Opening a restaurant is a dream for many, but the path to culinary success is paved with financial challenges. Budgeting is the secret sauce that can make or break your restaurant’s profitability. Having a comprehensive budget for your restaurant helps manage costs, boost revenue, and keep your establishment thriving. Whether it’s increasing revenue or lowering overhead costs, you’ll want to establish clear and achievable objectives.
Start with Sales
Top line revenue is the most important number to accurately budget since it drives variable cost budgets and is necessary to ensure profitability. Sales are the most difficult line item to project because there are many variables outside an operator’s control (COVID anyone?) that can have a significant influence on sales. The best place to start with budgeting sales is prior year sales results. Most operators want to see an increase in year-over-year results, the real question is how much of an increase. Taking prior year sales and adding the desired increase is an easy way to establish a sales budget.
Controlling Food Costs
The two largest expenses for a restaurant are Food and Labor costs. Luckily, they are variable expenses and can be controlled should sales deviate from their budget. A detailed review of past sales can act as a guide for budgeting the upcoming theoretical food costs. While waste is never ideal, it’s unrealistic to expect it not to happen. For this reason, a small buffer should be included in the budget to account for said waste. By setting a budget based on the historical costs, the food cost percentage can be established and set as the upcoming year's budget. Since food is a variable cost and sales are unlikely to be exactly what was budgeted, the food cost percentage can then be used as a guide throughout the year.
Establishing a labor budget should start with getting an understanding of the number of staff needed to properly service your customers. After optimizing staffing levels to meet demand, while also avoiding overtime, hours can now be turned into dollars simply by multiplying the hours needed by the pay rate for each position. The pay rates should be reviewed to account for any future merit-based raises and/or any upcoming minimum wage increases. The budgeted dollar amount can be used to set a labor percentage budget (remember labor is a variable cost) which can then be used as a guideline both mid-month and throughout the year.
Other Variable Costs
Other variable costs include credit card processing fees, paper goods, restaurant supplies, small-wares, and third-party delivery fees. These items should be budgeted based on their expected percentage of sales. Credit card processing fees come from the agreement with the credit card processor. Paper good costs should be evaluated in the same way as food costs, by getting an understanding of the theoretical cost and accounting for a small percentage of waste. Restaurant supplies and small wares can be reviewed for necessity and will vary with sales, the more they are used, the more they will cost. Third party delivery fees are based on the agreed upon rates as a percentage of those specific sales. The same process can be applied to any other variable costs that may arise.
The remainder of a restaurant's costs are either fixed or up to management to decide how much can be allocated to them based on target earnings. Fixed expenses include items such as rent, bank charges, business licenses and permits, insurance, and utilities. Expenses that are up to management include administrative overhead, meals and entertainment, marketing, and recruiting.
Capital Expense Budget
Capital Expenses refer to the significant investments made to improve or extend the life of assets that will provide long-term value. Items such as machinery and equipment, vehicles, and leasehold improvements are purchased with the goal of supporting the company's ability to operate in an effective and efficient manner. However, these expenditures are recorded as assets on the balance sheet and expensed through depreciation over their lifetime, not as line items that will affect net operating earnings. The expected timing of needing these large investments should be planned as part of the budgeting process.
Cash Flow Budget
Every company needs a cash reserve to properly operate. Unexpected expenses can arise at any time, such as equipment breakdowns or sudden necessary repairs. Having a financial cushion will prevent these emergencies from disrupting the day-to-day operations and forcing decisions that will negatively impact your budget.
A structured cash flow budget will help the business ensure that it has enough liquidity to cover its obligations as well as enable them to seize any growth opportunities. It's one of the many components of financial management to aid in the identification of potential cash shortages while enabling proactive measures to mitigate them.
Tracking and Monitoring
While setting a budget usually only happens once a year, monitoring the actual results versus that initially planned budget isn’t a one-time task; it’s an ongoing process. Having in-house accounting processes to run analysis or hiring an outsourced accountant to help you track expenses meticulously are the first step in monitoring results. Financial reviews should be regularly scheduled to analyze your restaurant’s performance and ensure the business is staying within budget. This proactive approach ensures that you’re always in control of your finances.
Training staff in budget awareness and setting monthly goals with rewards is a great way to align the best interests of employees and management. Encouraging staff and managers to find cost-saving measures and share ideas may help find small efficiencies that could otherwise be overlooked.
Budgeting is the meat and potatoes of financial success in a restaurant. By creating a well-structured budget and tracking expenses, you can increase your restaurant’s profitability and ensure long-term success in the highly competitive culinary world. Remember, a well-balanced budget is the recipe for culinary triumph!