Startups: Be Prepared to Operate at a Loss for 12 Months
Although startup failure rates vary, a thorough study of 81,000 restaurants over 20 years found that 17% of independently owned full-service restaurants fail in their first year. While this is less shocking than the 90% figure often thrown around, it still demonstrates the hurdles owners face with restaurant financials.
Experts, like Manfred Jachmich, think “one of the biggest causes of failure is that new owners don’t correctly evaluate costs before opening.” Even if you’ve nailed down your rent, labor, and food costs, the first year is full of unexpected expenses that puzzle even seasoned restaurateurs. Having access to capital helps ensure that you can move with the ebbs and flows of labor and food costs. It also provides the flexibility to pivot your brand or menu if required. Avoid becoming a statistic by being prepared to operate at a loss for 12 months.
Figure out your numbers
Long before you open your doors, you’ll want to forecast your revenue. This gives you a time frame for paying off your startup costs and helps you determine your break-even date. You’ll refer to this information to ensure that you’re staying on track throughout those first 12-months.
Balance sheet. Calculate your restaurant’s net worth with this snapshot of your restaurant financials.
Income statement (also called profit and loss statement). Input accurate data during the year to measure profitability annually.
Cash Flow Statement. Track cash on hand with a cash flow statement that reflects the amount of money coming in and going out during a specific period.
Inventory control. Regularly determine inventory use and cost to catch issues and adjust your menu or marketing accordingly.
Profitability analysis. Use weekly Prime Cost reports to track labor, food, and beverage costs. Doing so allows you to notice and act on issues immediately.
Develop a reserve fund
By and far, a lack of access to capital crushes restaurants in the first year. Along with the burden of startup expenses, restaurateurs also face unexpected expenses, from labor costs to emergency equipment repairs. In your business plan, you should have a list of all the one time and ongoing expenses you’ll occur.
- Taxes, legal, credit payment processing fees
- Rent, utilities, other recurring payments (pest control, laundry)
- Startup expenses like equipment, renovations, and cost of credit rates
Experts recommend that you have at least three months of operational costs available during the first 12 months of business. Access to capital allows you to keep your restaurant running regardless of increased expenses due to labor demand or supply chain issues. Plus, with a reserve fund, if you need to boost your marketing efforts, then you won’t be limited.
Have a plan for restaurant financials
Here’s the thing — most restaurants don’t fail from daily profit or loss. Instead, an unexpected event throws their restaurant financials into turmoil. According to the Restaurant Industry Report, 43% of operators rely on their personal savings for surprise expenses, while 52% acquire small business loans. However, a whopping 90% of restaurateurs report using other means for capital like crowdfunding and investors.
Consider your choices for restaurant startup loans and financing before a crisis. Invest in legal support to review all contracts and create options to keep your restaurant afloat if you’re incapacitated or need quick access to capital. Then, use best practices in restaurant planning and reporting.
While the first year is rough on restaurant owners, more restaurants succeed than fail. All of which means increased competition for you. Stay on top of your restaurant financials and be prepared to operate at a loss for 12 months by figuring out the basics then developing a reserve fund and a plan for dealing with the unexpected.