Starting a restaurant is an exciting whirlwind. Fueled by ideas and high energy, you might feel like the possibilities are endless. But transforming that dream into a sustainable, profitable business is where the real challenge lies.
In the rush of launching your restaurant, it’s easy to overlook certain financial details. Yet, those numbers, budgets, and forecasts are the backbone of your business. Whether you’re new to the restaurant world or a seasoned restauranteur, your success will hinge on your ability to sidestep common financial mistakes.
Today, we’ll look at six common financial mistakes you’ll want to avoid to ensure your business succeeds and thrives.
Mistake 1: Not understanding your financials
The first and foremost pitfall that many restaurant owners often fall into is the lack of comprehensive understanding of their financial numbers. This forms the cornerstone of successfully managing a restaurant. Without a clear and in-depth understanding of your financial situation, making informed decisions becomes a daunting task. This, in turn, can lead to dire consequences for your restaurant.
Understanding your financial data is not just about knowing your profit and loss statement. It includes understanding your cash flow, operating costs, food costs, labor costs, and overheads. It’s about recognizing the relationship between your restaurant’s expenses and revenue, and how that impacts overall profitability.
By understanding your financials, restaurant owners can identify potential issues that need to be addressed, monitor financial health, and make informed decisions that drive growth. It is advisable to consult with an accountant or use financial management tools to help you navigate this complex landscape. Remember, effectively managing your financials is integral to the success of your restaurant.
Mistake 2: Unrealistic forecasting
It’s crucial to develop a reasonable financial forecast, whether you’re trying to secure lending or financing the business on your own. The key to realistic forecasting is a flexible model that allows you to change inputs and test different scenarios to see how they affect your outcomes.
Think of your forecast as a financial roadmap – it should include income statements, balance sheets, and cash flow statements. The ability to tweak assumptions like food, pour and labour costs (aka “prime costs”) or sales projections can help you anticipate different business conditions. For example, you might test a scenario where expenses double or you only reach half of your expected sales. These “what-ifs” help you prepare for both good times and bad.
Many restaurants create optimistic forecasts, especially when they need to impress potential investors or lenders. It’s important to balance these forecasts with more conservative scenarios. By stress-testing your assumptions, you’ll be better positioned to handle unexpected turns.
This is where the expertise of a seasoned business advisor can really make a difference. They can help you identify your business’s key drivers, create realistic assumptions, and develop a forecasting model that adapts to any situation.
Mistake 3: Over-reliance on a single funding source
While it may seem straightforward, relying too much on one source of funding can have dire consequences. It’s not just about securing enough financial runway; it’s about understanding the timeline to break even and diversifying your funding sources.
First, consider your break-even point. You should have a clear roadmap of how and when your restaurant will start generating a profit. One common pitfall is underestimating the time and resources necessary to reach this milestone, which can lead to running out of money prematurely. Prepare for both unexpected costs and potential revenue shortfalls. Always aim to raise more money than you think is necessary, and have a backup plan to cushion your restaurant against unforeseen financial challenges.
This brings us to our next point: diversify your funding sources. Over-reliance on a single source of funding (e.g. your own lifetime savings) is risky. It exposes your restaurant to volatility and external control. Multiple funding or income streams give you options and help to negotiate competitive terms.
Mistake 4: Not attaining the right menu/market fit
Attaining the right menu-market fit is an iterative process. As you introduce initial versions of your menu to your target market, it will likely be a close, but not perfect, match to your customer’s preferences. The key is to actively seek feedback from your early diners and refine your menu based on their input and sales.
You’ll reach a turning point when your menu aligns well with the tastes of your market, creating a great dining experience. This is the true menu-market fit, where organic growth begins to take off through word of mouth, PR, and other non-paid channels. This is critical to expanding your restaurant while maintaining or lowering your average cost of acquiring a customer.
A mistake many restaurants make is aggressively promoting their menu before attaining any sort of menu-market fit. Driven by the pressure to generate revenue, restaurant owners invest heavily in promotion, which might stimulate sales but often leads to high customer drop-off rates. It’s akin to trying to fill a leaky bucket.
The lesson here is to focus on improving your menu-market fit before scaling up your promotion efforts. This approach ensures that when you do invest in promotion, it’s more likely to yield sustainable growth and customer retention.
Mistake 5: Poor staffing choices
Running a restaurant, especially in its early stages, can be overwhelming. It’s tempting to think that hiring employees will solve your problems, but employees are a significant financial commitment.
Remember this principle: hire slow, fire fast. Many restaurants do the opposite, hiring quickly and hesitating to let go of underperforming staff, which is costly and detrimental.
If you need to hire, take the time to ensure that the new hire is not only skilled but a good fit for your restaurant culture. Have a clear plan in place for their role and responsibilities. Ensure you can afford the full cost of an employee, which goes beyond salary to include payroll taxes, insurance, benefits, and possibly more, depending on the location of your restaurant and your circumstances.
And then there’s the “fire fast” part. It may sound harsh, but it’s practical. A staff member who isn’t delivering, can be a liability. Poor performers can hurt your bottom line and your culture. Retaining these employees can weaken morale among other restaurant staff who may feel burdened or demotivated working alongside underperforming colleagues. Prolonging the decision to terminate poor performers only increases your losses.
Mistake 6: Neglecting tax obligations
Taxes for a restaurant are like routine maintenance for a vehicle; neglect them, and you risk a breakdown. You need to be diligent about various tax obligations, including payroll taxes, sales tax, and possibly business or corporate income tax, among others.
Some taxes, like payroll, require withholding and must be remitted throughout the year. If you fail to withhold the right amount or you fall behind on payments, the penalties and interest add up quickly.
It’s crucial to ensure your taxes are paid in full and on time. Likewise, tax funds shouldn’t be diverted to cover other restaurant expenses or deficits. This error can lead to severe financial and possibly even legal repercussions.
This is one reason it’s crucial to maintain regular appointments with your accountant. They can clarify any tax obligations specific to your restaurant including those you might not be aware of, so you can steer clear of costly penalties.
You may also consider outsourcing some of these responsibilities, like bookkeeping and payroll to a specialized provider. This not only reduces the time burden for you, but it can also mitigate risks and liability.
Wrapping up
Remember, knowledge is your most valuable asset when managing a restaurant. If you’re looking to deepen your understanding or need tailored advice for your restaurant journey, our seasoned advisors are here to help. Together, we can help to ensure that your restaurant doesn’t fall victim to any of these mistakes. For more information, please contact our office.