Restaurant Financial Model

[CheGuevara]

A friend of mine and I are toying with the idea of a restaurant - althoguh we can easily put a financial model together to evaluate the feasibility of it, neither of us have any experience and would thus overlook some of the underlying assumptions which might not be immediately obvious to us.

Does anyone have access to a model which they could share? The actual numbers are not really critical, but rather the cost assumptions - primarily labour and food cost vs. planned menu and sales. It would be immensly appreciated.

Thanks.

-che

[Tim Hayward]

A friend of mine and I are toying with the idea of a restaurant - althoguh we can easily put a financial model together to evaluate the feasibility of it, neither of us have any experience and would thus overlook some of the underlying assumptions which might not be immediately obvious to us.

Does anyone have access to a model which they could share? The actual numbers are not really critical, but rather the cost assumptions - primarily labour and food cost vs. planned menu and sales. It would be immensly appreciated.

Thanks.

-che

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A wise colleague once told me that the equation for a restaurant lifespan (L) was something like

M - S x D = L

Where M is equal to the amount of money available, D is the depth of the hole and S is the speed at which you are prepared to shovel M into D

But seriously, how fantastic to follow your passion. The very best of luck

[Andy Lynes]

Carol Godsmark's How To Start and Run Your Own Restaurant: An Insider Guide to Setting Up Your Own Successful Business may prove useful to you.

[Mandarin]

All the best of luck with your venture - the first thing I would advise though, is for one or both of you to get some experience in the kitchen/on the floor of a restaurant.

[Winot]

And of course there's the adage about the best way to make a small fortune in the restaurant business (start with a large fortune).

[Matthew Grant]

It's odd, we all know the stories about restaurants losing money hand over fist and the stats for restaurants going out of business are quite horrendous. But none of us talks with much authority about restaurants making money and surviving for a long time, they do exisit but we all (myself included) seem to concentrate on the bad side of the business. Anybody got any successful sotries instead?

[Mandarin]

It's odd, we all know the stories about restaurants losing money hand over fist and the stats for restaurants going out of business are quite horrendous. But none of us talks with much authority about restaurants making money and surviving for a long time, they do exisit but we all (myself included) seem to concentrate on the bad side of the business. Anybody got any successful sotries instead?

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Yes, I do. My Father had two extremely successful Chinese restaurants in the North West for many years, having had no prior experience of running a restaurant. However, that was 40 years ago when there were no restaurants of this kind in the area. He simply, by his own admission, struck lucky. These days there is too much competition around for people to simply go into this business because they enjoy and have a passion for food. You need a solid working knowledge of a restaurant and also good business sense.

[naebody]

It's odd, we all know the stories about restaurants losing money hand over fist and the stats for restaurants going out of business are quite horrendous. But none of us talks with much authority about restaurants making money and surviving for a long time, they do exisit but we all (myself included) seem to concentrate on the bad side of the business.

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That's not strictly true. It's just that the successes tend to be viewed as isolated cases whereas the failures are considered symptomatic of the wider universe. Needless to say, this is true well beyond the world of catering. As a general rule, journalists have to put some kind of "this is important because ..." spin on their articles. And what kind of spin can you put on a story about a closed business, other than seeing it as a portent of doom?

Yet I'd argue that the specific successes are talked about much more, in the press and elsewhere, than the specific failures. How much have we heard about Leon, the world's most zeitgeisty sandwich shop? Maze and Yauatcha have generated more column inches than their evil alter-egos, Pengelly's and Anda.

On the subject of startup businesses, I'd be wary of studying someone else's business plan. Many recent successes have tended to break rules rather than follow rote. One example would be Ping Pong, which has minimised labour costs and created a scalable business simply by preparing dim sum in a central warehouse then re-steaming it on premises. It takes a locktight business brain to consider such things, not a foodie sensibility. Three years tutelage at the elbow of Ferran Adria may well give people the latter, but it can never guarantee the former.

Personally, I'd argue that the best training for any prospective restaurateur is to go work for McDonalds. Too many restaurants fail because their owners want to own a restaurant, when what they should be doing is running is a business.

Edited May 9, 2006 by naebody (log)

[SBonner]

Labour and food costs are the killers. The successful but not wealth forming NA model is labour costs under 30%, food costs under 25%. I think the average restaurant in Canada makes between 5 and 15% actual profit.

Cheers,

Stephen Bonner

Vancouver

[helenah]

I am happy to help with your financial planning. I set up a restaurant 3 years ago and would have really benefitted from some hard facts and data. The first thing I would stress though is do not just toy with the idea of opening a restaurant. It will cost a lot of money as well as your sanity for the first 12 months I would agree that first and foremost, it is a business and should be run as such from the start. Not sure I agree with other comments that you need practical, hands-on experience. As long as you set your staff budgets that they are expected to work to and that they understand what you are trying to achieve, it can work without you having to prove that you can cook, serve customers, empty the dishwasher, pay in the cash etc etc.

Your three biggest on-going costs or overheads will be: property (rent, rates, repairs, utilities, insurance); your cost of sales (the raw ingredients) which will be in direct proportion to your profit margin on food, alcoholc etc and finally labour. And of course don't forget the VAT man. The best starting point is to look at what you need to turnover each week to break-even, allowing for these key things. The first year you will almost certainly lose money, the second break-even and the third start making a profit. But that is where you passion and belief in what you are doing will carry you through! Starting a restaurant is not for the faint-hearted

If you want specific advice, maybe email me off-line?

[Mandarin]

Not sure I agree with other comments that you need practical, hands-on experience.  As long as you set your staff budgets that they are expected to work to and that they understand what you are trying to achieve, it can work without you having to prove that you can cook, serve customers, empty the dishwasher, pay in the cash etc etc. 

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As long as you hire trustworthy staff that can do the job well, and that you realise/understand the job that needs to be done. Staffing was the major problem my Father had as he didn't understand how a kitchen was supposed to be run and got completely taken advantage of by everyone.

[gnoos]

I had Business Plan Pro software once that was pretty good and had loads of demo business plans and costings. Could be worth a look.

Best of luck.

[Basildog]

I always find it hard to understand the idea that you can run a restaurant without have some real good understanding of being a chef/front of house.You are at the mercy of your key staff.You can get lucky and have loyal, talented hard working people, but law of averages means that you are going to get some shit who will take the piss.I've seen in happen twice, resultiing in Restaurants closing, and at the moment i'm in the process of watching a new restaurant opening soon, fingers crossed they have the right chef for the job.

[helenah]

There are many successful restaurants run and owned by chefs/managers as well as some that fail. Having hands-on experience running a kitchen or working front of house is not what I think ultimately makes or breaks a business though. I think it is as important, if not more so, to have a very good understanding of what the restaurant overall has to deliver to survive - whether it's keeping your customers satisfied, your staff happy and motivated, an awareness of what your competition are up to and have an idea of where your business is heading generally.

This may make you more reliant on your staff than you would like to be, but ultimately I think that key staff who are good have to have some real input into a business and feel they have some autonomy over their teams/depts in order to get the best from them. No-one is indispensable though - even the owner. As a business, it must function this way. If one person takes this piss, and of course the law of averages dictates that this happens occassionally, the rest of the team generally don't tolerate it.

I'm not a great believer in luck or crossing fingers when it comes to opening a restaurant with often hundreds of thousands of pounds at stake. This is again why I think that business expertise is probably more important than hands-on experience.

[Basildog]

I think your right about buiness expertise, which is why CEOs of big companies move to other completly different areas of work and do a great job.But i'm talking about owner run independant restaurants, where the boss may be a shit hot buisness brain but if he doesn't have an understanding of a chefs/FOH job then your in a more difficult position.The best way to understand a job is to do it.

[Mandarin]

I think your right about buiness expertise, which is why CEOs of big companies move to other completly different areas of work and do a great job.But i'm talking about owner run independant restaurants, where the boss may be a shit hot buisness brain but if he doesn't have an understanding of a chefs/FOH job then your in a more difficult position.The best way to understand a job is to do it.

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I absolutely agree with you. You can have the best chef in the kitchen, who turns out fantastic food but if he has no interest in the business then he will not be keeping an eye on GPs and the costings will go through the roof. In my experience, I also believe that if one person starts to take the piss, as Helenea mentioned, then the others merely see that as their OK to do the same. I think the reason why the percentage of places that go bust in the first year is so high is because people have a romantic dream of running a restaurant, with no actually idea of what is entailed on a day to day basis.

[CheGuevara]

A wise colleague once told me that the equation for a restaurant lifespan (L) was something like

M - S x D = L

Where M is equal to the amount of money available, D is the depth of the hole and S is the speed at which you are prepared to shovel M into D 

But seriously, how fantastic to follow your passion. The very best of luck

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so tim - does this mean that if i have negative cashflow, i could potentially end up with a restaurant into infinity? that would be something!

restaurant business is a funny thing at times - whenever the subject of a restaurant opening by anyone outside the industry is brought up, the usual skeptical comments abound. even bourdain makes the point in kitchen confidential. i agree with matthew, most people tend to view the failures and not the successes - do start-ups generally fail? in most cases, in most industries. not just restaurants.

somewhere i think that what differs between the restaurant industry and others is that it is infinitely more logical and natural for outsiders to have vast knowledge on it. what other industry do people taste three times a day for every day of their life; are able to visit markets, grow their own produce, cook, etc. None. when i got into the food industry i arrived - in many cases - with more knowledge about produce than the chefs i sold to. so, while i agree the story of the good home cook wanting to open a restaurant might ring alarm bells for failure - i don't think insiders enjoy having debutants know so much about their trade. have i served 100 covers in one night - no, but i know i haven't, and i know i don't have that experience. do i need it to be successful with a restaurant venture - it is certainly not essential.

what helena says i believe is true - a restaurant like any other business needs to market its product/service correctly, and follow with good financial mgmt. what might it be the case that many people get into the restaurant trade because it seems accessible, like opening a bed & breakfast in the french countryside - and then fail because they lack fundamental business skills?

the comment from mandarin about people with the romantic dream who have no idea of what it really entails to run a restaurant is a sign of an unconcious investor, rather than any measure on the difficulty or skills required to successfully open and run a place. you really have to be an idiot if you think a restaurant runs itself. likewise you have to be an idiot if you can't see a chef taking the piss on food costings. my guess is more restaurants would do succeed if they were better run from a financial standpoint, or at least do much better. that however, is an ignorant assumption.

-che

[CheGuevara]

Labour and food costs are the killers. The successful but not wealth forming NA model is labour costs  under 30%, food costs under 25%. I think the average restaurant in Canada makes between 5 and 15% actual profit.

Cheers,

Stephen Bonner

Vancouver

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this is the type of information i am after - industry metrics which i can't get a hold of easily outside. do you know what the average food wastage is, or is that built into your food cost?

i'm not really looking for business plan software - i run a business so am quite familiar with business plans and the day to day realities of a business and its employees. i'm just missing some of the assumptions to build a model, which require industry knowledge.

helena - i'll probably email you when i have some specific questions i have (thanks for offering). at the moment i'm wondering what the unknowns are... ie - where is the balance in the menu size to minimize food wastage when sales are low/growing. if we ever go ahead with this plan - then i will stop toying with the idea and take it seriously when you put your financial model together - where did you get your assumptions from?

-che

Edited May 11, 2006 by CheGuevara (log)

[Basildog]

My example

Food costs 35%

Labour 15%

Vat 17.5%

Overheads 20%

Profit 10%

Finance ( repayment on loan) 5%

my labour costs are low..i work 9.30am-12 midnight myself

Normal labour costs are about 20-25%

That's 102.5% but you get the idea

Edited May 11, 2006 by Basildog (log)

[helenah]

After VAT, sort of the same example:

Cost of sales 30%

Staff 30%

All other overheads 30%

Profit 10%

All food that is ordered by the kitchen should really be covered by your GP - this includes any wastage (which hopefully there won't be very much of!) as well as staff meals. Some restaurants also include the cost of kitchen laundry within their GP (rather than as an overhead).

[PotjieCheffie]

After VAT, sort of the same example:

Cost of sales 30%

Staff 30%

All other overheads 30%

Profit 10%

All food that is ordered by the kitchen should really be covered by your GP - this includes any wastage (which hopefully there won't be very much of!) as well as staff meals.  Some restaurants also include the cost of kitchen laundry within their GP (rather than as an overhead).

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To add to this:

Generally speaking (and in my experience)

Rent = 5-8% of turnover (realistically speaking around 10%)

Cost of Sales shouldn't exceed 33% (Food 70% of sales and Wet 30%)

Labour (salaried and wages) 34%

Other overheads including:

NI + PAYE

Employers NI cont

Business Rate

Water Rates

Premises Insurance

Trade Refuse Collection

Heat, Light and Power

Telephone

Office Stationery

Legal Fees

Audit and Accountancy fees

Consultancy fees

Miscellaneous Expenses

Repairs and Maintenance

Cleaning

Bank Interest / Charges

Loan Interest Paid

Credit Charges

Depreciation on Furniture & Fittings

Amortisation of Leasehold

Amortisation of Goodwill

Subscriptions Licence Donations

Other (miscellaneous)

Should account for 11-15% (realistically speaking)

Leaving you with around 10% profit. (obviously with fixed overheads and low turnover this can be somewhat unnerving, though on the upswing it can be quite rewarding).

It's been the model we've used to open up and whilst the profits aren't high, it does make for some interesting control mechanisms to be put in place. The wastage factor generally given is around 5% on food and 2% on wet (though all should achieve their 67-70% GP's with this included.

Best of luck with your venture

[CheGuevara]

basil, helena & potjie - thank you very much for the info - it is extremely helpful, especially as examples are very similar with respect to cost ratios.

-che

[algy]

che

just to second helenah's point above about covering fixed costs. The percentages quoted for the different cost elements are helpful, but are obviously based on sales volume assumptions. It's key to identify the balance between your fixed and variable costs and understand where your breakeven point is and the implications of not meeting it. Beating it is not a problem!

Apologies if this restating what you already know and good luck.

[Bond Girl]

I've got one for American restaurants. If you like, I'll email it to you. Send me a PM.

[CheGuevara]

I've got one for American restaurants.  If you like, I'll email it to you. Send me a PM.

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thanks a lot - sent you a PM with my email.

-che