As Part 4 of her How to Open a Restaurant series, hospitality consultant Alison Arth explains how to set your restaurant up for financial success, from building a budget to keeping your staff accountable.
Restaurants are commonly seen as risky business endeavors, and for good reason. In addition to being an intensely competitive and ever-changing industry, profit margins are lean, so every dollar makes a difference. Planning for financial success is often the most intimidating, time consuming, and least fun part of the pre-opening process, but it absolutely cannot be skipped. In this article, I’ll share some key tips for giving yourself and your new restaurant the best opportunity for long-term financial success.
Failing to Plan is Planning to Fail
The process of ensuring your restaurant’s financial viability begins long before there is even a restaurant to speak of. Whether you’re taking on investors or funding the project yourself, a business plan outlining how you intend to make money is imperative. Your business plan is your road map, and the process of creating one will force you to think through every detail relating to conceptual coherence, cost, revenue, and profit. There are many different business plan formats, but the strongest ones always include these four components:
- Describe your concept. Write this portion as though you’re describing your restaurant to someone you have never met. Taking the time to be diligent and spell out every detail at this stage will uncover pitfalls and opportunities that you may not have otherwise discovered until it was too late to correct them.
- Include an initial budget. Without having a budget in place, spending can get haphazard and irresponsible, landing you in a big hole before the doors even open. Including contingency money for unexpected costs and setbacks is crucial so that you aren’t forced to cut back in other areas when that water pipe above the kitchen breaks. A detailed plan for spending will ensure that you and your opening team know exactly where you plan to spend money and have parameters for doing so.
- Create a sample menu. Getting a menu down on paper at this early stage is important in estimating revenue and illustrating your concept, even though it will change over time. It is much easier and more accurate to make small adjustments than to operate on assumptions, which can be dangerous and costly.
- Calculate revenue and cost projections. This is the time to get granular; if you can’t make the math work on paper, it isn’t going to work in reality. Using your estimated average check and the number of covers you expect to do every day (be sure to take seasonality into consideration), you can put together annual revenue projections. Costing out recipes for food items and cocktails and costing out mock schedules for the property will give you a solid understanding of your prime costs.
If this is your first restaurant opening and business plans and budgets are foreign to you, enlist the help of professionals and external resources. There are tons of resources online and in bookstores to help you put together a business plan, but if writing isn’t your cup of tea, hiring a consultant that has experience with restaurant business plans is a solid investment. Similarly, an experienced accountant with restaurant clients is invaluable, and their expertise in combination with your vision can provide the balanced perspective you need to get your restaurant off to a sound financial start.
Become a Strategic Purchaser
The urge to get it all over with, the need to make decisions quickly, or having expensive taste can quickly make you forget your budget when it comes time to purchase furniture, fixtures, and equipment for your new restaurant. It’s important to stay focused because the decisions you make at this stage will affect your financials for years to come. Here are a few guidelines on getting it right.
- Always request quotes from multiple vendors. There are generally numerous products, services, and tools available to you that will get the same job done. The first price you get may turn out to be the best value, but you won’t know until you’ve looked at a bunch of options. Getting competing quotes also puts you in a more powerful position to do some negotiating.
- Don’t be sold on what you don’t need. Remember, while you may be new to this, your vendors aren’t. Ensure that you’re working with someone who understands your needs and budget, and stick to the essentials. It’s much easier to buy more of something than it is to get rid of something you have in abundance.
- Keep cash flow in mind. As cliché as it may sound, timing really is everything. Save large purchases for when they’re absolutely necessary, as unexpected expenses are frequent, and cash flexibility can be a game changer.
- Will it make sense in three years? It’s easy to get caught up in the moment when making opening purchases, but you’ll be kicking yourself later if you don’t keep the big picture in mind. Are your purchases crucial to operational efficiency? Is it something you need or something you want? When glassware and plateware start to break and silver goes missing, will you have to sacrifice a disproportionate part of your operating budget to replace it? Making smart purchases comes from constant questioning.
Make It a Team Effort
One major area that is often overlooked is the impact that the financial health of your restaurant has on your entire team. It is imperative that you set goals for your managers and make P&L presentations transparent and keep financial discussions inclusive. This will encourage your managers to adopt an ownership mentality and enable you to ensure that your objectives and those of your key team members are aligned.
A great way to incentivize managers to keep the numbers top of mind is to institute a bonus program based on hitting specific targets related to operational costs that they directly affect. Managers set the tone for your staff, so if they’re a part of setting the goals and stand to benefit from reaching them, they’re much more likely to manage as an extension of ownership. When you hit your monthly/quarterly/annual goals, you’ll happily pay out bonuses for a job well done, and everyone wins.
Opening and operating a successful restaurant is hinged on a structured approach to managing finances. The most successful restaurateurs start with a plan, operate accordingly, and make sure to communicate expectations with staff. Developing a sound financial strategy requires some time and commitment up front, but is sure to pay off in the long run.
Photos courtesy of Bonjwing Photography.
When it comes to opening a restaurant smoothly and running it successfully, Alison Arth is a pro. She held leadership positions on the opening teams of multiple restaurants within Daniel Boulud’s prestigious Dinex Group in New York before working as General Manager of Locanda and Director of Food and Beverage at The Battery in San Francisco. Now, as the founder and principal of hospitality consulting firm Salt & Roe, she partners with restaurants to create consistent, genuine guest experiences and build long-term success. To date, she’s been involved in 13 restaurant openings; most recently, she has consulted on the opening of Gavin Kaysen’s Spoon and Stable in Minneapolis. At Open for Business, we’re thrilled to partner with Alison for a new series on starting and growing a restaurant business, step by step.