How to Start a Restaurant: The Ultimate Financial Plan

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You’d like to know how to start a restaurant business but are not exactly sure where to begin. 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 and a sound restaurant business proposal. 

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 major distribution companies. So then what is it that makes your new restaurant stand out? What makes the experience like nothing we’ve ever seen?

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. So let’s take a look at what makes up a great business plan for a restaurant.

2 Women looking at laptop in restaurant

Executive Summary

Before we start talking about high-level concepts, let’s begin with the broadest notion of how to start a restaurant business: the executive summary of your restaurant. In other words, you need to lay out a mission statement. Any well-designed mission statement answers the following key questions (we consider this your complete restaurant vision):

  • Why are you in business?
  • What unique offerings will your restaurant provide that others can’t or don’t?
  • Who are the key players that will create and foster your business culture?
  • Where will your restaurant be in six months or even six years? Having both short and long-term goals is critical in devising a meaningful mission statement, and the eventual business plan for your restaurant.

Once you establish your mission statement, it’s time to think about the concept and execution of your restaurant, your restaurant business proposal, and important factors like capital expenses, sales, the restaurant labor matrix, and other significant considerations – which we’ll cover below! First, let’s look at Capital Expenses and Forecasting Sales, imperative for writing a restaurant business plan.

Restaurant Patio

Market Overview

With the executive summary buttoned up, it’s time to roll up your sleeves and tackle the loaded question of how to start a restaurant business. The next step is to conduct some good old-fashioned market research. A thorough market overview assists in determining how your restaurant integrates and excels in the current business climate. In other words, the business plan for your restaurant should account for:

  • Business trends. What are the key indicators of your restaurant’s neighborhood and other regional eateries? Think growth trends, changing demographics, which relatively new restaurants have succeeded, and more importantly, WHY they succeeded. 
  • Specific market goals. Will your menu “fill the gap” with the market, or compete directly with similar cuisine offerings? 
  • Projected growth. Has your local market gained or lost population in recent years? Is the neighborhood on the upswing? These are important questions to ask when thinking about where your restaurant will be 5, 10 even 20 years from now.
  • Pricing and competition. Closely related to the trends and goals listed above, your restaurant business proposal should factor in things like menu pricing, competitor research, customer feedback, etc.

Restaurant employee taking orders at at table

Capital Expenses

Capital Expenses is the category of purchases we use 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
  • Operating, Computer, and Restaurant Equipment

Each of these groups has a different amortization and depreciation schedule that is 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. More often than not, this isn’t the case. Therefore, carefully planning your build-out costs and Capital Expenses will save you in so many ways after you’re open.

Restaurant Pro Forma template example 3

Forecasting Sales

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.

#1) They’ll use the sales from the restaurant where they used to work, or they’ll ask the manager at their favorite restaurant

#2) They’ll simply take the square footage and divide it by what they think they’ll do in a week of sales.

While these concepts have some of the elements for what is correct, it’s not complete. You must take the key indicators below into account to effectively forecast your sales.

  • 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? Review our article on menu engineering to accurately determine the contribution 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.

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The Restaurant Labor Matrix

First-time restaurant operators rarely forecast their opening labor needs accurately. Restaurant labor must be forecasted using a detailed Labor Matrix. Each day and daypart, number of hourly and salaried positions (per job code), work center, and estimated wages, must be calculated against your projected weekly sales.

Restaurant Pro Forma template example 2

This enables you to accurately forecast how much cash you need to properly service your guests. More importantly, using a Labor Matrix allows you to react quickly during the erratic sales spikes that you’re sure to experience during your opening months.

Restaurant Pro Forma template example

 

Developing An Accurate Restaurant Pro Forma

Developing an accurate pro forma rounds out your financial plan and solidifies your restaurant business proposal. It also provides you with the greatest chance of operating a successful restaurant. It is necessary that your Pro Forma is detailed and contains your revenue and expenses by period.

Restaurants should operate on a 13-period or 4-4-5 financial statement cycle versus a monthly accounting cycle. Therefore, the year is divided into 13 periods containing 4 weeks or 28 days per period; or, 12 periods containing two 4-week periods followed by one 5-week period. These cycles ensure that when you’re reviewing historical and current data, you can look at trend comparisons and know you’re comparing apples to apples.

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 expenses, 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 of detailed 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.

Restaurant Equipment

Understanding Cash Flow Basics

Your restaurant’s budget, perhaps more than anything else, will ultimately determine your restaurant’s successful transition from a startup eatery to an established enterprise. Understanding your cash flow statement helps simplify, streamline and track the cash coming into – and going out of – your restaurant. Let’s look at the fundamentals of cash flow, which will help immensely when writing a restaurant business plan. The three mainline items include:

  • Cash Beginning Balance: Your cash beginning balance is available cash from your previous balance sheet. Within the initial business plan for your restaurant, this is essentially your startup cash. 
  • Cash Flow from Operating Activity: Your cash flow from operating activity is all the credits and debits associated with your restaurant business. Credits are revenue from food sales, merchandise sales, etc. Debits are inventory costs, rent, labor expenses, etc.
  • Net Profit or Loss: In any given accounting period (one week, two weeks, three months, etc.), your net profit or loss is basically the difference between your restaurant’s gross profit or loss and the expenses associated with running the restaurant business. A positive value indicates a net profit; a negative amount reflects a net loss.

Knowing how to utilize and track your restaurant’s cash flow is essential to writing a restaurant business plan. For more information on the function of your cash flow statement and how it impacts your restaurant business proposal, check out RASI’s helpful article on this subject.

Operator looking at tablet in restaurant

Plans in Place for How to Start a Restaurant Business? Contact RASI When You’re Up and Running!

RASI’s complete suite of restaurant business accounting services helps transform your concept into reality. From POS integration to financial reporting and much more, our agile, intelligent solutions empower and enable restaurant owners to have full confidence in their business finances, allowing anyone to focus on other business-critical tasks like menu engineering, promotional events and more.

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Request a demo today – we’d love to review your concept and offer practical, affordable restaurant accounting services to help you grow! 

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