Restaurant owners experience each type of financial problem that affects other businesses and some unique challenges that are unique to the culinary industry. Great chefs and people-pleasing managers can still come up short by failing to address key financial issues. Changes in dining and advertising trends can doom even long-established restaurants that fail to keep current with evolving dining tastes, advertising strategies and interactive customer engagement.
Of course, no amount of financial juggling or efficient management of inventory can compensate for inadequate gross sales, but accurate accounting, organized inventory and accounting methods and reducing waste and operating expenses can make marginal operations profitable and high-grossing facilities extraordinarily lucrative for owners.
Problems that Owners Face in Restaurants
Three major problems that owners face include operating expenses that are too high in relation to gross sales, poor accounting and inventory control and failure to review key financial statistics to make timely adjustments.
High Expenses
Restaurants often operate on thin profit margins because intensive labor and food costs generally run from 60–70 percent of gross sales. Unlike fixed expenses, restaurant owners can control these percentages by lowering expenses, changing brands, cutting labor costs, reducing portions or raising menu prices. If variable labor and food costs exceed 70 percent, then any restaurant could be in trouble.
- Proactive management can reduce labor expenses by scheduling employees more efficiently.
- Waste and theft become a real issue in restaurants where many employees feel entitled to eat or fail to take or prepare customers’ orders accurately.
- Portion control is critical, which is why restaurant franchises typically succeed due to their strict control of portion sizes.
- Staff audits can identify cooks or chefs who make too many errors or employees who take too many breaks or fail to perform restaurant jobs quickly and efficiently.
- Cross-training allows owners to cut staffing during slow hours.
Poor Accounting
Restaurants are businesses, and owners need to post accounting information correctly and include all financial information. Common issues include failing to count gift certificates as liabilities until redeemed, making sales tax errors and ordering too much inventory. The tighter owners keep their inventories, the more profitable their restaurants will become.
- Typical inventory for a full-service restaurant should never exceed a seven-day supply.
- Excess inventory leads to thefts, accidental losses, spoilage and kitchen staff failing to control portions properly.
- Failing to keep complete daily inventory records makes it difficult to spot food losses or calculate food costs in proportion to sales.
- Excess inventory ties up restaurant operating capital, which could be used for other financial purposes.
Failure to Review Reports
Financial reports are a management tool, but they can’t work if owners and managers don’t review them. Daily and weekly reports can show when labor or food expenses are getting too high, spot unexplained losses of food staples, recognize when employee meals are costing too much and identify how discounts and complementary meals affect profitability.
- Established restaurants often fail to update their portion costs on a regular basis to account for price increases.
- Relying on bank balances fails to consider accounts payable and fixed costs that should be allocated to each period being reviewed.
- Restaurant owners usually don’t have IT staff or analysts to spot problems, so they need to develop a working familiarity with the information that reports provide.
- Financial skills are as important to restaurants as culinary and management skills, and inexperienced owners can delegate these tasks to qualified accountants, attorneys or restaurant management software.
Small and large restaurants face the same financial challenges as other businesses. Additionally, restaurants face the unique problems of food spoilage, wasted food from employees who eat on the job, food that spoils and changing dining trends that include seasonal adjustments, loyal customers trying new restaurants and people who look for healthier food choices. Good financial management spots these trends and issues before they become insurmountable problems.
If you are interested in financing your restaurant, make sure to check this article: Restaurant Financing.