It’s hard not to wonder how many would-be chefs Rocco DiSpirito deterred from entering the restaurant business by famously declaring that nine out of 10 new eateries go out of business within 12 months of opening.
The celebrity chef’s claim was overblown, but the real numbers don't inspire much more confidence. Researchers at Ohio State University estimate that about 60 percent of restaurants undergo an ownership transition in their first year; 80 percent shut down within five years.
Fortunately, failure is not a foregone conclusion. Chef and TV personality Robert Irvine told Business Insider that financial competency is one of the top factors separating success from failure in the restaurant world. Fiscal prudence and a bit of foresight can help restaurateurs get their finances in order and avoid the grim fate of going out of business.
Why Restaurants Struggle Disproportionately
Financial mismanagement is one of the top causes of restaurant failures, but it’s important to note how demanding the industry is. Restaurants operate on absurdly thin profit margins — the National Restaurant Association reports that pretax profit margins range from two percent to six percent — which means the room for error is equally slim.
This pinch can cause restaurants to cut corners to make ends meet. Olive Garden found itself in hot water a few years ago after investor Starboard unveiled that the Italian chain no longer salted its pasta water so that it could get a longer warranty on its pots. While it's probably not advisable to skimp on salt to save a few cents, seemingly slight differences in your budget can mean the difference between feast and famine.
Plenty of restaurateurs are reactive when it comes to their finances, and many turn a blind eye to profitability as long as customers are happy and the food is on point. As long as there’s money in their bank accounts and they are selling enough food to cover their costs, they assume all is well.
Instead of studying historical trends to predict business booms and busts, restaurant owners often respond to changes as they happen. This knee-jerk approach can leave them short-staffed and understocked, potentially upsetting hungry customers. Considering how consumed most owners are with day-to-day operational demands, many simply don’t have the time or resources to stay on top of their books. Unfortunately, ignorance is not a defense when it comes to finances.
Take Charge of Your Books Before You Flame Out
If it feels like financial mismanagement is eating away at your prospects for success, don’t worry. There is a path forward. The following steps can help even the most disorganized restaurateurs gain control of their finances and avoid becoming a statistic.
Gather Your Financial Data
Find out what you know and what you don’t know. Make a checklist and gather information on all the important aspects of your operation, including:
- Your sales data by channel (in-restaurant, delivery, catering, etc.)
- Cost data by channel
- Sales data by day and time
- Margin by product (menu item)
If you don’t already have this information, figure out where the problems exist. Is your chart of accounts detailed enough? Do you track inventory in a reliable system? Have you organized your sales numbers by channel? List any gaps in your financial picture and then work to fill them in.
Evaluate Your Data to Draw Conclusions
Once you've compiled information about your restaurant's finances, it's time to figure out what's happening beneath the surface. Like any other business, restaurants are all about revenue versus cost. Beyond that key metric, you'll want to explore numerous elements of your operation, such as:
- Sales of any special dishes and whether the profit covered associated costs.
- Margin comparisons between last year and this year.
- Profitability increases and business growth since you opened.
- What you pay in fixed costs versus variable costs (and what levers you can pull to decrease both).
- How many employees you need when you have a certain number of customers.
It’s easy to feel overwhelmed by this information if you don’t know how to capture and interpret it. Instead of going it alone, find a bookkeeper who understands the restaurant world and can implement a user-friendly accounting system. Find someone who is forward-thinking and can glean insights from your historical data to help you make timely adjustments to your menu and staffing strategies.
Implement Changes Based on Your Findings
Surviving in the restaurant industry is all about being adaptable. You must be able to predict and act on trends instead of letting them catch you by surprise. This level of insight will also give you a tremendous advantage over competitors who don't pay attention to their books.
If you can understand what drives your revenue, what drives your cost, and where your margins are highest, you can maximize those elements. That might mean focusing more (or less) on happy hours, specials, catering, or delivery. Figure out what your numbers are trying to tell you, and use that information to benefit your business.
Above all else, regularly carve out time to monitor trends in your organization and the industry. You might also consider undertaking a sensitivity analysis to determine what your P&L looks like under various conditions. See what your business looks like if you have a good year, a mediocre year, and a bad year. Determine any costs you might be able to cut in a bad year or potential areas for investment in a good year.
A Recipe for Success
Consumer preferences change constantly, meaning part of financial management is somewhat intangible. Loyalty is huge, and restaurants need to have some level of consistent clientele to stay afloat. While your food and service are clearly important, a firm grip on your financials is just as critical.
Before you head to your local community college to enroll in business classes, remember that you don’t have to become a financial guru to keep your restaurant afloat. The most important thing you can do is invest in platforms and partners that can help you use the wealth of data you’re already generating. Knowledge is power, but it's also money — and you're going to need a lot of both to help your restaurant sizzle.