Like most of you who are reading this article, you manage your business every day. Whether, physically in the office or from a ‘hidden bunker in the basement of an undisclosed bldg.’, your business has to be managed. Much too often ‘management’ is reduced to just being on site...kind of making sure your employees know you’re there and watching.
This holds true for any business...if you’re not managing growth, that lack of business management results in status quo, or no growth, which then results in a direct dilution of your business and is the precursor of failure.
There’s an axiom that businesses that aren’t growing...are dying. Your competition is nipping at your heels. An owner’s focus should be how do we win more customers, how do I reduce expenses, how can I make my employees better.
Especially in the restaurant industry, everything revolves around managing a business’ revenue and expenses. Owners typically focus on their net profit. But that ‘focus’ is misplaced, the focus should be on ‘sales’...are there more customers this month than last, were the gross sales higher?
At this time in the restaurant industry, there’s a lot of new money floating around...be it from increases in salaries, reduction in taxes, a strong stock market, and a high level of consumer confidence, it should be easy to attract that money to your tables. But attracting them takes money. Opinions differ, but approximately 5%, more if possible, of your sales should be funneled to advertising and marketing. Once sales have been generated, management skills become increasingly important. Sales figures have been established, now the road to profitability has to be reviewed...reviewed & analyzed to evaluate if some of that revenue will drop to the bottom line.
There are a couple of metrics used by most owner-managers...rent-revenue, labor cost-revenue, food cost-revenue.
Starting with food cost, depending on the particular type of restaurant, food costs should be kept under 40% of sales. Obviously the cost of flour for pizza is cheaper than roast beef for sandwiches. As the single largest manageable expense, monitoring all food-related costs is critical. When the cost of shrimp increases, to keep the cost/sales ratio in check, it may be necessary to massage the menu and promote chicken dishes.
Payroll today is another major issue that needs to be held in check. At a time when attracting good help is so difficult, the cost to maintain a staff is getting prohibitively expensive. Basic labor cost should be ‘ideally’ fixed at 25-30%. However, behind the scenes, the insurance and tax costs associated with the payroll costs can be devastating.
Food and payroll costs are manageable. What isn’t manageable is rent...occupancy costs. Once a lease is entered into, the operator is tied to that commitment for years to come. Seasoned operators avoid leases that can be considered exhorbitant, that said, these same operators get hooked into these leases by landlords offering cash upfront for renovations, tenant improvements, and free rent for a period. Then once hooked they become blinded by optimism and self-confidence.
The percentage of revenue associated to rent ideally should be under 7% in today’s economy. Studies have claimed that 6% is the ideal value of base rent as a percentage of gross revenue but in the last year or two, the percentage is moving to 7%. So if your monthly sales are $100,000, your rent shouldn’t be higher than $7,000, not including taxes or common area maintenance (CAM) expenses. Triple net charges are the tenant’s share of the building’s real estate taxes, insurance, and maintenance.
Stated again, the people walking through the door is a function of management. Once you know where you stand, then it’s up to you, management, to drive sales. Driving sales, by many restaurants is offering prepared food pick-ups, catering, extending operating hours to accommodate a food segment not presently offered. In some cases just extending hours of operation could help. The problem for management is how do these adjustment affect your cost and staffing. Adding catering is becoming more and more popular because events are planned in advance and you don’t have to be concerned that you won’t be ready for sales that grow. Where allowable, adding an outdoor dining area can also increase your performance because it allows you to accommodate more guests without increasing your rent. As with any business metric, it’s only as valuable as how it is managed.
Dennis Serpone is president of National Restaurant Exchange and New England Restaurant Brokers, Wakefield, Mass.