Starting Your Restaurant: Know the Numbers and Manage Them
by Kyle King | November 20, 2018
Most entrepreneurs that are looking for their start in the food service have worked in the industry at some point in various positions. The food service industry is notorious for a lack of education in financial and operational skills needed to properly manage the numbers. This is but a skim of the surface, as there are many considerations and adjustments that will vary from operation to operation.
Start with a budget and sales projections in mind.
Plan on how to obtain and track these projections.
Determine your costs (start up, fixed, and variable) prior to launch.
This will determine how much product you will need to sell. Examples of items to consider include scouting potential locations, anticipating equipment costs, and developing the marketing plan, etc.
A good rule of thumb is to overestimate expenses and under estimate sales. This should allow you to create a buffer.
Establish long-term goals.
After establishing your financial business model and your performance goals, it is crucial to have a goal in mind for long-term success of the business. Ninety percent of food businesses fail in the first three years, usually due to lack of cash flow.
Potentially having an aggressive push for profitability is a crucial focus. Take the steps as your business grows to constantly reduce the fixed costs needed to run the business.
Manage your variable costs.
Your variable costs, also referred to as prime costs, will make up the Cost of Goods Sold (COGs) and direct labor cost. We will go into ways to establish systems for managing these costs later.
Understand that these are the two largest expenses that your business will have and they will require daily attention to manage and keep in line.
Cost of Goods Sold
It is crucial that you establish a theoretical food cost that is inclusive of the items that are going into the sale of it.
Example: Selling a cup of coffee
Ingredients: Coffee Beans/Water
Supplemental Ingredients: Cream/Sugar/Other Additives
Operating Supplies: Cup/Lid/Sleeve/Stirrer
Some may account for these costs in different line items of the profit and loss statement (P&L), but it is crucial to assure they are properly budgeted for.
Quick Tip: Assume every item is going to utilize every ingredient, therefore the ones that do not will provide you a buffer to your food costs: For instance, assume each coffee drinker uses a stirrer, napkin, and cream and sugar for each item sold. When doing this, anyone who loves their black coffee just increased your profitability.
Again, overestimate costs, and under estimate sales.
Labor is a crucial element.
Labor is a crucial key to operating the food service and it can be your most expensive expense if not managed properly. Staff your business for success by remembering these key items:
- Prepare for the sales you want, not the sales you have had.
- The food service industry is consistently inconsistent.
- If you get a rush of people and are not prepared, you will have a poor customer experience, which will lead to a bad perception, which will lead to long-term sales loss.
- Know your peak times, and when to make appropriate cuts for the business based on volume.
- Look at your labor budgeting and scheduling constantly. If you are scheduling with a budget that does not fit in your sales projections, then you are setting yourself up to fail.
Understand that all numbers are not financial.
Establish traffic and performance goals for your business. Performance goals can be set differently based on the type of food business you own. Check Average/Per Person Average (PPA) is very common in restaurants, quick service, and food truck concepts.
What does your perfect check/transaction look like? Appetizer, entrée, drink, dessert? How much does that add up to?
With establishing this “perfect check” you have a tangible goal for each of your employees or sales associates to obtain. You as the business owner also have the ability to coach, teach, and develop these employees to sell more efficiently with a goal in mind.
Traffic is crucial, as it will allow you to not only effectively project sales, but also determine the businesses peak hours. This will allow the business to be properly staffed and labor to be managed efficiently.
How you track your traffic will vary from operation to operation. Essentially, it will be tracking the number of transactions in a given period.
In addition to total traffic, if you have the ability to track the frequency of return customers for the business, do it. It is crucial to keep a steady flow of both new and existing customers for the business.
The rule of thumb for this is 80 percent returning customers and 20 percent new customers. If you are able to track this, you now have another tangible indicator that will give you a better understanding of the operations and marketing for the business.
Once you have established your traffic and performance, you can track the efficiency of your team, and set realistic sales projections for your business.
Communicate the key performance indicators.
Now that you have mastered all of your numbers and Key Performance Indicators (KPIs), you need to assure that all of your team has those in mind at all times. Key employees and management should be reviewing the labor, COGS, and financials daily. You cannot fix it once it is over! One could even go a step further to continually educate the staff on the financial implications of their daily decisions.
Here’s an example of how simple education and awareness can cost a lot of money. Assume you own a burger restaurant, and you sell 100 orders of fries a day. The small operational adjustment of offering 1 ounce of ketchup “upon request” rather than with all orders could be a cost savings of thousands of dollars a year.
$.29 Ketchup Cost/per oz.
100 orders/daily x 365 days = 36,500 orders a year
$.29 x 36,500 orders = $10,585 annual ketchup cost
Quick Tips for Managing Your COGS: Track your inventory usage. Assure you are prepping the adequate amount of food for expected volume of sales. This will minimize food waste and running out of product. Running out of product is a lost sale and a poor customer experience.
Track fluctuating costs of ingredients. Assure the purveyors and ingredients you are using fall within your theoretical cost projections.
This skimming of the surface will assist in pointing you in the right direction. It is best to constantly work to educate yourself and stay on top of your operations to assure a higher likelihood of financial success in the food service business.