You pay your staff fair wages and your suppliers market rates. How much should you pay yourself? By Tracey Porter
Helen Grace reckons the formula behind working out how much to pay yourself is pretty simple.
The Brisbane-based chef, who, along with her husband Michael, has been at the helm of AbFab Catering for nearly 30 years, says that when it comes to doing the sums, the trick is to be realistic about your earning potential.
“Accept that [whatever the figure is], it will never be equal to the hours you work,” says Grace.
If you’re in the hospitality sector, chances are you will have heard the grim, oft-quoted Ohio State University study finding that close to 60 per cent of restaurants can expect to go bust in their first year, and 80 per cent within five years.
The chief cause of this carnage is lack of cashflow, which is precisely why experts such as Tim Muxlow of Food Business Consultancy (FBC) suggest that before even considering paying yourself a wage, you need to ensure you have enough funds to cover payments such as GST instalments, staff wages and tax.
“The restaurant industry is tough and you need to have profit forecasts and budget analysis clearly worked out before you decide to open your establishment,” says Muxlow.
Muxlow, who established FBC in 2008 following a 30-year stint in the hospitality industry, says it’s hard to provide a concrete figure on how much wages food-service operators should pay themselves because there are many variables, including business size, the number of covers and staffing levels. However, the best way to ensure profitability in your venture—and therefore secure yourself a decent income—is to plan well, do your research before opening and be realistic when forecasting sales, wages and expenses, he advises.
“If the restaurant you are looking at is generating figures that don’t look like you will make enough money to survive, walk away and find a business with better figures.”
Muxlow says most businesses have peak times throughout the year and knowledge of these should see you putting money away to cover all costs for the quieter times. Once you know the seasonal peak times, you can then work out how much you have left. “You get out of a business what you put into the business. In my opinion, pay yourself a wage but work for that wage. If you are a chef, run the kitchen and pay yourself a chef’s wage. If your role is as a front-of-house manager, pay yourself a wage that you would receive in that role. Don’t over-pay yourself. Keep the money in the business for lean times.”
Helen Grace, whose company specialises in catering corporate and private functions for entities including Australia Post, the Civil Aviation State Authority, Queensland Health and TransLink, reviews her figures annually and says this has been key to remaining in business.
“We have slow weeks and use these as production weeks and also to give staff a continuity of work. We now use these slower weeks as time off, as we have the luxury of a long-running business which enables down time rather than working to save the dollars.”
“Over a period of at least six weeks or six months, you can see if it is possible to consistently pay yourself a payroll wage, and still have money in the bank to pay bills.” — Lisa Reed, A Little Ray of Sunshine, WA
Grace says AbFab has clients who book 12 months in advance and others who book just a few days before their event—recognising that it is easier for AbFab to plan ahead and budget accordingly than it is for restaurant owners, who must purchase supplies ahead of time without knowing how many they must cater for.
“We know when it will be quiet or slow and when we will be busy and can use this knowledge to our advantage. A catering business differs from a restaurant that has to have its doors open regular hours and staff ready to serve and does not know who is coming in the door. We know in advance who and how many to prepare for. The disadvantage is carrying this debt for up to two months.”
Lisa Reed, the business director of Perth-based business coaching group, A Little Ray of Sunshine, says that while it can be a balancing act at first, undertaking a cashflow forecast will aid with decision making. “Forecast your business’s cash needs by week or by month,” says Reed. “A cash flow forecast shows the inflows and outflows in your main operating bank account, and your net cash flow position as a surplus or deficit. Over a period of at least six weeks or six months, you can see if it is possible to consistently pay yourself a payroll wage, and still have money in the bank to pay bills.”
In terms of working capital, Reed says a good rule of thumb is to ensure you have the equivalent of one month of total expenses sitting in your bank account to support your operations from day one. Typically, first-time business owners don’t have enough in the start-up budget for operational working capital, meaning that from the day they throw open their doors, they find themselves on the back foot. “It’s really hard to recover from this position without a cash injection from the owner or a third party,” says Reed. “This also means the business owner typically will choose to go without a wage until the business is trading comfortably enough to meet operational costs, repay set up/fit out costs and provide drawings or a wage. Often it may mean a restaurant owner will not pay themselves the equivalent of a market wage until well into year two or three.”
After the first year in business, most operators should be putting aside an amount for PAYG and superannuation. By their third year, they’re ideally moving to a payroll wage that allows them to plan their wage as part of the cost structure, and to operate a business that is more “saleable”.
Reed says it’s not unusual for a business owner to have to do major hours in the first year to get a business started. However, once this period is over, they should employ people to run the daily operations.
“You want them to be better than you. That typically leads to quicker profit generation. This phased start-up approach typically allows owners to cover their own living costs by being very hands-on and operational to start with. As the business grows, you can plan to move out of the daily detail and more into a business management role that comes with a more steady income. Of course, this will depend entirely on the size of the restaurant venue.”
Reed says food-service operators should always pay themselves first, out of the cash available after breaking even or making a profit. It is important owners do this from day one, and then as the business grows, to pay themselves a more steady income.
“If you can’t do this within a foreseeable time, you need to revisit the business budget and cost structure.”