Downing, Childs & Musser

Be Just Like Your Competitors

The downfall of way too many restaurants is a lack of originality.  You may serve great food, but what sets your business apart from everbody else in town?  Pick an important attribute of the dining experience that sets your business apart.  Once you know that attribute, focus on it relentlessly.

The most powerful concept in marketing is “owning” an important word in a customer’s mind.  Subway owns “fresh.”  KFC owns “chicken.”  Olive Garden owns “family,” Bob Evans owns “farm,” and Cracker Barrel hangs it hat on “country.”  What word do you own?

Treat Inventory as a Good Thing

Inventory is a double-edged sword.  It enables you to prepare your product, but it ties up one of your most valuable resources…. cash.  A restaurant with too much inventory will invariably have higher food costs than it should.  Too much food sitting in storage causes lots of problems.   But how do you know how much is too much? 

A full-service restaurant should have no more than 7 days of inventory on hand, and a limited menu restaurant should shoot for 4 or 5 days.   Here’s how the math works…

a. Multiply monthly food sales by cost                                                                     b. Divide result by 30 to get 1 day’s usage                                                                c. Count actual inventory on hand and divide the result by 1 day’s usage

 Ideally, the result should be <7 for food  (beverages <14)   

 For example, assume you have $10,000 in food sales each month and your food cost is 70% of sales.  

$10,000 x 70% = $7,000 divided by 30 = $233 for one day’s usage.

 Then assume your counted inventory = $1,500.  $1,500 divided by $233 = 6.4 days, a healthy inventory level for your business.  

Sell Great Food & Service… sometimes

 Next to “bad,” inconsistent is the worst word in a customer’s vocabulary.  If they order “the usual,” they should get it.  The most successful restaurants treat complaints as learning opportunities for staff and chances to build relationships with customers.

Treat Bookeeping as an Afterthought

Bookeeping isn’t just about taxes.  You’re in business to make money, right?  If properly maintained, your books will tell you what’s going well and what needs your attention.  

We’ve already talked about Inventory Days on Hand, but there are two other metrics that you should track…. Prime Cost represents the cost of food, beverages and labor divided by total sales.  This should be below 70% for full-service restaurants and closer to 60% for establishments with more limited menus.  

Pretax Margins represent your profits before taxes.  Since you don’t think about taxes daily, feel free to consider this figure the portion of every dollar that you get to keep.  A profitable restaurant should have pretax margins between 4-7% of total sales.

 Ignore Common Restaurant Risks

 Like it or not, if you’re in the restaurant business, you’re in the risk-management business.  Some risks, such as customer falls are pretty standard.  But others, such as an outbreak of food-borne illness or the dangers swirling around in a hot cup of coffee, are nearly impossible to predict or quantify.  

Some of the risks common to restaurants include the following:

Customer Falls:                                                                                                      Restaurants are particularly susceptible to lawsuits arising from customers falling.  It really doesn’t matter if it’s your fault.  These types of suits drain two of your most valuable resources:  your money and your time.  

Damage to Customer Property:                                                                                    No valet parking?  No coat check?  Well don’t think you’re off the hook .  What would happen if one of your servers spilled a bowl of soup on a customer’s laptop computer containing all of her valuable business data?

Food Poisoning:                                                                                                                 The CDC reports that outbreaks of food-borne illnesses have risen rapidly in recent years.  The risk of being linked to a food-borne illness is rising due to:

• Increasing food imports into the U.S. from all over the world
• Inadequate FDA resources to inspect more than 1% of food imports
• The ease of tracking an outbreak to its source
• High industry turnover that makes it difficult to keep employees trained in proper food handling procedures

It’s not enough to tell your employees to wash their hands and not to leave dairy products out of the cooler.  It’s important to have a written set of procedures designed to reduce the danger of food poisoning.   At a minimum, there should be written food handling procedures. 

 As litigation resulting from food-borne illnesses becomes more common, having written guidelines for food procurement procedures may become necessary.  Restaurant owners should be aware of their supply chain’s practices and take proactive measures to ensure the quality and safety of the food they serve.

 Fire:                                                                                                                                           Any business could have a fire, but thanks to open flames and fryers, restaurant owners have more to worry about than most.  To mitigate this risk comply with most underwriting guidelines, restaurants should have active fire suppression systems and a maintenance contract to have them professionally serviced twice each year.

Food Spoilage:                                                                                                                        What happens to your inventory if the electricity is off for several days?  Do you have sufficient funds to replace it once the power comes back on?   

Employee Theft:                                                                                                           Obviously a dishonest employee could do a lot more damage in a jewelry store…  But restaurants aren’t immune to pilferage.  An employee smuggling steaks or giving free food to friends can have a significant impact on your restaurant’s profitability.

Loss of Business Income:

If a fire prevented you from operating your business, could you pay:                

• Your employees?
• Your creditors?
• Yourself?

It doesn’t take something as dramatic as a fire to interrupt your business.  Events as mundane as your street closing for repairs can have a major  impact on your bottom line.  At Downing-Childs & Musser we help our clients prepare for the unexpected.  That’s why we like to complete a loss of income estimator at least once each year.