A study by Cornell University found that 30% of restaurants in the US fail or change ownership after their first year of operation. This is a far cry from the popular myth that half of all restaurants fail in the first year. But this is nothing to sneeze at either. The reasons restaurants may fail vary from inadequate marketing to average food and bad service. But the main reason that restaurants go under is undoubtedly poor financial management.

The success of your establishment relies heavily on how well you balance your books. Fortunately, you don’t need an accounting degree to stay on top of your restaurant’s finances. You can control your expenditure and revenue with these financial management tips.

Location

It’s important to choose the right location for your restaurant so you can benefit from maximum foot traffic. But high-traffic areas usually come with higher rental fees. Proximity to businesses, schools and residential areas also increase rental costs. You need to strike a balance between good food traffic and affordable rent. A good rule to follow is to keep the cost of your restaurant’s location under 10% of your projected gross profit for the year.

Fixed and variable expenses

Speaking of rent, it counts as one of your fixed expenses. So estimate your internet and phone bills with the cost of equipment, décor and furniture. On the other hand, variable expenses include food and beverages. The trick here is to keep your fixed expenses fixed and ensure that your variable costs don’t vary too much. Food prices rise and fall so it’s crucial to remain prepared for a sudden hike so it doesn’t hurt your profit margin too much.

Food and labour costs

Food and labour costs are an area where every restaurant spends the most money. You can keep your food expenses manageable by choosing the right suppliers and balancing bulk and on-demand orders. Wastage is a money hole that you can easily fall into if you don’t order ingredients carefully. Your labour costs will depend on the type of restaurant you’re operating. However, the amount you spend on labour shouldn’t be more than 15% to 20% of your monthly sales volume.

Front- and back-of-house equipment

Front-of-house equipment is everything you use to serve patrons in the dining section of the restaurant and at the till. Back-of-house equipment is everything in your kitchen, storage and office. Most of your restaurant equipment costs comprise operational expenses that must be factored into your budget. Securing rental and lease agreements instead of buying your equipment will also ease the impact on your capital.

Marketing

Marketing is the aspect of your restaurant that’s affected first and suffers the most serious consequences when the purse strings are tight.

However, effective marketing can directly boost your revenue so it should never be neglected. It’s wise to include marketing as part of your fixed expenses, which you should factor into your budget. You can reduce your marketing budget instead of scrapping it in times of financial pressure – it could just be the thing that saves your restaurant.

Author : Rudi Badenhorst

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