HOW TO START A RESTAURANT? PLAN.
You want to start a restaurant and you create the ideal concept in your head.
That concept begins with the idea at its inception; however, for your idea to survive, or even better to thrive, it must operate on a consistently executed financial plan for a restaurant.
There’s a difference between dreamers and visionaries. Both can come up with ideas, but only one can execute on them.
This article’s focus is intently on the part of your restaurant business plan that has the greatest effect on keeping you in business…your restaurant financial plan.
50% of the restaurant concepts we see are largely “inspired” by existing operations. Beyond this, 85% of your food and supply purchases will be delivered from the same four major distribution companies.
Even if you think you’re beating the system and sourcing elsewhere by purchasing those local, oxygen chamber grown tomatoes that you can’t live without… well, those are also most likely being sourced to your special supplier by the aforementioned distribution companies, except now, you’re paying three times as much.
So then what is it that makes your new restaurant stand out? What makes the experience like nothing we’ve ever seen?
- Restaurant Financial Plan
- Capital Expenses
- Forecasted Sales Using A Seating Method
- Restaurant Labor Matrix
- Restaurant Pro Forma
RESTAURANT (BUSINESS) FINANCIAL PLAN
Creating a financial strategy is often the least glamorous side of the business plan to develop.
Before we open a restaurant, we can typically describe our concept in vivid detail as we’re writing the operational and conceptual aspects of the business plan.
You see, it’s easy to see ourselves dashing between tables and hobnobbing with pleased guests who have just devoured our latest culinary delights and washed it down with the rarest of vintages.
On the flip side however, it’s not so easy to describe your restaurant’s financial plan with that same level of precision and passion. In fact, we typically see a lack of detail that parallels that of someone being asked to describe their last weekend in Las Vegas.
Unfortunately, the reality here, is that without a sound and detailed financial plan and a commitment to following it, 75% of restaurant startups will be bankrupt within the first 24 months. There’s nothing more that I love than seeing an idea come to fruition, so let’s take a look at what makes up a great business plan for a restaurant:
Capital Expenses is the category of purchases that is used to describe startup costs.
Within Capital Expenses there are subgroups that assist in identifying your build-out needs. Some examples of these subgroups are as follows: Leasehold Improvements, Professional Services, and Operating, Computer, and Restaurant Equipment.
Each of these groups has different amortization and depreciation schedules that are assigned to them. In most of the plans that we see, folks will use a poor estimate of what the aforementioned items will cost with the thought that once they get the doors open, everything will just work its way out because they perceive cash rolling in by the truckload. Spoiler alert, this strategy does not work.
In fact, what happens is that at ninety days into opening your restaurant, everyone comes looking for their money and you’re living more like a scene from Groundhog Day. I promise you that time spent carefully planning your Build Out Costs and Capital Expenses will save you in so many ways after you’re open.
FORECASTED SALES USING A SEATING METHOD
Similar to budgeting for your expenses, you’ll need a strategy for forecasting your restaurant sales. After all, sales pay the bills right? Most folks will estimate their sales based on several unscientific methods.
First, they’ll use the sales from the restaurant where they used to work or they’ll ask the manager at their favorite restaurant.
Second, they’ll simply take the square footage and divide it by what they think they’ll do in a week. While these concepts have some of the elements for what is correct, it’s not complete.
The following key indicators must be taken into account to effectively forecast your sales:
Note: While you’re estimating you’re using several key indicators which, when tied out to each other, will increase your forecasting accuracy.
- Day Parts: Does your restaurant serve Breakfast, Lunch, and Dinner? Does it just serve brunch on the weekends?
- Revenue Centers: Do you have a Bar, Dining Room, and Patio? Do you have Catering and Private Dining?
- Guest Check Average: What are your guests going to spend on average for each day part? (See our article on menu engineering to accurately determine contributed margin per item)
- Number of Seats: This indicator is important because each seat is going to generate a certain amount of revenue. For example, what type of seating do you have? 2 Tops, 4 Tops, Banquet seating, flip up rounds, bar stools and fixed seating will all differently determine the maximum amount of revenue that you can generate from your restaurant.
- Table Turns: It’s important to know how many times you believe that you are going to turn over the tables in the restaurant. For example, if you have 200 seats and you have 2 table turns, then you are saying that you’ll seat 400 guests.
RESTAURANT LABOR MATRIX
First-time restaurant operators rarely forecast their opening labor needs accurately. We typically see one of two scenarios.
#1) They drastically over hire using the “Gladiator Method” of labor-management: The thought here is that management will sit back and allow the strongest to survive.
The Gladiator Method is accompanied by the, “I have no form of organized training program.” You can almost predict the sheer mayhem created by this strategy and sadly, it’s the most common opening experience for first-time owner/operators.
#2) The “I’ll Do More with Less” method of labor-management: The thought in this scenario is that because money is tight the management team will hire every “experienced” FOH and BOH team member from his or her former places of employment.
Accompanying these pros are their bad habits which include higher hourly wages and personal agendas. Even on the outside chance that there is an organized training program, the assumption is that most of these folks already know it all because they learned (x activity) at (x prior place of employment). The end result here is much like the Gladiator Method, and it does not work.
Restaurant labor must be forecasted using a detailed Labor Matrix. Each day and day part, number of hourly and salary positions (per job code), work center and estimated wages, must be calculated against your projected weekly sales.
This will enable you to accurately forecast how much cash you’ll need to properly service your guests. More importantly, using a Labor Matrix will allow you to react quickly during the erratic sales spikes that you’re sure to experience during your opening months.
DEVELOPING AN ACCURATE RESTAURANT PRO FORMA
Developing an accurate pro forma not only rounds out your financial plan but it also provides you with the greatest chance of operating a successful restaurant.
It is necessary that your restaurant pro forma is detailed and needs to contain your revenue and expenses by period.
Restaurants operate on a 13-period financial statement cycle vs. Monthly accounting, therefore the year is divided into 13 periods containing 4 weeks or 28 days per period.
Further categorical breakdowns look like this:
- Prime Cost Breakdown: This includes Food, Beverage & Labor (including Payroll Tax)
- Gross Profit Calculation: Sales minus Cost of Goods
- Direct Operating Costs: All “self-inflicted costs” includes items such as: linen, restaurant, kitchen & bar supplies, china, glass & silverware, etc.
- Advertising & Marketing Plan: Both in house and external Advertising & Promotional activities
- Repair & Maintenance: All repair and maintenance activities
- General & Administrative: Items such as legal and accounting, dues & subscriptions, credit card expense, etc.
- Occupancy Costs: This includes rent, utilities, trash, telephone, etc.
- EBITDA: Calculated as Earnings Before Income Tax Depreciation & Amortization
Finally, your pro forma needs to be forecasted for 5 years detail sales growth as well as expense changes such as rent or payroll tax increases as well as increases in cost of goods.
Doing so will also provide your investors with a reasonable expectation for payback on their loans. Creating a solid financial plan to start a restaurant takes time.
If it were as easy as plugging numbers the following wouldn’t be true; 75% of new restaurants fail in the first 24 months.
If you would like to view the complete version of our Restaurant Startup Financial Plan, simply reach out and ask!
Yes, it’s daunting and huge; it also includes a financial Break-Even analysis that we can discuss with you if you decide that it’s in your best interest to utilize this financial model.