FINANCIAL MANAGEMENT: Know your numbers

 
March 19, 2003

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

There are two main areas or sets of functions in every restaurant. First of all, every restaurant has an operational side. The operational side is basically what the restaurant business is all about and includes things like the menu, recipes, purchasing, hiring, training, marketing, customer service, sanitation -- plus myriad other activities and functions that occupy an operator's attention.

Jim Laube

If you're an owner/operator or restaurant manager I'm sure you can identify with living and breathing these issues for too many hours a day than you'd care to be reminded of. It's not uncommon for the operational activities in a restaurant to occupy 110 percent of an operator's time, focus and energy.

However, there's also another critically important side or dimension to every restaurant and that's the numbers, or the financial side of the business.

The financial side includes things like accounting, financial statements, cost control, cash management and even maintaining good relationships with bankers and investors.

Granted, not the most "top of mind" matters to most restaurateurs, but vitally important to managing any successful business, especially a restaurant. In many ways, managing the financial functions require a totally different set of skills, disciplines and knowledge from that of running the restaurant.

If there is one overwhelming truth that I have observed again and again in the past 20-plus years working with literally hundreds of restaurant operators it's this -- restaurant owners, operators and even managers, who are truly experts at the operational side of restaurants, and also have a solid understanding and put a high priority on knowing what's happening on the financial side of their restaurants, consistently outperform operators who don't have a good working knowledge of their numbers.

Operators who understand the numbers side their business know where they stand financially, they know how much money they're making or not making. They're in a position to respond quickly to problems that crop up, and they have better relationships with lenders and investors.

In short, financially astute restaurateurs make more money and they have more opportunities to raise capital for growth and expansion than those who are less financially literate.

A very successful businessman, by the name of Harold Geneen said, "The difference between well-managed companies and not so well-managed companies is the degree of attention they pay to the numbers." This is true of businesses in general, but especially true of restaurants.

In many respects the restaurant business is a numbers business. Now don't get the wrong impression: I recognize that the restaurant business is first and foremost about people, and the most important thing an operator does every day is take care of the customer. And, of course, this business is about food, too. But success in foodservice is not just measured in terms of rave reviews from critics and smiling, satisfied customers, but also in the cold, hard realities of facts, figures and finances.

There is a big difference between running a restaurant and managing a successful business. Said another way, a restaurant isn't just a restaurant, it's also a business. And to have a shot at operating a restaurant like a business, it's imperative for any operator to have a good understanding and pay close attention to the numbers or financial side of the restaurant.

Financial management practices of the best

Here are a few activities many successful operators perform to help them stay on top of the financial side of their businesses:

If there is one overwhelming truth that I have observed again and again in the past 20-plus years working with literally hundreds of restaurant operators it's this -- restaurant owners, operators and even managers, who are truly experts at the operational side of restaurants, and also have a solid understanding and put a high priority on knowing what's happening on the financial side of their restaurants, consistently outperform operators who don't have a good working knowledge of their numbers.

* A high priority is placed on getting a complete and accurate set of financial statements (balance sheets and profit & loss statement [commonly called the P&L]) at the end of each reporting period. From those statements operators get feedback on how profitable (or unprofitable) the restaurant has been, if margins are on track, where the cost control challenges are and if the business is financially healthy or not.

Financial statements are complete and in the operator's hands quickly: no longer than 10 days after the end of the reporting period. The longer an operator has to wait for "the numbers," the less valuable and useful they become.

Believe it or not, the savviest business managers in our industry don't get monthly financial statements. Their reporting periods are based on a four-week or 28-day cycle not a monthly one. So they receive 13 -- four-week periods a year instead of 12 monthly periods.

One advantage of this system is that it makes the P&L more useful in comparing one period to another because all periods are based on the sales of four Mondays, four Tuesdays, four Wednesdays and so on. The number of days in a month is always fluctuating as well as the number of week-end days. Week-end days are the busiest in most restaurants with many doing over 50 percent of a week's sales on Friday and Saturday.

At the end of every week, top operators find out what their cost of goods (food, paper, liquor, beer & wine) and payroll costs were. If there's an unexpected spike in these costs, they're investigated and watched closely during the current week.

To get accurate cost of sales numbers a physical inventory is taken every time food and beverage cost, for example, is calculated. Smart operators know that when a physical inventory isn't taken and food cost is based on purchases, every dollar difference in the value of the beginning and ending inventory is the amount the food cost number is misstated.

One way operators can become more financially astute is to seek the council of trusted business advisors who are experts in the financial aspects of business. One of the best candidates for this would be a CPA with plenty of experience dealing with several successful restaurant operators. A good way to find such a professional is to ask other operators in your area about their own CPA. Also, contact the local chapter of your restaurant association.

The restaurant business essentially boils down to people, food and numbers. Don't let your success be limited by not paying enough attention to your numbers. Successful financial management may be the surest way to turn your good restaurant into a more successful business.


Topics: Financial Management


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