Restaurant Finance Management: Our Top Tips
When you know how to manage restaurant finances, you can capitalize on opportunities, ride out tough times, and earn more profits. This is — and will remain — especially important during and after the COVID-19 pandemic.
Fortunately, you don’t have to be a finance expert to manage your restaurant’s cash flow effectively. Nor do you need a formal financial education. What you do need is an understanding of a few basic concepts of financial management.
With this understanding, you can run your restaurant more efficiently, make better decisions, and mitigate financial risks. To that end, in this post, we’ll review our top tips for restaurant finance management.
How To Manage Your Restaurant’s Finances:
1. Compile Your Revenues and Expenses
If you haven’t already, the first thing you need to do is audit your revenues and expenses. Revenues are simple enough to compile since all you need is to add up your total sales.
Expenses are more involved because you need to categorize them. Generally, there are two big categories for restaurant expenses: direct and indirect.
Direct expenses are the costs directly related to food production, such as inventory. Indirect expenses are also called “overhead” and include all non-food and beverage expenses. This might include:
- Payroll and property costs
- Administrative and advertising costs
- Equipment not directly used for food production
Once you’ve compiled your business’s revenue and expenses, you can start making useful projections.
2. Audit Your Day to Day Expenses
The reason you should compile and categorize your expenses is so you can audit them. Restaurant owners that consistently audit expenses make more informed decisions and accurate projections.
For example, let’s say that you decide to open a café that serves breakfast and lunch items. Each morning, you make fresh croissants, which sell well until 11:00 a.m. Looking back at your typical expenses, you can determine that an average amount of croissant inventory goes to waste each day.
With a BOGO promotion, you realize the café can capture sales from that wasted inventory. Moreover, while your profit margin will decrease on croissants sold during the promotion, you’ll likely sell more complementary products.
Without auditing your expenses, you can’t get a sense of how a promotion or new product might affect your margins.
3. Find Ways to Optimize Your Operations
Effective restaurant management means taking a hard look at your operations and identifying opportunities to be more efficient. That said, it’s easy to go overboard and attempt to optimize too many things at once. Instead, focus on your most significant expenses.
According to food columnist and restaurateur, Irene Li, typical benchmarks for a financially healthy restaurant look like this:
- Food cost is between 20 and 30 percent of revenue
- Labor cost is between 30 and 40 percent of revenue
- Overhead cost is 30 percent of revenue
- Operating profit is 10 percent of revenue
If you find that your food, labor, or overhead cost is above these ranges, start looking for ways to cut costs. Just keep in mind that these ranges are for a financially healthy restaurant — newer restaurants take time to reach these benchmarks.
4. Build Up a Safety Net of Working Capital
Most personal financial advisers recommend creating a safety net of three to six months of living expenses. Similar advice is also applicable to how much restaurant businesses should save for their safety net.
The only difference is, with business, we refer to this safety net as working capital. The underlying concept of mitigating financial risk, though, is the same.
For example, let’s say you have a slow sales month, causing you to be short on cash. If you miss any bill payments, you’ll incur fines, causing you to be even more short on cash. Then, when you do have cash available, you’ll have to use it to pay for the late fees you’ve acquired. Therefore, this prevents you from paying other bills on time.
The result is a domino effect that could’ve been avoided had you saved a few months of working capital. Of course, the precise number of dollars you should set aside depends on your goals, seasonality, and other factors.
In addition to a safety net, you might benefit from researching restaurant financing options. Common restaurant funding products include
- Business loans
- Merchant cash advances
- Credit cards
- Lines of credit
Of course, your credit score, time in business, and daily sales will all determine your ability to qualify for these products.
If you recently opened a restaurant, you might be better off waiting to apply for funding. That way, you can review your business plan and determine how much funding you’ll need. In addition, you may have a better chance of qualifying.
Conclusion: That Which is Measured Improves
What’s come to be known as Pearson’s Law states: “That which is measured improves. That which is measured and reported improves exponentially.”
In the context of restaurant finance management, this law rings true. By paying close attention to the key financial metrics in your restaurant business, you enable yourself to improve those metrics.
Ultimately, it’s imperative to create, and pay close attention to, your business’s financial map. Combined with your restaurant experience, savvy financial management will help you grow your business the way you want to.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.