Is your restaurant in need of a financial check-up? Many restaurant owners we work with are not aware of the financial health of their own restaurants, or know they are in trouble but cannot explain why. Having great food and service is not enough to be a good business and many restaurants struggle financially. As a restaurant owner, assessing the health of your business is an essential part of your responsibility and can often be overwhelming.
Conducting a regular financial check-up of your restaurant does not need to be difficult and can be broken down in to smaller steps. In order to give your restaurant a financial check-up, you need to do the following:
Keep Clean Books
Studies find that restaurants that incorporate accounting best practices are more likely to be profitable than those that do not. Keeping an organized accounting system is the only way to have a clear idea of how cash is flowing through your business. The key elements are to know 1) where in the business your revenue is coming from 2) where you are spending your money, 3) how much you are spending, and 4) how much you need to earn to make a profit. It doesn’t matter whether you use high tech software, a bookkeeper or an old fashion ledger book, you need some kind of system for timely recording of revenue and expenditure to allow you to make business decisions and plan for the future.
Compile A Monthly P&L
As we discussed in, Does Your Restaurant Compile a Monthly P&L Statement?, a profit and loss statement, or P&L, is a basic financial statement that serves as a report card for your business. A crucial part to creating a useful P&L statement is monitoring your food and beverage inventory; this step will allow you to spot food waste in handling and storage, possible theft and proper ordering levels and frequency. Tracking fixed and variable costs, such as payroll, operating expenses and occupancy costs can highlight wasted resources and where you can tighten your belt.
Know Your Prime Costs Inside and Out
Prime costs are the total of food, beverage and all payroll expenses including taxes and benefits, and are the most important numbers a restaurant owner should know. Once you’ve compiled your P&L, prime costs should be what you examine first, as they offer the most accurate depiction of your restaurant’s health, showing how well your business is managed day-to-day. Frequent review of food, beverage and labor costs holds your chefs and managers accountable for their work.
Adjust to Changes in Your Business Cycle
Since prime costs are variable, they can and should be adjusted when your restaurant experiences changes in business levels, as we illustrated in The Dog Days of Summer: How to Manage During a Downturn in Business. Planning for or being acutely aware of a fall-off in business, enables you to scale back labor schedules properly, rotate out vacations among the staff and utilize staff that has been cross-trained – increasing productivity per work hour. Making changes to your menu can also impact food, beverage and labor costs by offering a smaller menu, consolidating the number of items on your menu and decreasing the number of steps of production.
Just like an annual physical with your doctor can lead to healthy changes in lifestyle, keeping your finger on the financial pulse of your restaurant can highlight areas of weakness. With this information you can make appropriate and timely changes to have a financially healthy restaurant.