The views of this article are the perspective of the author and may not be reflective of Confessions of the Professions.
Is Owning A Restaurant Costing Your Profits?
It’s the most common question at parties: “What do you do?”
When your answer is “I own or manage a restaurant”, then there’s no doubt you know very well what green eyes of envy look like.
Oh, if it was only that easy! Do these party goers know how hard those in the hospitality industry work? Do they know that 60% of all restaurants fail in the first year? And that 80% have hit the skids before their restaurant’s fifth birthday?
Like any other business, a restaurant normally goes under for a very simple reason: it’s not making money. And there are plenty of obvious reasons for that. Did you pick a bad location? Are you not doing enough marketing? Is your food and service simply not up to scratch? Or are you just not very good at running restaurants?
Again, like most things, it’s almost certainly much more complicated than that.
So beyond simply not doing a great job of putting delicious meals on tables, here are 5 ways your restaurant could be shedding profits without you even noticing.
1. Staff turnover
There’s no doubt you already know that hiring and retaining good staff is a particular challenge in the hospitality industry.
In fact, the turnover rate is alarming. While that’s not new, what might be news to you is just how much it costs. A study by Cornell University found that constantly training new staff is only just the beginning of a cost that weighs in at over $5000 per staff member.
Area to focus on: Your staff retention policies. Be flexible, prioritise up-skilling existing staff, incentivise, pay well, and formulate a serious hiring plan.
2. Poor inventory management
Food inventory management may not sound as important as serving up delicious delicacies, but getting it right will mean supercharged profits. And getting it wrong could mean losing your restaurant altogether.
In a nutshell, however you track what stock is coming in, what’s going out, and what’s left over, is your food inventory management system. And if it’s done well, you cut out one of the easiest ways for a restaurant to shed money — because even a well-oiled restaurant will still spend at least a quarter of their expenses on food inventory.
Area to focus on: Improve the way you track inventory, even if all you do is use an Excel spreadsheet — and then pay attention to it every day of the week.
3. Sloppy financial management
As skillful and knowledgeable as you may be about restaurant locations, customer service, presentation, marketing and — above all — food, it’s just not going to be enough if your restaurant is not run first and foremost as a business.
Like it or not, while food and service may be your passion, a restaurant also needs to be a profit-making machine — and too many restaurateurs put awesome financial management down their list of priorities.
It means owners and managers often try to run their restaurant without adequate funding, or with unwieldy loans. Even so, the same restaurants will often then host garish launch events whose costs outstrip total sales for an entire year.
Other poorly-run restaurants might keep inaccurate financial information, and then therefore make poor decisions at the wrong times. And once the money-shedding process is underway, sloppy financial discipline habits means a few lost dollars here and there ultimately add up over time to a failed business.
Area to focus on: Regular financial planning. Make it a priority task for at least once a month, in which goals are set and attention is directed towards making your restaurant a smooth-sailing ship — from a financial point of view.
4. No food costing strategy
At the very heart of your restaurant as a business is that price in italics on the menu. But far too few restaurants give menu costing the serious attention it deserves, thinking instead that you either look at how much your competitor is charging, or just add up the cost of the ingredients and factor in a bit of profit.
But you’re going to have to do much better than that, and make recipe costing and menu prices something you prioritise with the same importance as your location, decor and head chef.
Area to focus on: Building your recipes. Smart restaurants use recipe cost sheets and then brief staff about their importance to the profitability of the entire business. These sheets break down items like precise ingredients and meal portion sizes — because even slight deviations can very quickly erode profit margins.
5. Forgetting the hidden costs
Why do we need to pay so much attention to things like food and menu costs? Because, as we suggested earlier, failing to see your restaurant as at heart a money-making machine is just a recipe for failure.
And, also as we said earlier, simply adding up the cost of the ingredients and adding a bit extra on that menu price for profit is just not going to be good enough.
There are plenty of businesses that are pretty easy and simple to start and run — and a restaurant is definitely not as straightforward as babysitting or blogging. The easiest way restaurant managers get their numbers dead wrong is by forgetting all of the many little overheads that make running a restaurant very tricky business.
We’re talking about all that equipment, those loans, the many consumables, the expensive premises, staff turnover, utilities, marketing, food waste, delivery charges, licenses — and unfortunately that list goes on and on.
Area to focus on: Breaking down a daily cost of running your restaurant. By not forgetting all the little things that cost you money, it’s not only easier to get your overheads right, but also easy to spot areas of wastage and potential savings.
The bottom line: Restaurants are a serious business
Owning and running a restaurant is difficult enough without consistently losing money — and not even knowing where your profits are going and what to do about it. So as you look to make your surviving and thriving restaurant sustainably profitable, the keys to a great future are attention to detail, discipline, honesty — and more of that good old fashioned passion and hard work.
