CHAPTER
5

Creating a Solid Business Plan

In This Chapter

• Why you absolutely need a business plan
• Understanding budgets, expenses, and profits
• How to draw up a realistic financial plan
• Putting your business plan together

Managing a restaurant is like having a teenager. It can be unpredictable. It misbehaves. That’s why you need a solid and realistic financial plan. A strong plan will put you in the position to be prepared for any misbehavior your “teen” surprises you with.

A financial plan is your foundation for sustained success. It shows how you will generate a profit and pay back your investors. And, by the way, you can pay back your investors within the first year or two, if you follow your sound financial plan.

Here’s an example. An average suburban restaurant with 80 to 100 seats, aspiring to do $2 million in annual sales, has the potential to yield a $400,000 profit. That’s 20 percent of the pie. Say the restaurateur’s investors put in $500,000 for the capital budget. Your operating budget profit will allow you to pay back your investors in a couple years and fund your reserve account. That’s the best-case scenario.

To create a realistic financial plan, you need to understand basic restaurant math. Don’t worry, we’re going to make it easy. It’s more detailed than difficult. And we’re going to share the worksheets and forms we’ve created to help you through the process.

Setting Your Capital Budget

A capital budget details how you’re going to spend the money you need to get your restaurant up and running. It’s the most misused tool in creating a new restaurant business. But it’s vitally important. Setting a realistic budget to open your restaurant creates a solid foundation for the business. What’s a realistic capital budget? One that allows for delays, such as when your contractor is missing, the electrician can’t come until next week, and your painters can’t start on the exterior until the rain stops.

You might also have unforeseen renovation costs and soft costs such as recipe testing, pre-opening training, and utility deposits. And most importantly, your budget needs to include a working capital reserve to cover six months’ operating expenses for worst-case scenarios such as a rough winter of major snowstorms, when customers stay home and business drops.

SMART MOVE

It’s a myth that a restaurant won’t make a profit until year three or four. You can make a profit in month one—if you follow a well-crafted business plan.

That said, few restaurateurs set realistic capital budgets. They don’t fully fund their restaurants, and that sets their business on a shaky foundation. All too often, restaurateurs find themselves dipping into the operating budget to cover the final renovation bill. Or even worse, they’re dipping into employee payroll tax withholdings, a practice that is illegal. It happens way too often. It’s a bad business practice, and it’s not going to make you happy come tax time when you’re scrambling to come up with those funds.

The Operating Budget: Your Moneymaking Plan

You can start your business with a $100,000 investment or you can spend millions, but the people who succeed are those who start out with a good income stream. This is where the operating budget comes in.

Your operating budget lays out the projected costs and sales of food and liquor, labor, and overhead. This is your profit. Food and liquor average 30 percent of sales; labor averages 35 percent; and overhead averages 20 percent, which includes 7 percent for rent. That’s 85 percent—the remaining 15 percent is profit. The ideal profit margin is 20 percent of sales. Plan to make a good profit.

Food and Liquor Profit Formula

Typically, food costs are 30 percent of sales. Liquor costs are 20 percent. Depending on the mix of food to alcohol, the blended total could be 25 percent of sales.

That means it’s essential that you make a profit by building menus with high-profit items you sell a lot of. Say a hamburger costs you $1 to produce and you sell it for $4. Your food cost is 25 percent. Your menu price points will vary, and include higher price point items such as steak. A steak costs you $10 and you sell it for $20. The food cost is 50 percent of sales. You’ve just put $10 in the bank.

The utopian model for average food and beverage costs is 20 percent. A 25 to 30 percent blended food and liquor cost is an ideal target range. It’s essential that you stick to the formula you establish in your operating budget. We determine our food price points by doing yield tests, pricing out the cost of ingredients, adding wrap-around costs, and knowing the threshold for price in the market.

DEFINITION

Wrap-around costs represent the items you give away such as salt and pepper, ketchup, lemon wedges, or a cotton candy surprise at the end of the meal.

You must keep an emotional threshold on prices. Even if your restaurant is high-end and known for being expensive, don’t be greedy. Don’t slap your guests in the face with a $15 tab for desserts when everyone else is charging $10.

Wine pricing is critical, too. As the bottles get more expensive, the profit margin shrinks. If you buy a bottle for $50 and sell it for $125, you’ve made a $75 profit. That’s a 150 percent markup. When you sell a $6 bottle for $6 a glass, that’s a 300 to 400 percent markup.

Strategy comes into play with wine. For low-priced wines, don’t choose those everyone knows, such as Santa Margherita pinot grigio. Your guests know how much it costs; they see it in the liquor store or supermarket, and they’ll resent your markup. Instead choose a more obscure pinot grigio. Put three of them on the menu, priced at $19, $26, and $35. People don’t want to seem cheap. They always choose the middle-priced wine—so make sure it’s a high-profit bottle.

Testing Food Cost Profits

After the first 30 days, we run a test to determine the profitability of each item on the menu. The POS system tells us how many of every menu item we’ve sold in the last 30 days. We set three categories: profitability, popularity, and production (how difficult or time-consuming it is to make). Then we grade the dishes from 1 to 3.

For instance, firecracker spring rolls are popular, so they get a 3. In addition, they’re profitable, so they get a 3 for that, too. However, they’re made from scratch, so they get a 2. Add that up and the spring rolls have an 8 out of a possible score of 9. They’re staying on the menu.

We do that for every item and re-examine every one that scores 7 or below. It’s a useful exercise because it helps take the emotion away from the dishes.

You also have to keep an eye on your chef, the creative genius. Chefs are artists who rarely understand profits. He or she wants to step outside the menu you’ve established. That’s when your food formula goes out the window. This might indulge your chef’s ego, but it’s not good for the business system. Say he creates a roasted maple-syrup pork belly dish. It tastes great, guests love it, and the waiters are recommending it. But your chef and waiters are shooting the restaurant in the foot if this dish scores 5 on the profitability, popularity, and production (PPP) test.

We manage this by having our chefs create eight or nine specials they’d like to add to the menu, and cost them out. If we put them on the menu, we run them through our profitability, popularity, and production test. The results determine whether the dish stays or is chopped from the menu.

Managing Labor Costs

Labor is the most volatile cost. A restaurant requires lots of staffing, with contingency plans based on holidays, weather, or promotional events such as restaurant week. You need a deep roster of staff.

Once we create a staff schedule, we cost it out, including payroll taxes. We project the sales number for the week and manage the labor to be 30 to 35 percent of sales. For instance, if we project $35,000 in sales, the labor budget will be $10,000.

Once you set your staff schedule, don’t let your manager knock it off course. Don’t let your manager send a bartender or waiter home early because it’s a slow night. Keep your staff busy even in slow times. You can use the downtime for training. Send home the staff who can’t make a sale, such as hosts, busboys, and runners. A bartender only needs to sell one drink every hour to pay for all the cleaning he can perform. Employees standing around doing nothing have a negative impact on morale, and that’s when your employees get into trouble and cost you money.

Overhead: The Unknown Enemy

Overhead is a vast category encompassing internet connection, insurance, grease trap service, utilities, rent, bookkeeping, and bank fees. It should add up to 20 percent of sales. That includes rent, which is 7 percent of sales. Once you set your overhead costs, don’t relent. Your business success is based on setting as many fixed costs as possible.

Here are examples of overhead categories and the expenses associated with them:

Overhead Categories and Expenses

The restaurant business is a game of shaving pennies wherever you can. It means making decisions about what overhead expenses your restaurant can do without. Why do you think so many contemporary restaurants have bare tables? Because it removes the expense of washing linens.

Cover Page

The cover page should contain an image that embodies your business concept. It should be attention-grabbing, something the reader wants to look at—something he or she will want to eat. The name of your restaurant and company name also should appear on the front page. The cover page should make the reader desire to know more.

Table of Contents (TOC)

The table of contents lists all the major headings and subheadings your business plan will contain.

Executive Summary

The executive summary has two parts: a short, concise two- to three-sentence encapsulation of you and your business experience and why you will succeed at this business. Keep it fact-based and write in an active voice, stressing verbs and containing few adjectives.

“cb5 is a boutique restaurant concept firm that has developed more than 300 dining establishments around the globe. After hand-crafting inspired dining concepts for clients for 18 years, cb5 has elected a single model that they galvanized and blueprinted, making it ready for a multi-unit rollout.”

The second part of the executive summary is your restaurant’s mission statement. This is one sentence that describes your restaurant concept. It states what you will provide your customers and shows why customers will choose your business over another.

“Bring to market a sophisticated high-quality modern organic Tuscan trattoria, a menu produced by authentic Tuscan chefs, combined with a contemporary eco-friendly American service culture and design aesthetic.”

Business Concept

In this section, you’ll go more in depth into your business concept. Start with a historical sentence or two about the type of cuisine your restaurant will be serving. Include what it is, where it came from, how it changed over time, and most importantly, how you will make it relevant to the contemporary market.

“Americans have carried on a long love affair with Italian food. As its popularity grew, more Americanized versions of classic Italian dishes evolved and soon an entire genre of cuisine “Italian American” was a staple from coast to coast.”

You want to show the reader a snapshot of the contemporary market. How have other cuisines changed over time in this country? How have perceptions changed? Have they changed in ways that are testament to their sustainable popularity? The answers to these questions should make the reader realize there’s a new way of thinking about food and your restaurant encapsulates this new way of thinking/dining.

“The foodie culture is creating a demand for a healthful return to authenticity of this grand, but often bastardized, cuisine.”

Bolster your argument with five or fewer quotes from reputable sources regarding the growth and acceptance of your restaurant’s cuisine.

“There are more Italian restaurants in the state than any other type, according to the Zagat Restaurant Survey.”

Market Analysis

You’re going to show why your restaurant concept will work. Create a list of all the restaurants in your geographic area of interest. Mark each restaurant that serves the type of cuisine you’ll be serving. Note if your market area is saturated with your particular type of generic cuisine.

Break down each restaurant in your cuisine group by service type (high-end full service, casual full service, takeout/delivery only). Then rate each restaurant on a sensibility scale. Sensibility factors are things today’s consumers are concerned about such as healthy, fresh, clean, organic, local, and sustainable. This shows how each restaurant is fitting in to the new way the cuisine is perceived, and it’s called market bandwidth. You can create a graph using Price and Sensibility as your X and Y coordinates showing readers how your restaurant will fit into the market.

You can also create a market share pie chart breaking down the variety of restaurant types for your cuisine in your geographic area. They should include high-end, full-service, casual full-service, and takeout/delivery only. The chart should show how your restaurant concept is poised to fill a gap in a growing market.

Management Plan and Organizational Plan

This section answers the question, “Who are we?” You want to stress that you have the experience and skills to launch and run this venture. Unless a chef is a business partner, don’t single out the chef. If there’s a certain type of chef that’s central to the concept (juggling hibachi chefs, for instance), describe that. If you have a strong business partnership that’s central to your concept—you’ve teamed up with a company making fresh pasta—show how that will make your concept more profitable.

“Plenty of restaurants claim to offer “authentic” cuisine and will typically overpromise on their concept. Jody Pennette, who has opened more than 300 restaurants around the world, knows American consumers want more than ‘authentic’; they want healthful too.”

Marketing Plan

The marketing section can include branding; and images of the menus, table settings, uniforms, and the restaurant space. Remember, a restaurant’s look is a marketing tool. Location can be as well. In this section, you want to show your plan to draw people to your restaurant.

Financials

This is where we get into the nitty-gritty, all-important topic of money. You’ll figure out how much it’s going to cost to start up, and how much money you expect to make daily, monthly, yearly, and over three years. These figures are the benchmarks for your future business. They’ll also show how you can pay back your investors.

Start-Up Cost Projections

Prepare your capital budget starting with your initial investment, detailing all of the startup costs associated with your restaurant, such as construction, equipment, furniture, professional fees, training, recipe development, and the opening party Be sure to include a working capital reserve to cover six months of operating expenses and a reserve for renovation overruns.

Pro-forma Income Statement

A pro-forma income statement is a projection of your business earnings. In accounting, the income statement shows whether the business earned a profit. The basic formula is Sales - Expenses = Profit. Restaurant math is calculated differently, as you can see in the following table.

In restaurant math, the net income or profit is included as an operating expense of 20 percent.

In this restaurant math scenario, profits above 20 percent are realized at a much higher rate of return since your rent and overhead have already been covered. That’s where you really start making money.

Prepare your projected income statement in three ways:

1. Daily for each day of the week with a total and average daily sales.

2. Monthly for each of 12 months with an annual total.

3. Annually with projections going out three years. All of these will be used as benchmarks when your POS system is spitting out the income statements of actual data. The numbers in the business plan are the numbers you’ll need to hit when you start doing business.

“Profits shall be allocated in the following order and priority: (i) first, in proportion to any deficit Capital Account balances, until such deficits are eliminated; and (ii) second, to the Members pro rata in accordance with their respective Percentage Interests until the balance in each Member’s Capital Account is equal to the amount of each Member’s Adjusted Capital Contributions; and (iii) third, any remaining Profits shall be allocated among the Members pro rata in accordance with their respective Percentage Interests.”

Contact Page

The final page of your business plan should contain your contact information. It’s better to put it on the back page rather than the front, because you want the cover page to be clean and uncluttered.

The Least You Need to Know

• In “restaurant math,” expenses and profits are calculated as a percentage of sales.
• A business plan is more than a necessary tool for selling your concept to investors—it establishes the financial benchmarks your restaurant will need to hit to make a profit.
• Work up a realistic capital budget that includes contingency funds for unforeseen renovations and enough money to keep the restaurant running for six months.
• Create your business plan as a presentation and use visuals to get the feel of your concept across, and charts and graphs to illustrate market analyses.