4 Must-Know Tips when Managing Restaurant Finances
Part four in our four-part series with culinary consultant Jenny Dorsey on her best advice for your restaurant brand, menu, staff and finances when you’re owning and running a restaurant.
Now that you understand key components to your restaurant’s brand, menu, and staffing, we close with financial tips for restaurant owners. Keeping on top of your restaurant’s finances is the most important step to ensure your restaurant stays open. Dorsey suggests four key areas to focus on when managing your restaurant’s finances:
Track All Costs — Including Hidden Ones
As a restaurant owner, closely monitor a spreadsheet that captures your total revenue, line item costs and gross revenue. Before you even open a restaurant, you should have an estimate of what all these costs will be. Every month, you need to track how close your actual expenditures are to your estimates. This way you can unearth hidden costs that crop up as you manage your restaurant. Adjust your monthly budget accordingly, so you’re always on top of what money is going out and into your restaurant.
“What are your food costs and labor costs?” Dorsey asks. “These are two really big ones for restaurants, so you should be tracking these closely. What are your overhead costs every month? Rent, utility, Wi-Fi … You need to know what that number is too. Even if you don’t sell any food, you still have to pay those overhead bills, at minimum.”
Dorsey also recommends understanding what types of financial changes come with restaurant seasons. For example, if you are opening a patio and staffing it for the summer, track those costs in your spreadsheet. Be sure to track the seasonal overage for turning up the heat in the winter as well. Finally, Dorsey recommends watching how your food costs raise or lower based on buying food in small quantities or bulk. This is a hidden line item that can save (or cost) your restaurant a lot of money.
Understand How Sales & Net Income Affect Each Other
You might be able to increase sales by making changes, such as adjusting the menu. But if you’re also increasing your costs, then more revenue means nothing. Dorsey stresses that it’s important to understand how sales and net income work with each other. Ensure that while you’re increasing sales, you’re not also significantly increasing costs.
“A lot of people think sales equal net income,” Dorsey says. “Sales are sales, and net income is your sales minus your costs. So, even if you’re constantly increasing sales, if you’re also increasing your costs then you’re not making any money. If you’re going to invest in something for your restaurant that’s not going to bolster your sales or net income right away, that’s okay, but then you need to recognize that. For example interior design might not pay immediately, but you might have increased future sales after really good Yelp reviews about the ambiance of your restaurant. Think about bolstering your sales in a way that has your income in mind.”
Don’t Underestimate Your Required Working Capital
Dorsey says restaurant owners make a common financial mistake: not accounting for the working capital needed to run their restaurant. Once you know your monthly costs, keep two-to-three months of working capital saved in case there is a downturn.
“You don’t want to be living and running your business ‘paycheck to paycheck,'” Dorsey says. “Things usually domino, and it can be as simple as if you didn’t make enough money to pay your utility bill, then you incur a big late fee, which means you can’t pay something else on time, and bills begin to spiral out of control. You perpetually end up in this cycle of not being able to pay your restaurant’s bills on time.”
If you can’t save enough to get ahead for two to three months, another option is to obtain restaurant and food service financing from a trusted source such as Strategic Funding. This can provide you with working capital you can use in case business declines for a couple months.
Know Your Resources for a Loan & Use Them Wisely
Dorsey says there are three main sources where restaurateurs obtain financing:
Friends and Family: Getting financing from friends and family can be great because they know you and terms can be generous. On the other hand, if things go awry your business finances will become entangled with personal relationships.
“You should have some sort of formal contract in place, even if it’s your mom and dad lending you money,” Dorsey says. “It’s best to have as much legal framework around this relationship in case anything goes south.”
Crowdfunding: Dorsey says the best time to use crowdfunding platforms is if you’re trying to raise funds for a restaurant product or if you’re raising money for a beloved neighborhood location. However, she stresses it’s important to understand the legal implications.
“The challenge with crowd is if someone gives you $5, they technically own a very small share in your company,” Dorsey says. “If you have 5,000 backers, then you have 5,001 shareholders in your company and they technically have a say in what you do with your restaurant, no matter how small their contributions are. Because of this, it’s important to make sure the legal framework is set out before crowdfunding. Alternatively, there’s some platforms that are non-equity based, but in that case your backers will still expect to receive something tangible in return for their contribution, so think wisely about what you’ll be offering them.”
Restaurant Business Loans: Dorsey says it’s important when obtaining restaurant financing to clearly understand how you can turn around the loan money and pay it back since you’re bound to terms. You can’t miss payments or float cash like you might be able to with friends and family.
“I think restaurant financing works especially well for owners with established restaurants or those very confident in their financial projections because you have a record of what that loan is going to get you,” Dorsey says. “For example, if you need $100K in financing to open a second location, you should know based on financials from your first location that you can expect to pay that back in X amount of months.”
Interested in obtaining operating funds for your restaurant? Visit Strategic Funding Source Inc. to learn more about how a restaurant loan could grow your restaurant this year. To find out more about how Jenny Dorsey can help your restaurant, visit JennyDorseyConsulting.com.