Why It Is So Hard To Make It in the Restaurant Business

Controlling Your Cash

Restaurants need to be run like businesses, and businesses require just as much attention on finance management as they do on quality controls. A restaurant may offer great services with customers waiting in lines out the door and yet may not even be able to break even, let alone make profits. You may think that a successful business is one with those that gets great reviews from food critics and loyal customers. On the contrary, the restaurant’s ability to make profits is what determines what makes it successful or not.  A restaurant that has to close its doors because cannot make it financially is failure.

So you can cook, manage staff and take care of your customers, but if you can’t manage cash, read a P&L sheet or develop business strategies, then your business might be in trouble. It is very crucial for you to understand what each number and expense truly means in terms of profitability. You need to understand how to manage employees, perishable goods and plenty of other factors that are involved in running a truly successful restaurant.

It is very easy to be so engrossed in the day-to-day operations of smoothly running the restaurant that you forget to focus on the financial aspects of the business. A restaurant owner is supposed to be the Chief Executive Officer and needs to keep an eye on the bigger picture. Focusing on a singular aspect or getting involved in jobs that the staff has been hired for are not great ideas for the owner Restaurant owners most often worry that they will lose control if they aren’t constantly involved in the minutest of details, but in most cases, they end up losing control because of it.  Following are some of the most common reasons why restaurants fail:

Not Safeguarding Cash

Too often restaurants don’t have control over what comes in and what goes of the register and anyone working the floor has access to the cash register, and so no one person is accountable for any loss. Particularly in restaurants that don’t have a Point of Sale System, the situation is much worse. Without the POS, workers have to take the orders into the kitchen, hence making it almost impossible to track sales and run accurate reports.

Accounting

Lack of account monitoring has been a contributing factor in plenty of restaurants being closed down. Accounting is a serious business, but most restaurant owners are too engrossed in the excitement of running the place, that they choose to ignore the dull task of bookkeeping. Hiring an accountant might seem like an avoidable expense, however, it offers a good return on investment. So if a restaurant owner isn’t good at managing accounts, then it is better to seek professional help. You can look for a reliable finance management system, mobile or tablet applications or look for online service providers for assistance.

Poor Cash Management

Restaurant owners many times fail to monitor cash flow on a weekly basis. For a restaurant to survive, money in has to be greater than the money going out. Restaurants that spend above their means have little chances of survival. Restaurant owners need to develop both short term as well as long term cash flow projections. Many times restaurant owners only look at the short term returns and don’t monitor their spending history. A refrigerator breaking down or a string of bad weather can have dire effects on a restaurant if it hasn’t planned for emergencies. Restaurant owners need to have a short and long term plan and manage their cash properly.

No Cash Controls

Just like when you visit the grocery store and see the prices on items magically increase little by little or pack sizes shrink, your restaurant’s expenses need to keep up with inflation, and aptly monitor and control the expenses. A restaurant owner who does not look carefully at price increases is likely to witness the profits disappear with time. Increase in prices is a ways of life, but if a restaurant owner hides his head in the sand or just doesn’t take time to read the invoices has nobody to blame but himself.

Cost control also includes waste management. Waste in not just what is being thrown out but also includes leaving the air conditioned on during the night. Equipment and appliances that suck too much energy need to be monitored and handled smartly.

Lack of Inventory Controls

Where  extra inventory is just money sitting on the shelves, lack of inventory means not being able to fulfill obligations to the customer by not having a complete menu. Inventory and ordering is a science that all successful restaurant owners use to their advantage. Restaurants that do not monitor their inventory not only suffer in terms of profits and lack of management but also send a bad message to their staff, which could lead to employees thefts and eventually become the cause of the restaurant’s demise.

Financial mismanagement can cost a restaurant. Following are a few concepts that anyone entering the restaurant business should know and implement:

Managing Finances

Financial mismanagement will quickly cause a restaurant to fail. Cutting corners is not the answer.  Following are a few concepts that every restaurant needs to know from the beginning.

Taking Average Profits

You’d be surprised to know that on average a restaurant makes 5 cents on every dollar spent. So if it made sales of $50 in an hour, it means the profit is just $2.50, now that doesn’t sound much does it? And if you add the daily minute mishaps to these calculations, the profits would drastically decrease. A broken salt shaker or pouring out the wrong drink or the most common glass breakage might seem insignificant, but let’s see it from a different perspective. To make up for the loss of a salt shaker worth $5, the restaurant needs to make sales worth $100. Isn’t so insignificant after all is it?

The Tale of Expenses, Sales and Profit

In the simplest terms, profit is what you make when you minus the expenses from the sales. And if for whatever reasons, the expenses are more than sales, there is only so long that a restaurant can stay in business.

Fixed and Variable Expenses

Insurance and rent are fixed expenses whereas the labor and raw materials are the variable expenses. So the sales a restaurant makes after investing in variables need to pay for the fixed costs before profits are extracted.

Your Inventory

Liquor and food stock is like cash too, a restaurant only need so much in hand. Ideally there should be a week’s supply of food and a couple of weeks of liquor in store. Any more than that and the restaurant owner is simply overstocking.

Concentrate on Boosting Sales rather than Cutting Costs

Cost cutting is very important to help make more profits, but boosting sales is far more profitable. Many restaurant owners spend so much time concentrating on cutting down costs that they don’t think much about growth.

Cents Make Dollars

Regardless of how you do your math, there will only remain 100 cents in a dollar. Take 100 coins and let the staff divide them for wages, rent and other expenses. You’d be surprised on how they make the assessments.

Staff Expenses

Staff is most commonly the biggest expense in restaurants and so it is important that they are productive enough to make it worth the investment. Any rise in wages should be matched with productivity.

Additional Costs of Staff

Uniforms, training, meals, leaves need so be added in to total staff costs. They also need to be adjusted into the accounts.

Profits Pay For Equipment

Any investments made in equipment cannot be adjusted in the restaurant’s expenses and need to be paid for from the profits, so owner’s need to make sure that they are well worth the money. A good idea to judge if the equipment is worth the investment is by seeing if it will have a fast return on investment by either cutting down on overall costs like ingredients or labor or by boosting sales.

The Costs of Small Things

By working out the exact costs of small things restaurateurs can better evaluate the profits and sales. They need to know how much each napkin, glass or even a tomato, cucumber or scoop of red chilies costs, then check how much of it is wasted every week and how much it truly costs.