Restaurant Finance 101

Restaurant Finance 101

QUESTION FROM: NEW OPERATOR, Chicago, Ill

I’ve opened my bar/restaurant only 4 months ago and I'm not gonna lie, I really underestimated the industry. It’s been more difficult than I ever thought it would be...but at the same time I love it. My question is: What methods do you consider to be the most important to make your place sustainable? I mean, I'm confident that my team and I know good service and understand our concept, but I need to find a way to increase sales to avoid closing closing soon I've heard that it's important to eat, sleep and breathe numbers and that I should have a detailed P&L. What does "P&L" stand for? Could you please elaborate?

Thanks,

New Operator

 

HH ANSWER:

It's equally, if not more important to keep your finger on the pulse of your restaurant's financials as it is your restaurant's level of service. The best way to avoid "closing soon" is to have a realistic expectation of capital requirements, make sure you are being fiscally responsible and have a strong grasp of your controllable costs in every profit center.

Most restaurant failures start and end in the P&L...which stands for "Profit And Loss Statement".

In order to know whats wrong with your operation, eliminate unnecessary expenses and avoid future ones -  sit down with an experienced operator or an experienced restaurant-specific accountant for a thorough review of things that represent or directly affect your biggest costs: Rent/CAM/%Rent, Labor and Food Cost - all of which should be broken down with every other line item in your P&L and PMIX (AKA: The mix of products you're selling and how many of each are being sold each day or day period) as it always tells an objective story. 

Don't feel bad New Operator. Lately, we've been seeing a pervasive lack of some truly basic fiscal knowledge that every owner, operator and manager should have. 

I'm not sure if it's due to micromanagement or to so many people getting into the industry with little to no prior experience - but either way, as a new contributor to HH, I feel compelled to answer your question first.

If you don’t know the following information (and it’s fine if you don't but say you did as most prospective managers claim during interviews) - you absolutely NEED to know this stuff because a restaurant’s financial welfare…and very survival often depends on it.

 

COST OF GOODS SOLD (AKA: COGS)

Beginning Inventory + Purchases During Time Period - Ending Inventory = Cost Of Goods Sold

 

FOOD COST (Target 20-35% depending on concept)

Menu Price / Cost of Every Ingredient In The Dish* = Food Cost

*Remember - EVERYTHING  that goes onto the customer's plate and every lb. of waste or unusable product needs to be accounted for.

(You could also work it backwards to determine MENU PRICE:

Cost of All Food Product / .25 (or other desired Food Cost %) = Minimum Menu Price.

 

JUST DON'T IGNORE YOUR MAGINS: You don't pay your staff with percentages and you don't deposit percentages into your bank account - you deposit dollars... and Food Cost is only half of the equation when it comes to Food Sales.

MARGINS (AKA: PROFIT IN DOLLARS)

Menu Item Price - Menu Item Food Cost = Margin / Profit