Chapter

15

Protecting Your Business

In This Chapter

Once your food truck is open for business, you may find yourself asking if you’re running it or it’s running you. To be successful, you need to be proactive, not reactive. And to be proactive, you need to set up an accurate system to evaluate your success.

The only way to determine how well you’re doing is to examine the numbers. That’s not to say that common sense, intuition, and your business experience aren’t valuable tools to gauge the success of your enterprise. But at the end of the day, it’s vital you know the brutal truth, and numbers never lie. Don’t fool yourself with press clippings, long lines of customers, or gross revenues. The bottom line profitability of your truck is all that matters long term. If you aren’t profitable, your business is unsustainable.

In this chapter, I show you how to create reports that will help you track your progress. I explain how to create daily sales and expense reviews, as well as how to determine if your business can be more profitable. Finally, I give you tips on reviewing and replenishing your inventory in order to maximize profitability and minimize waste.

Financial Reviews

The details of your financial reports and the factors determining your performance are fundamental to your making good decisions about your truck. Most important, you need to know how much money you’re profiting, not how much money you’re generating. If you’re making thousands of dollars in income but it’s costing you even more to generate that income, you have a problem. Knowing what happens to every dollar that’s generated by your truck will tell you whether you’re succeeding or in need of improvement.

Acting like a detective and doing a forensic analysis of your business unveils any inefficiencies that exist. Even the most successful businesses in the world have inefficiencies, and you need to find yours to protect yourself. By putting a review system in place to monitor these figures on a daily, weekly, and monthly basis, you’ll be able to maintain an accurate perspective of how your business is performing and make the necessary adjustments.

Playing by the Numbers

Numbers reveal the hard truth about the success and profitability of your business. You have to have a system for reviewing and analyzing your sales and expenses. Doing this on a daily basis will allow you to spot trends, both positive and negative, and detect waste. Use your experience and common sense to look for irregularities in the reports and figure out whether they’re business or reporting issues.

Tip

Accountants and bookkeepers aren’t on the front lines of your business. They take information that you communicate to them and put it into an acceptable format. Often these numbers just don’t tell the full story. Take the numbers and combine them with what you’re seeing on the streets to make the best business decisions.

Be diligent, even if the truth hurts. You don’t want to be surprised by your financial situation, and ignoring negative information only makes matters worse. Use the sales and expense reports you generate as tools. They reveal what’s working and what isn’t. Use this insight to make meaningful and informed changes to avoid negative situations.

Calculating Your Breakeven Report

In order for your business to be profitable, you have to reach and then exceed your breakeven—the figure you must make in gross sales in order to cover your expenses for the week, month, or year. Establishing a weekly and monthly breakeven for your business is the primary step in determining the health of your truck.

Create a list of all your fixed and variable costs. Add up your fixed costs and divide them by the amount of time for which you’re determining the breakeven. If you’re trying to figure out your weekly breakeven, divide the total number by 52; for the monthly breakeven, divide the total amount by 12.

Definition

Your fixed costs are business expenses that aren’t dependent upon the level of goods or services produced by your truck. They stay the same no matter how good or bad business is, and include things like insurance and commissary costs, for example. Your variable costs are expenses that change in proportion to the activity of your truck: if you sell more food, the amount you spend on the ingredients will be higher.

To determine your weekly or monthly variable costs, generate a sales forecast for an average week or month on your truck. You can do it by reviewing historical data after a few months of business. If you’re trying to do it prior to having that information you’ll have to make a conservative educated guess. Add up the costs for food, beverages, and staffing to generate your weekly or monthly variable costs. Because of inventory rollover—the current value from the beginning and ending of a specific time period—it’s easiest to deal with food cost on a monthly basis. Counting your entire stock of food on a weekly or daily basis won’t give you accurate data.

Now combine your fixed and variable costs. The total will be your weekly or monthly breakeven. This is the amount of money you need to generate on a regular basis to cover your expenses. Anything beyond your breakeven is profit.

Reviewing Daily Sales and Expenses

Your daily sales and expense reports break down all the money you’re earning and spending each day, including your labor and food costs, fuel, tickets, and all other expenses you incur. The sales reports should be broken down by individual menu item. You need to know how many of each product you’re selling daily to determine which items are making and losing money, and how you should order for the following day’s operation. You should also have a tally of how many customers you served on your daily report.

By keeping detailed records every day, you’ll accumulate a history of your business. You can track and compare your sales and expenses on a day-to-day, month-to-month, and year-to-year basis. Being able to refer to what you made on the same day of the previous year allows you to determine trends. The patterns that emerge will help you anticipate these trends with moderate accuracy so you can adjust your staffing, inventory, and other variable costs accordingly.

Tip

If you’ve invested in a point-of-sale (POS) system (see Chapter 11), it should include a feature that prints a variety of reports. These reports will allow you to better harness the power of historical information and implement changes to your truck that will help you succeed. Have your POS provider program your system to generate the reports you think can best assist you in managing your operations.

An accurate, detailed, and organized history of your revenue generation and expenses will prove useful for several reasons. Here are a few:

Determine if your business is growing over time, and if not, why. This will be reflected in sales trends, profitability, and cover counts.

Avoid overstaffing. A daily report will help you accurately forecast demand. Being able to predict which days you can do without that extra pair of hands saves money.

Determine the quality of your cashiers’ salesmanship. You may notice that your Friday sales are consistently lower when one employee works the window. Either the person working the window on the other days is great or the one working on Friday is sub-par. Either way, you’d better find out.

Determine the profitability of specials. By tracking the sales of your specials and the number of customers that they draw, you’ll know which specials are most effective and worth repeating.

Monitor the consistency of your product. Is a lot of food thrown out, burned, spilled, or wasted on the days that a particular chef is working? If you find a pattern of food having to be remade, you may need to retrain or replace him or her.

Evaluate promotions and how they affect sales compared to the previous year. What effect does a particular marketing campaign or loyalty program have on your gross and net revenues on a year-to-year basis?

Discover signs of theft. If your cover counts remain constant but your sales are fluctuating, you may have an issue. Someone might be giving away food or stealing.

Tip

Always include the weather in your daily reports. Inclement weather can have a huge effect on your truck’s business. You may have done half the business you did on this date last year, but if it’s raining today that doesn’t necessarily mean your business is trending down. Don’t draw inaccurate conclusions based on flawed information; make sure you know all the facts before making changes.

Generating an Income Statement

Also known as a profit and loss statement, an income statement is a monthly report that reviews your sales, expenses, and profits. It’s basically a summary of all your daily financial reports over a 30-day period and can be as simple or as complicated as you like. Naturally, the more detailed your report, the better you’ll be able to diagnose problems. With that said, for a small business like a food truck, I recommend keeping things as simple as possible.

Itemize all your expenses, including a breakdown of payroll, inventory, and sales, so that you can see exactly where your money’s going each month. Include the figures for the same month of the previous year and your projected figures.

There’s no right or wrong way to format your income statement. Again, if you’ve invested in a POS system, it should come preprogrammed to generate a monthly statement for you. Otherwise, simply plug your figures into a spreadsheet. This is for your own use, so make sure it’s clear enough for you to read and understand. The document should be broken down into three sections: revenues, expenses, and profits. Separate your food and beverage sales from one another and the food and beverage costs from the rest of the expenses.

Tip

If you don’t feel confident dealing with your daily or monthly figures yourself, consider working with in an accountant. You’ll still need to keep a detailed and accurate record of your revenues and expenses, but you won’t have to analyze the data yourself. Your accountant will take the information combined with bank statements, generate the necessary financial reports, and then give you advice. You can also have an accountant help you set up your systems and then manage them on your own. That’s a good way to save money but still run a professional and efficient operation.

Performing a Cash Flow Analysis

Your cash flow is the rate at which money enters and leaves your business. All businesses strive to maintain a delicate balance between the rate of spending and revenue generation. As you accumulate an accurate financial history of your business through daily and monthly statements you’ll develop a sense for predicting the rates at which you can expect to earn and spend money. It’s a very important skill set, as you must always be cognizant of how much debt you carry in relation to the income you’re generating. You need to know when the bills are due and always have enough cash on hand to cover your expenses.

To determine your cash flow, use as many “real” numbers as possible, including your current bills for food, labor, and other expenses. Then use the forecast you created earlier to anticipate your sales for the coming weeks. As a truck owner you must not only be aware of how much money you have at any given time but also how much you owe. Determining your cash flow involves taking the cash you have in the bank, adding next week’s expected revenue, and figuring out what expenses need to be paid at the same time. Perform this calculation for the next four to six weeks and you’ll determine your expected cash flow.

Here are some tips to help you balance your cash flow:

Reduce your staff to lower payroll costs. If your cash flow figures aren’t sustainable, you need to cut costs. Use your daily reports and monthly income statement to choose at least one or two days on which you can reduce staff by one team member.

Reduce inventory. Use your daily reports to determine which menu items are the least profitable (see the next section for help doing this). Downsize your inventory by limiting the menu or opting for less expensive ingredients. Never sacrifice quality, but aim to operate with minimum inventory until you build up your cash flow.

Opt for longer pay periods with your purveyors. Many suppliers will offer a small discount in exchange for paying within 7 to 10 days instead of the customary 30. Consider the benefit of foregoing the discount in exchange for holding on to your cash.

Never open tabs for customers. People, however well intentioned, are unpredictable. You’re in the business of serving meals, not collecting debts. Always require payment up front in exchange for your products. If you do open a tab for anyone, don’t count on receiving payment when predicting your cash flow.

Tip

When making cash flow predictions, always round up for expenses and round down for sales. That will give you a worst-case prediction. You should always plan for the worst, not the best. If you take the worst-case approach, you’ll never have to worry about covering your expenses.

Require a down payment for large catering events and parties. This cash can buy you some time by covering your immediate expenses and underwriting the costs of executing the event. As long as you don’t misallocate the funds, nothing is better than using other people’s cash to earn more money for your business.

Evaluating Operations

In addition to daily cash flow, income and expense reports, and monthly profit and loss statements, it’s important to run more detailed reviews of your operations to help find solutions to problems that aren’t revealed in the financial reports. You can do this by evaluating your menu and inventory item by item. These reviews will quickly illuminate what’s making you money and what’s causing inefficiencies in your operation.

Reviewing Your Menu Mix

An itemized analysis of everything on your menu will indicate which items are selling, which aren’t, and the profitability of each. A menu mix report is a valuable tool, and it can be as simple to construct as a computer spreadsheet. Include the following columns of information laid out in a horizontal format:

After you’ve completed your spreadsheet, take some time to analyze the information. You should be able to answer some very important questions about your menu, including which items are the most and least popular and which have the highest and lowest profit margins. Often you’ll find that a dish with a low profit margin is one of the most popular and vice versa. Think of ways to make items with the highest profit margin more popular: making them a special, changing the name of the dish, or making your staff aware of the item’s profitability so they’ll push it more to your customers.

Your menu mix report will also reveal important trends. You may notice, for example, that your customers prefer lighter dishes in the summer. Use that information to your advantage; change your menu seasonally to offer more of what your customers are looking for. Remember that they’re voting with their dollars every time they order from your menu and, as with any vote, there will be winners and losers.

Beep! Beep!

As Gordon Gekko said in the movie Wall Street, “Don’t get emotional about stock.” Your menu items represent potential revenue. If something isn’t selling, you’re sacrificing potential revenue and increasing your waste. Don’t keep an item on your menu because you like it or it’s your grandmother’s recipe. Keep what sells, cut the rest, and don’t look back.

If certain items on your menu are selling poorly, consider making one or more of the following adjustments:

Reviewing Purchasing and Inventory

Inventory can be incredibly complicated, and there’s no perfect formula for handling it. No two food trucks, even with similar menus, will choose the same ingredients or purchase goods the same way. You need to find out what works best for you and your business in the most cost-effective way possible. It’s a matter of trial and error, making incremental adjustments over time.

While purchasing and inventory are radically different for each food truck, there’s one universal tool that can help you maintain a broad perspective of the cost-effectiveness of your purchasing habits. A cost of goods sold (COGS) report measures the true food cost percentage for your menu and inventory as a whole. It isn’t very useful as a diagnostic tool, because it just provides a general figure, but it’s the easiest way to keep your finger on the pulse of your total food budget.

To determine your COGS:

The figure that you end up with is your COGS percentage.

There are no hard-and-fast rules about where your COGS percentage should be, but I recommend keeping it at or below 30 percent. For a quick service business like a food truck you’d ideally want your food cost to be even lower, but with the trend toward gourmet trucks, a lower figure may be difficult to achieve.

Controlling your food cost is vital to the health of your business, but you need to find a balance. What you’re really doing is determining the point at which price meets value and quality. Your customers will notice minor changes in portion size or the types of ingredients you use, so you need to be diligent in the managing of your food cost while making sure you don’t negatively affect the experience you’re trying to offer.

The bottom line is really the last word when it comes to operating your business. Generating these reports and using them to make proactive decisions will govern the long-term success of your truck. Don’t hide from the numbers. Deal with the fiscal realities and empower yourself to grow and protect your business.

The Least You Need to Know