How to Know if Your Restaurant Is Making Enough MoneyLosing money doesn’t mean you’re failing — at least in the beginning.
You decided to ignore the odds and open a restaurant. It required a leap of faith, and possibly a good chunk of your savings. Chances are you did it because you love food and had a killer concept. But unless you’re independently wealthy, you’re also counting on turning a profit, preferably sooner rather than later.
But how — and when — can you know if you’re destined to be one of the restaurant startups that succeeds? In this, the last installment of the NCR Silver series Guide to Starting a Restaurant, you’ll learn which clues to pay attention to.
Even if you do run into trouble, recognizing the signs early enough can allow you to step back, analyze where you went wrong and chart a better course to profitability.
How soon should you start turning a profit?
There isn’t a one-size fits all answer to when you can hope to be in the black, but don’t expect it to happen right away. “Most operators don’t really think they’re going to make money for the first few months, maybe up to six months,” said Stephen Zagor, dean of business and management programs at Institute of Culinary Education.
“You just don’t really know when you open the doors what products are going to sell the best, who actually is going to be your customer. . . It’s kind like when you put a baseball team on the field for the very first time,” said Zagor.
Expect to lose money in the first couple of months. If you can’t pay your bills during that time, you’ve committed what Zagor calls the number one sin of restaurant launches: undercapitalization.
Some 80 percent of the restaurants that fail in the first two years do so because they weren’t sufficiently funded when they started according to David Kincheloe, president of National Restaurant Consultants.
Though losing money in the beginning is par for the course, that doesn’t mean you should be hemorrhaging increasing amounts of cash. What’s most important in the first six months or so is the direction your financials are trending.
“In the first year, you’d like to be progressively better every month,” said Zagor.
Where are your prime costs, and what direction are they heading?
The most critical factor to scrutinize, according to both Zagor and Kincheloe, is your prime costs — where they are now and the direction they’re heading.
Prime costs are your total labor costs, including benefits and insurance, plus your food and beverage costs. It could take six months or even a year for these costs to stabilize, said Zagor, but when they do, you want them “in the mid to upper 50s, definitely below 65 percent” of your sales.
Even those first few months, pay attention to whether your prime costs are heading down or up, Kincheloe advised.
“We all expect when we start up a restaurant that your costs are going to be higher in the initial few months. We’re going to overstep and work our way down to the correct levels. Is that happening? Are we seeing the trend in the right direction?”
Knowing your costs requires accurate recordkeeping, a task many owners neglect.
“The average person doesn’t know if they’re making money because they’re not keeping a good set of books on a regular, short-term basis,” said Zagor. To get a true sense of how you’re doing, he advised, find time every week to close the door and look at where you are. Pay attention to your major costs, especially your payroll and purchase costs, but also smaller costs, down to how many paper towels and trash bags you’re buying, in relation to your sales.
“It’s a business of pennies, and we sometimes lose sight of that,” said Zagor.
Signs you’re making money
“Positive cash flow is the first sign of making money,” said Zagor. That means you have money left over after paying all your expenses. “But the real measure of making money is paying off the investment,” including any investment you made. “What’s left after the investment is paid off is really what goes into the pocket.”
When you have money left after you subtract debt service, debt repayment or investor payment, “That’s when you’re really free and clear, that’s when you have real free cash flow,” said Zagor.
Signs you’re struggling
If you’re struggling, you’ll sense it. If you’re really struggling, you’ll know it.
You’re in trouble if you don’t have the money in the bank to pay the bills that are coming in. “That’s the simplest answer,” said Zagor. Here are a few other signs the business isn’t where it should be:
- Your prime costs are trending up instead of down.
- Your profit margins are way below the average for your concept and service style.
- Your first call in the morning is to the bank to find out your cash position and whether the credit card payments have been deposited.
- Vendors are calling because you’re delaying payments.
Of course, restaurants have high and low seasons, so you won’t know your true sales until your first year is over.
In your second year, “You should have control of all of your costs and understand where your sales level are,” said Zagor. From there, he said, if the sales levels and margins aren’t good, “Then the model is broken.”
What to do if the restaurant is struggling
Zagor is an optimist. In his view, most problems are solvable, except one: “If your rent is too high, then you’re in trouble.”
If your prime costs are too high, start by taking a cold hard look at:
Your menu mix. Are you selling too many high-cost items or too many low-margin items?
Your food costs. Are you paying your food purveyors too much? Do you really need to use filet mignon in your fajitas, or can you substitute a different spec? Can you find smart ways to incorporate reusable trim? “Listen to your vendors,” said Zagor. “They will help you.”
Your labor costs. Are you overstaffed for your level of business, especially during fringe hours? Don’t panic and start cutting staff until you’re sure you need to, especially since you spent time and money recruiting and training those workers. “The minute you start scaling back on labor, you’re swamped,” said Zagor. If you do need to trim labor costs, analyze the best way to bring them down. “Maybe your lunch menu needs to be trimmed so you can take one station and close it down. Maybe you open at 6:00 instead of 5:00,” said Zagor.
Your direct operating expenses. You may be able to conserve on expenses that don’t affect guests. Paper (which includes garbage bags, plastic wrap, etc.) in particular is a big expense, said Zagor. “There’s an enormous opportunity to save money there.”
One big ‘don’t do,’ said Zagor, is stiffing the government. “The government doesn’t care if you file bankruptcy or not. Pay your sales and payroll tax. Those are the items that will never be resolved.”
Above all, seek solutions
When your restaurant is struggling, it’s easy to let panic prevent you from stepping back and seeing solutions that may be obvious.
“It’s a vicious cycle because you become so absorbed in fighting off the barbarians at the gate that you don’t spend the time to focus on ‘how can I get out of this mess, what’s happening here, what’s selling, what’s not selling?’” said Zagor. “You become very tired, very worn out and numb to what’s going on around you. That’s the biggest problem.”
At that point, he said, “You need to take a breath. Close the door, get a consultant or friend in the business to help you see the forest” and not just the trees. “Bounce ideas off that person. All they have to do is give you one great idea.
“To quote Yogi Berra, ‘It ain’t over til it’s over.’”