How to Create a First-Year Restaurant BudgetBefore you open your doors, run your restaurant on paper to make sure you won’t go broke.
Many first-time restaurateurs open their doors without creating a budget. This is not unlike playing roulette: You could get lucky, but the odds are against you.
According to one recent study, 63 percent of restaurants fail in the first year. “But then you peel that back, and probably 80 to 90 percent of those people fail because they can’t plan, they don’t know what it’s going to really take to open a restaurant,” said David Kincheloe, president of National Restaurant Consultants.
Related: NCR’s Guide to Starting a Restaurant
Creating an annual budget by month should tell you if your concept if financially viable. It also gives you benchmarks against which to measure your performance. And it will help you understand all your costs so you don’t find yourself running out of cash months or even weeks after you open.
“Most new restaurant operators fail to account for their costs,” said Kincheloe. “Accounting is an afterthought instead of a forethought. They will run their restaurant with how much cash is in their checkbook. Instead of planning to succeed, they basically fail to plan — and they fail.”
Use an Excel sheet, seek out budgeting software that’s geared for restaurants or get help with your budget from a restaurant consultant. (National Restaurant Consultants has a 27-page financial model it uses with clients.) But by all means, do a budget. Otherwise, you’re gambling your loan, your personal savings, your investors’ money or all three.
“Our goal is to run the restaurant on paper before we build anything,” Kincheloe. Here’s how to do it.
Choose a budgeting approach
There are a few ways to go about creating a budget. Two main approaches are bottom-up or top-down budgeting.
‘Top-down budgets start at the top of the income statement, that is, sales, and drive down to the bottom of the income statement, ending in net profit or loss,” said Tage Tracy, a financial consultant and co-author of several books including “Accounting All-in-One for Dummies” and “Small Business Financial Management Kit for Dummies.”
“These projections focus first on forecasting sales (food, beverage, etc.), which then drives all of the expenses the restaurant would normally incur. They tend to be more summarized in nature and focus on using ratios to estimate expenses — for example, food costs should be X percent of food sales.
“I almost exclusively use the top-down approach given that I generally work with early stage/start-up operations and need to build a forecasting model that is very flexible to complete different what-if scenarios.
“The bottoms-up approach builds the model from the detailed operating expense level. It is focused on detailing out all types of expenses (rent, utilities, supplies, labor burden, etc.) starting at the bottom and working its way up the ladder to the top of the income statement (sales revenue). Bottoms-up budgets tend to be very detailed and list out all expenses on a line-by-line basis as well as sales on a line-by-line basis.”
Zagor noted, “They both lead to the truth. You could do both as a test.”
Figure out your sales
“Sales is going to be the driver,” noted Zagor.
Start by guesstimating what your average guest check is going to be. “This is where it becomes kind of voodoo-ish,” said Kincheloe. “It’s a little difficult for a new restaurant.” Talk to a restaurant consultant for help.
Or, do some detective work to find out what others in your area are doing in sales, advised Zagor.
“You talk to people in those businesses that are either comparable or competitive. You analyze what their average checks are and what their guests counts are, and you come up with what you consider to be a reasonable guess. Then you figure, ‘If that place is doing X, I should be able to do Y.’”
Test your detective work by looking up the sales of publicly owned restaurants of your type. Then look for national averages in terms of sales per square foot and sales per seat. With all this information in hand, “You kind of narrow it down into an envelope,” said Zagor. Use the lowest figure in the range for your budget.
To figure out your sales, you’ll also need to estimate guest counts for each day part and each day (this will also help you figure out how much labor you need). Multiply those guest counts by the average check amount to figure out your revenue.
Don’t forget seasonality
When you’re looking at how much you can sell, don’t make the rookie mistake of assuming each month will be the same.
“People calculate based on an average month, but there are highs and lows throughout the period,” said Kincheloe. “In Arizona you can sell only 50 percent of your average in June, July and August when it’s 120 degrees. On east coast, at certain times of year, people don’t want to go outside.”
Figure out your costs
Consider both your fixed and variable costs. (A third category, called semi-variable, spans these.) Fixed costs are things you have to pay for even if you’re closed, such as your rent or mortgage, your equipment leases, insurance, salaries for permanent employees and interest on any loans. Variable costs include things like food, non-salaried staff, utilities, uniforms, restaurant supplies and marketing.
To figure out your labor costs, do a staffing chart, aka coverage chart. It should indicate how many hours of coverage you need for each position.
Don’t forget cleaning and maintenance costs, including extermination.
“I have to pay someone to come clean my hood, empty my grease trap, just regular ongoing cleaning supplies, maintenance of the building, insurance — all these things have monthly costs associated with them. If you’ve never done it before, there are probably 60 or 70 line items in the budget you need to account for and address,” said Kincheloe.
According to Kincheloe, most people who create their first restaurant budget leave about half the costs out.
“That’s why they’re so excited to open the restaurant — they think it’s going to make them a gazillion dollars because they just don’t know what it takes to really run and operate a restaurant.” He said most operators either underestimate the costs of restaurant supplies, such as smallwares (which get lost and frequently need to be replaced), plates, uniforms, linens, paper and the like — or they forget to include them at all.
Look at your prime costs against your sales
If you want to succeed, your prime costs should fall into a certain percentage of your sales.
Prime costs are your total labor burden (including benefits and insurance) plus your food and liquor costs. “As a percent of sales there’s a range you want it to be in,” said Kincheloe. For a quick-serve restaurant he said it’s in the low 50s to upper 50s. For a casual dining concept, aim for the 60s. “Fine dine might push into the high 60s.”
Don’t underestimate your startup costs
Restaurateurs often underestimate their start-up expenses, including hard costs (such as the cost of the build-out and furniture, fixtures and equipment) and soft costs (like rent deposits, pre-open payroll and pre-open insurance).
The build-out in particular often costs much more than the operate thinks it will, especially if he or she used an architect with no prior restaurant design experience.
“All the money that they set aside as a contingency they use up on the construction side, so they usually start with no operating cash,” said Kincheloe.
To be safe, Zagor advised adding 20 percent to your startup expenses.
Cushion your initial food and labor costs
Bump up whatever you think your food and labor costs will be for the first month or two by 10 percent, recommended Kincheloe.
Since everyone’s new, you should be overstaffed when you first open. With food, “You’re going to make mistakes initially,” he said. You’ll be over-portioning, buying the wrong thing and throwing away food until you get the drill down.
Be conservative — and believe the numbers
Creating a budget calls for realism, not optimism. “I go through life putting cold water on people’s numbers,” said Zagor. It’s far better to be off in the positive direction than the negative.
If your budget doesn’t show enough profit no matter how you trim your expenses, wake up and smell the coffee. “I would tell my client, ‘don’t do the restaurant,’” said Kincheloe.
“Most people are very emotionally tied to this idea, they have a dream, this is what they’ve always wanted to do. They run all the numbers and they see the result and they don’t believe it — so they decide to jump off the cliff anyway.”
That’s a good way to go broke.
On the flip side, a good budget will help you plan for success — and beat the odds.