Four ways restaurants lose money but don’t have to

Four ways restaurants lose money but don’t have to

By Rick Braa, CHAE

QUESTION: I’m losing money and I’ve been trying as hard as I can but I know I need to stop what we’re doing and reinvest/rebrand, we’re just not going to make it as is. What mistakes can I avoid this time around?

ANSWER: Restaurants lose money for a variety of reasons. At the core are improper financial fundamentals. Here are four areas in which restaurants fail and that you must improve to be profitable this time around:

Lack of Proper Funding—Cash poor companies are poor companies. In cases where there is less than two weeks of sales in the bank to begin the week, decisions are made for the short run and activities managing cash distract from the core of hospitality. Rather than devising plans to drive sales and service, many operators spend time off the floor worrying about how to make ends meet and cover expenses. Unfortunately, too many operators use other people’s money to fund the daily activities of their businesses. Look at one key ratio on your balance sheet. Are current assets (those that can be converted to cash within one year) in excess of current liabilities (those that need to be paid within one year)? If not, the business is surviving on other people’s money. Too often, when current liabilities exceed current assets the ability to negotiate evaporates. Being in the position of indebtedness to vendors and employees is a position of weakness and not strength. Build the discipline of putting money aside each week and start with two weeks of working capital in the bank.

Investing too much for the concept—According to Department of Revenue statistics an operator in Washington has a 97% chance of having annual sales of less than $2.5 million and 85% chance of having annual sales of less than $1.0 million. Yet many operators will spend as much opening or reopening as the restaurant will generate sales in a year. The proper ratio, sales to investment, is 3:1 meaning that $3 of sales are generated for every $1 spent on construction, FF&E, and opening costs. To put this in perspective, if a space requires $1 million to build out and open, $3 million in sales should be generated. Using this ratio allows the operator to recover the initial investment in about 3 years and enjoy great returns for the remainder of tenancy. Most operators have a ratio of about 1:1 and with a projected 10% or less profit per year the operator won’t return the investment until well into maturity of the business. Spend as little as you can to open the restaurant to keep this ratio in line.

Lack of Proper Information—A recent survey of financial professionals reported only 28% of 300 surveyed said they trust reported numbers. What is telling of this survey is it was done with finance professionals. Only 15% of the “lower level” professionals believe their numbers are accurate. The risk of inaccurate financial data can lead to poor decision making. It’s important to have the right data that is accurate, relevant, and timely. You can have all the data in the world but if it’s not accurate and there are no double checks by qualified professionals, proper decision is made by luck. Better business information management includes efficient, optimized practices combined with excellent industry tools. Best practices in information generation allows better decision making. Surround yourself with qualified financial professionals and get the information and systems necessary for driving financial results.

Lack of Financial Discipline—As time goes by operators lose nickels, dimes and quarters leading to dollars through lack of study and financial discipline. What is missing is a financial planning session each month and proper goal setting to create focus and drive necessary results. Each period sit down for an hour, at least, per location. Study the data and walk through the P&L line by line with your team. Identify three to five things on which to focus. Be honest and keep the sacred cows front and center and slaughter them when needed. Ask whether something is being done just because you always have or whether change would better serve the restaurant and enhance or not take away from the guest experience. Clarify and communicate expected financial results and work together to achieve them.

Losing money is unsustainable and unnecessary. As you rebuild your restaurant be sure to keep financial ratios and discipline front and center and you will reap a great return to catapult you into the future. n

For a more information on improving profitability and driving sales, contact AMP Services at Rick Braa is the co-founder of AMP Services, an accounting and consulting firm specializing in helping companies grow profitability.

(Source: Washington Restaurant Magazine, July 2013)

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