When to panic

While there is no need to panic,  there are some factors that shouldn’t be ignored.

While there is no need to panic, there are some factors that shouldn’t be ignored.

Restaurateurs need to keep tabs on the numbers to avoid any business disasters. Mike Parker-Brown looks at the financial warnings you can’t ignore.

Where is an adage that the difference between a well-managed business and a not so well-managed business is the degree of attention paid to the numbers. That’s certainly true of the restaurant game where running a successful business is more reliant than ever on savvy owners having the ability to pay just as much attention to the bottom line as they do to serving good food with friendly service in an impressive environment.

It doesn’t matter how big you are, how beautiful the view, how much you spent on fitting out the place, how much the critics love you or how many awards you hang on the wall. What it basically boils down to is, if you’re not involved in the numbers side of your business or worse still, leaving it to someone else, you’re making a very big mistake.

Today’s cold hard reality is that restaurateurs need to be experts on things financial.

Restaurateurs who know what’s going on are those who make more money, grow their client base, retain their staff, maintain good relationships with their suppliers, keep their investors happy and as a result, create more opportunities for growth and expansion.

The even colder, harder reality is that those restaurateurs who don’t show an understanding of the financial side of their business, and who fail to keep tabs on the numbers, despite great food and service, are most likely to be those surviving on the crumbs or worse still, have to close up shop for good.

But what are the warning signs? What do the experts say are the 10 most important financial factors restaurateurs really can’t afford to ignore if they are to succeed? And how do business operators go about dealing with them?

According to Sam Henderson, principal and senior financial adviser for Melbourne and Sydney-based Henderson Maxwell, formulation of an achievable business plan and seeking expert help all play a major role in any business winning through—irrespective of if they are a start-up operation, an existing business or a business looking to expand.

“The main issues are cash, capital and financing and businesspeople need to have all of this in place for at least the first two years in order to allow for their business to grow organically.

“As importantly, every business, irrespective of what it is, needs to make sure they market themselves properly if they are to succeed.

“Too many businesses have failed simply because they didn’t recognise the need to market,” he says.

Restaurant & Catering Australia magazine canvassed several experts from state industry associations, restaurateurs, a restaurant consultant, a supplier and a bank, who all agree the pitfalls facing restaurateurs are legion and can affect business operators across the board if they don’t keep a firm hand on the financial side of things.

And while the experts responses vary and cover a great deal of ground, all ultimately agree the following 10  factors must never be ignored:

  • failing to manage cash flow
  • failing to understand the relationship between price, cost and sales volume
  • overcapitalising
  • overpaying suppliers
  • failing to do the homework and not  installing a proper business plan
  • failing to monitor financial position
  • overstaffing
  • failing to recognise and manage growth
  • failing to borrow properly
  • failure to get help

But to narrow it down even further, the experts agree that cash flow, or rather an operator’s inability to manage cash flow, not doing the homework, failing to see financial problems coming and poor staffing management are four of the biggest factors that can make or break restaurateurs.

“Understanding of the relationship between price, cost and sales is vital and if you don’t understand it, get some expert advice,” says Henderson. “As everyone knows, cash is king but cash flow can present huge problems – obviously it’s critical that restaurateurs understand how to manage their books in order to keep cash flow happening.”

Brisbane-based Peter Sheehan, partner, business advisory services, BDO Kendalls, agrees. “While making a profit is wonderful, cash remains king,” he says.

“At the end of the day it is critically important not to get into a debtor situation.

“The first thing you have to do before you even start is take a very close look at the issues which can make or break good cash flow—efficiency in the stock and inventory area, staffing and accommodation overheads (rents and leases).

“Rent is one of the biggest problem areas—you really have to ensure your business is going to be able to feed a heavy rent commitment. Too many times this is the difference between success and failure.”

Borrowing sensibly too, he says, is a major factor in getting it right.

“You have to be in a capacity to borrow a bit more than you need just to open the doors. The same applies to growing a business. Growth opportunities invariably arrive at a time when cash flow is exceeded by outflow and that’s when a successful business is at its most vulnerable. Sensible borrowing has the effect of rolling all of that out.

“To coin an expression ‘what you measure is what you manage’ and I would advise anyone going into the restaurant business to make sure they are constantly measuring their financial progress, the inflow and the outflow, from the outset.

“Without some sort of measuring system you are setting yourself up to fail. You don’t need expert advice to set up a system—you can set up an Excel spreadsheet or do it on the back of an envelope.

“All you need is to make a point of doing it on a regular basis,” he says.

Staff issues

Sydney-based restaurant consultant Michael Hickey, who has operated several successful businesses in his native Darwin, says a common error many restaurants make, and something that can eat up large amounts of potential profit, is overstaffing.

“Overstaffing obviously affects cash flow but many consider staffing, and retention of those staff, to be one of the most important factors in the business.

“The level of staffing should also be determined by the menu but it’s best to start on the basis of what you can afford, as opposed to how many staff you think you actually need to run the business,” he says.

“It’s a fine balance but it basically comes down to erring on the side of caution initially and especially in those critical early start-up days when you need every cent.”

Catherine McConachy, manager of ‘Out of Africa’, a Manly (NSW) icon for more than 10 years, agrees.

“Staffing is a very difficult thing to master and one that can have a major effect on your bottom line,” she says.

“Understaffing is not good for the reputation of the business, but overstaffing will send you broke before you know it.

“The best way we have found to manage this is by knowing
our business and keeping track of the averages for any given day of the week. Selection, management and retention of staff once trained requires understanding, compassion and compromise and teamwork is an integral part of operating a restaurant business successfully on a day-to-day basis,” she says.

Former Restaurant and Catering Queensland president Richard Pozzey, now chief executive officer (CEO) of Brisbane-based supplier Culinart, says aside from food and beverage, staff costs represent one of the biggest overheads.

Pozzey, who has operated several high profile restaurants and a reception centre in metro Brisbane, also emphasises the need to balance the wage factor against overall food and beverage sales.

“You need to be constantly looking at the figures and asking yourself where you can trim back, while still being able to maintain the best levels of service.

“This is something owners need to be doing and not laving it to someone else—your business is your responsibility,” he says.

Restaurant & Catering Victoria (RCV) has recently been working in close consultation with Westpac’s Melbourne-based business advisory and training unit manager, Paul Wright, on the development of a series of restaurant business-specific finance seminars.

First trialled with RCV members last month, the workshops, according to Wright, have been designed to make finance simple—even fun—and are extremely interactive with the use of real-life case studies.

“The main aim of the seminars is to show people how to identify and manage financial issues and build towards long-term success,” he says.

“Subject matter covers a broad range of areas—how to improve cash flow and rely less on overdrafts, how to work out required sales and how to understand what the numbers in the profit and loss and balance sheet really mean.

“It’s important to understand how our costs behave in our business, as sales occur in order to make informed pricing and investment decisions in the business.

“The seminars also cover growth, which is a fantastic thing but must be managed properly. We also look at the traps associated with failing to borrow properly.

“In addressing these points, we’re hoping to help more restaurateurs succeed by reducing the stress of running a restaurant on a day to day basis,” he says.

“You need to be constantly looking at the figures and asking yourself where you can trim back, while still being able to maintain the best levels of service.

“This is something owners need to be doing and not leaving it to someone else—your business is your responsibility,” he says.

RCV CEO, Wendy Jones says while many restaurateurs are doing their best to stay on top of things, there are still a great many operators who “quite simply don’t see it coming”.

”These are the people who need to seek better financial advice in order that they may be properly prepared for any eventualities.

“Getting the right advice is always money well spent and the Westpac seminars have been designed to provide it,“ she says.

This great content is produced for members of the Restaurant & Catering Association. Find out about becoming a member here.

Restaurant & Catering magazine and its associated website is published by Engage Media. All material is protected by copyright and may not be reproduced in any form without prior written permission. Explore how our content marketing agency can help grow your business at Engage Content or at YourBlogPosts.com.

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