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If you want to make a small fortune in catering - start with a large one!

Stop throwing your money down the drain

Monday 05 June 2017

The hospitality industry is a hard one to be in, 50% of new restaurants/pubs don’t make it to their second year and 84% never make it to their 5th year.  There are many factors contributing to business failure.  In this first part of our blog I am looking at two mistakes that new business owners often make and which bring about the biggest number of business failures.

The first is underfinancing the business from the start.  Banks and investors require a business plan which will inevitably include a cashflow and forecast trading account.  But it easy to make things look good on paper.

Mistakes often start with the cashflow.  The setup costs, initial rent or purchase cost, equipment purchases, food and drink costs, training and recruitment, are clearly identified along with VAT, utilities, accountant and solicitor fees.  However too often I see an underestimation of personal costs; housing, clothing, food and travel.  Many first-time business entrepreneurs forget to factor these costs in and are immediately on the backfoot.  You must live while the business is building, and being self-employed the only source of money is your business.

As a general guide add 40% to the original capital requirement you calculated.  You should then have sufficient funds to successfully complete your first years trading.

 

The second problem new business owners often encounter is a failure to understand the finances of the business.  Often using free tools from the internet to complete the trading accounts and cashflow statements they manipulate figures to make things work (see above).  But they don’t really grasp the finances.  The first and one of the most important pieces of information needed is “breakeven”.  Breakeven is the point at which the contribution (gross profit) covers all fixed costs.  The point at which the business has no losses.

Do you know your breakeven? 

Do you know this in terms of turnover required, number of covers or customers? 

And do you know the contribution each sale makes to you fixed costs?

 

To calculate your breakeven, you need to know the gross profit that each sale will generate.  This is selling price, less VAT, minus the cost of sales (food and drink costs). 

You then need to know how much it costs to run your business, per week or per month or per annum.  Any work, but you need to bring this to the lowest denominator to make the information meaningful, so bring the calculations down to “per week”.

Example; the average spend per head at your restaurant is £35 and you have calculated the gross profit as 68%.  The contribution would be;

£35 less VAT at 20% = £29.17

The gross profit would be £29.17 x 68% = £19.83 per cover/customer

If you had monthly fixed costs of;

Rent

£4,500

Utilities

£2,050

Rates

£1,150

Labour costs

£6,000

TOTAL FIXED COSTS

£13,700

 

Your breakeven in covers sold would be £13,700 / £29.17 = 691 per month

Weekly this would be 691 x 12 / 52 = 159.5 or rounded up 160 covers per week

Now if you know you serve an average of 310 customers per week you will be able to work out when you breakeven.  In this case it would be (Sunday is 1st day of the week) around mid-afternoon on Wednesday, assuming sales are equal throughout the week.

To calculate this in monetary terms multiply the number of covers by the average spend per head including VAT;

Breakeven in income is 160 x £35 = £5,600 per week (NB: I have used the rounded up number of covers to calculate the income)

 

A few words of warning though;

If you calculate your breakeven point and discover you aren’t achieving it weekly or only just doing it you need to rethink your offer.

Don’t guess your gross profit – calculate it.  Complete regular stocktakes, or better still get someone to do it for you, and use these gross profits rather than your target/forecast GP%s.

Know your breakeven, recalculate frequently and review your performance weekly.  Become a profitable wise sage rather than a busy fool.