FINANCIAL MANAGEMENT: Educate your staff about the cost of your business

May 7, 2003

A 25-year veteran of the restaurant industry, Jim is the owner and operator of, and a sought-after industry speaker.

Unless you've made a point of educating your employees, most of them are clueless about how much it costs you to operate your pizza shop or restaurant. In fact, unless you've made an effort to enlighten them about basic restaurant economics, most of them probably think you're making a killing.

Whenever I work onsite with an operator, I always try to bring this point to light by asking three or four employees, one at a time, how well they think the restaurant is doing. I take a dollar bill out of my pocket and ask,

Jim Laube

"Out of every dollar in sales that comes into this place, how much do you think the owner gets to keep?" Typical answers range from 30 to 60 cents. The least I ever remember hearing was 25 cents.

When employees think your restaurant is a high-margin, extremely lucrative business, it can affect their attitudes, behavior and work habits. If they believe you're pocketing 50 cents out of every dollar in sales (when in reality it's probably less than a nickel), they may find it easier to rationalize carelessness, waste and even theft.

Following are some suggestions for educating your people and bringing them into the real world as far as the financial realities of the restaurant business is concerned.

A glimpse of reality

Begin by showing them where the money -- your money -- goes. I know several operators who demonstrate this by starting with a stack of dollar bills on a table, say $100. This represents sales, or what "comes in" on a given day. Then they begin paying the bills ("what goes out"): $30 to the food vendors; $28 for payroll; $5 for payroll taxes; $4 to utilities; $6 to the landlord; and so on until $5 remains -- approximately what a typical independent restaurant owner gets to keep. (If you're losing money, go ahead and pull a few dollars out of your pocket to illustrate where the money comes from to pay all the bills at the end of the month).

Such a demonstration helps employees understand why you go nuts when a case of lettuce gets mis-rotated and thrown away, or when a customer request for extra napkins is met with a handful.

Opening the books

An owner of three independent Mexican restaurants in California was struggling with what to do with the last restaurant he'd opened. Despite running two winners, the third was a real dog, and after being open nearly a year, he was seriously considering closing it.

Before he pulled the plug though, he tried something fairly radical for our industry: He got all of his employees together and showed them the restaurant's latest profit and loss statement (P&L).

He took the time to explain just what a P&L was, and what the major expense categories were. When he got to the bottom line, there was a fairly large number with brackets around it. "This number" (representing net loss), he explained, "is approximately the amount of money I have to take out of my pocket each month to keep this restaurant going."

Jaws dropped, several people gasped, lots of eyes opened wide. Most employees were just plain shocked. Nobody had any idea the restaurant was "losing money."

The owner then talked about the functions of each group of employees (servers, line cooks, bussers, etc.) and described how their efforts are connected to and ultimately reflected on the P&L, line by line.

The operator said after the meeting he noticed some pretty profound changes in the restaurant. First, no one had the nerve to ask for a raise for nearly a year after the meeting. He also noticed changes in attitude and behavior. People were much more conscious in portioning and handling products. He saw people going out of their way to bend down in a trash can to pull out a knife or fork, something he had rarely observed before.

Amazingly, his margins started improving, he implemented a successful new marketing strategy, and within six months, the restaurant moved close to breaking even for the first time. Within a year it was actually turned a small profit.

Since then he has continued showing his employees the monthly P&L to educate, inform, motivate and even reward.

Granted, this example is extreme for most restaurant owners, but I've heard firsthand accounts of other operators doing essentially the same thing. The bottom line is that they keep their staff informed of how their restaurants' financial performance.

Drive a Chevy

That's right. Even if you can easily afford it, hold off on getting your dream car until after you've sold your restaurant. Driving a shiny new Mercedes or comparable luxury auto will only serve to validate what your employees have always assumed -- that owning a restaurant is a highly lucrative, high-profit undertaking and you're getting filthy rich -- and in their minds, you've got the car that proves it.

After discussing this fact in one of my live seminars, an attractive middle-aged woman came up to me at a break and told what had happened after her husband surprised her with a new BMW for her last birthday. A week later her employees gave her a surprise of their own: a 2 to 4 point increase in food cost in "each" of their six quick-service restaurants.

Educate and inform

At minimum, let your employees know, in terms they can relate to, that the restaurant business is a "low-margin" business. When they really know what's going on, they will usually do the right thing. The problem is that when you withhold information, people are forced to make assumptions, and as you can expect, those assumptions usually are wrong.

Additional articles by Jim Laube:

* FINANCIAL MANAGEMENT: Know your numbers

* FINANCIAL MANAGEMENT: Preparing a monthly P&L won't give you the best numbers

Topics: Financial Management

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