capabilities. Comparing actual results in key areas to benchmarks, enables a business manager to quickly identify opportunities for improvement and to pinpoint when things go south. Benchmarks can be internal or external — internal against your best past performance and external against best practices in the industry.
For example, consider the benchmark guidelines for full-service restaurants. As a percentage of net sales, food costs should run between 30 to 32 per cent (if costs are higher, prices may be too low or recipes should be revisited); labour costs, including payroll, benefits and vacation pay should range from 31 to 34 per cent (if actual is higher, revisit scheduling practices); rent should amount to about 10 to 12 per cent; and overhead, which includes the rest of costs, should run between 21 to 23 per cent.
Remember that these are broad guidelines and specific benchmarks should be tailored to issues such as local competitive rents, minimum wage structure and the volume of takeout business. In fact, if you only operate on the high-side of these benchmarks, you’ll find yourself quickly in the red. Operations high in one area need to be low in the other to ensure total costs don’t exceed revenues. The key is that the bottom line should result in pre-tax profit of three per cent to five per cent to build a viable business for the long-run.
Budgeting // Although it sounds like a dry and boring accounting exercise, budgeting is essential to ensure consistent future profits. It begins with the income statement revenues planned on a daily, weekly and monthly basis (taking seasonality into consideration). Costs should be based on the benchmarks developed, but also include expenses that don’t hit the income statement directly, such as principal payments on debt and capital expenditures (leaseholds). Even though these aren’t expenses on the income statement, they still require cash.
A detailed and reliable budget will help prepare operators for other expenses such as potential expansion, profit distribution to owners and new financing. It often takes a couple of attempts to get a budget right, but begin with best expectations based on past trends and external benchmarks. Adjust it as time passes if actual results differ from expectations, or if major unexpected matters arise. Once you have a good handle on the budget, a daily and weekly comparison of actual results with estimated results will help identify potential problem areas and allow operators to investigate and tweak operations to get them back on track.
Financing and Cash Management // At the best of times, financing is difficult, which explains why many restaurants are funded using the owner’s private money. Traditional bank borrowing is not as readily available to restaurateurs due to the lack of valuable hard assets to pledge as security. But don’t lose heart, financing opportunities aren’t impossible to find. Mature restaurant-chain operators may be able to obtain cash-flow loans on the strength of their history and its diverse portfolio. Landlords may help finance leaseholds and, in exchange, increase the rent so they can be paid over the term of the lease. Some institutions will also lend against expected credit-card receipts for a few days or a week, enabling access to a cash float.
Once funding is secured, it’s important to determine how much of it is needed on hand. Underestimating cash needs, especially for a start-up, is a typical oversight by restaurateurs. It’s similar to renovating a house: hope for the best, but plan for the worst. A cash cushion is essential for any unexpected issues, such as over-budget leaseholds, delayed start dates or slower-than-expected early month sales. Even mature restaurant operators need a sizeable cash cushion. As a rule of thumb, carry an operating-line availability equal to at least one month’s operating costs.
Loss Prevention // Restaurateurs can plan all they want, but if employees are stealing or cutting corners, there will always be a gap between the plan and what is actually making it to the bank. It’s been said that a certain amount of theft and unplanned inefficiencies are inherent to almost every business, but it’s important to determine how much can be absorbed. Theft and inefficiency can be as seemingly harmless as taking an extra-long coffee break or as blatant as outright stealing of food, cash or supplies. Some employees may not even benefit directly from theft but could instead be giving unauthorized freebies to customers. The bottom line remains: pilfering is a cost borne by the operation with no related revenue, and the more it can be controlled, the better the profit.
The good news is most restaurants have built-in controls in the POS system, with a record of every order by a server and a record of every related cash receipt. The bad news is, even with improved technology, these systems need monitoring. Management needs to ensure any corrections or overrides are appropriately authorized and that total cash and credit-card receipts balance at the end of each day to the sales as recorded by the POS system.
Food control is one final key area of note. Count food daily and compare it with what is expected to be on hand, test recipe yields for compliance with plan, and, if possible, shuffle chefs around to different locations from time to time. It’s amazing what can be seen with a different set of eyes.
The five basic accounting ingredients — cost control, benchmarking, budgeting, cash flow management and loss prevention — to a successful business are on the table, now it’s time to put them in action before indulging in the sweet delights of owning a foodservice operation.
Illustration by Kim Rosen