Most restaurant or bar venues that are experiencing some form of stress are usually suffering from one of two basic problems - or both. Either their costs are too high (possibly as a result of not adapting to new circumstances) or their revenue has been declining below the projected assumptions when first opening. Everyone knows that either of these two challenges can sink a food/beverage business, but many operators don’t know how to turn the profit & loss statement around in an organized and diligent way.
The first step in plotting out a path forward is to fully understand what the situation is. Now, many folks say, “But of course, I know the problem!!”. When we’ve encountered this off-the-cuff response, we usually press forward and ask more questions, and that’s when everything gets fuzzy. The sad truth is that many operators know their business really well but don’t maintain the objectivity to look at how it is functioning in a cold, unbiased way. For instance, understanding the operation’s prime rate, overhead rate, cost of ingredients, and labor costs, to name a few, are metrics that most operators have heard of and maybe even analyzed at some past date. But our experience is that most operators facing an immediate crisis don’t know where they stand right now, and they rarely track them on a monthly basis.
Knowing a few metrics about your business is vital to planning where to place your guidance in charting a path forward. But for most businesses, it’s not enough to just know what your metric is. You also need to know where it stands relative to other successful operations. It is this knowledge that makes us worry when the restaurant’s operational cost is over 15% or when direct labor cost starts to exceed 33%. There are many metrics that can be distilled from a P&L, but looking at them in the context of what they should be is key to maintaining a grip on your business. So that’s why when we perform an analysis of a restaurant or bar operation, we always provide our clients with benchmark metrics to understand where they should be. From that, we can work with our clients to determine the best path to correcting a situation that might not drain working cash for another 6 months or more.
One of the best examples of following metrics very closely is the impact of direct labor costs on a business. It’s quite common to delegate the scheduling of staff to a manager that knows all of the staff schedules intimately. This manager might receive the duty during a busy period of the year and continues the same par number of staff even as revenue declines. What began during a period when labor costs were around 28% quickly can escalate to unacceptable levels when revenue declines if this metric is not monitored on a regular basis. Oftentimes it is not discovered that labor is too high for the type of business being reviewed until 6 months or more later. At that point, depending on the scale of the business, a substantial sum of money may be spent unnecessarily.
Other prime examples of the need to closely follow metrics are reviewing the amount of money being spent on credit card fees or service fees to online order aggregators like Uber Eats, DoorDash, or GrubHub. These types of services often start out low but have many ways of creeping up over time. When credit card processing starts to go above 3.2% of revenue, it’s probably time to explore other cost-effective solutions to this service. And we have seen some clients where the fees paid to online order aggregators climb so high that it is actually costing the restaurant for every meal they deliver through that service. Without meticulous attention to these metrics and their relative weight in the context of what the metric should be, operators never know where to focus their managerial attention.
One of the most valuable services we provide to our clients is an objective financial review of past performance and how the business is reflected in a litany of metrics. Then each of these metrics is shown in the context of where it should be for a similar type of business based on our past research and ongoing monitoring of trends. These provide a very clear roadmap for where the operation can be optimized. The answer to many operational conundrums is not always to increase revenue - but without a detailed analysis, it is difficult to see where the focus should be from the business owner.
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Jeff Leiter, AIA is a licensed architect, experienced designer, and has deep expertise in the food & beverage industry. With over 20 years of brand design and restaurant/bar operational knowledge coupled with architectural experience, Jeff brings a comprehensive approach to every client project. Jeff has directed and managed projects from initial ideation and evaluation of prospective locations to the development of conceptual design for many complex retail and F&B projects. As an architect, he’s followed many of these projects through design development, construction, and initial operations. Jeff has also served as Founder, designer, and operational head for several successful restaurant & entertainment venues. Not only does he know his way around the commercial kitchen, but nightly he creates ridiculously complicated cuisine at home, often involving his homebrewed wine or beer.
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