Restaurant Budget: How to Build Your Plan to Profitability and Freedom
Have you ever found yourself going to last page of your profit loss statement just to see if you made or lost money? Have you ever been disappointed at the final number and just said your favorite F word and then throwing it on your desk? And that's about all you do with the profit and loss statement, right? If you want to understand a restaurant budget and how to build your plan to profitability and freedom, don't go anywhere. Watch this tip or keep scrolling to read why that profit and loss statement is useful and how to use it and a budget to build your plan to profitability.
As I’ve talked about in previous tips, your profit and loss statement is your rear view mirror. It’s what has already happened. But how about creating your proactive plan for success, something that looks forward? How do we do that?
Start no matter what month you're in and grab the trailing 12 months’ numbers. The past year is your history. There is no need to wait for December or January to start this process. You need the last 12 months what’s in your rearview mirror, that profit and loss statement.
Start by grabbing each month’s sales for the trailing 12 months. Coming out of the pandemic, last year’s numbers probably aren’t much good, but it is a measurement to how you performed. So you put those numbers in. Look at your sales from your point of sale system. You can also use your profit and loss statement or any spreadsheet/documentation you’ve kept. Break up your sales by category: food, bottle beer, draft beer, wine, liquor, merchandise.
Then you go to cost of goods sold and find out what your food cost was running for the last year. What are the percentages sold of food, bottle beer, draft beer, win, liquor or merchandise. If you've made changed to your menu in the last three months and you know there’s an improvement, use those more recent numbers.
Next is labor cost, making sure you’re splitting up your fixed costs of salaried managers and hourly costs by percentage. That's your hourly managers for full-service restaurants, servers, bussers, hosts, bar backs, bartenders, line cooks, prep cooks, dishwashers, maintenance, etc. You get the picture. You need to know what percentage of sales those labor targets have been running. Same here if you've made improvements in the last three months because you made a pivot, use those more recent numbers. Otherwise, you should be looking at a full year of labor cost.
Next are your operating expenses, fixed or variable. For instance, if you pay $10,000 a month in rent, that's a fixed expense. If your rent is 7% as a variable lease, then that 7% goes up and down with sales, so it’s variable. Go line by line by line, looking at every expense, and determine is it fixed or variable.
Look at your paper supply. It could about 2% of your sales, so as you get busier, you’ll use more paper and vice versa. As a percentage of sales, it's 2%.
Then when I set up a budget, I'm going to set it up as quasi cash accrual. Sales as they happen, cost of goods sold based on inventories, labor as it happens, but down line by line, as the payments happen.
In this case, you’re not going to put an interest expense, amortization, depreciation. You’re going to put the full SBA loan payment. Put the actual payment to anybody you owe money to because you want to see what your cash looks like as well. It's not a perfect world when it comes to accounting, but when it comes to planning, it's a perfect world.
Now, once that is done, the next step is to create the plan. Based on your last twelve months, you’re predicting what you’re actually going to do if you keep doing the same thing you've always done. But you don’t want to do what you’ve always done, so you need to create a plan for success to change your reality. You deserve to make money, and you deserve to do better than you did last year.
The plan develops as you ask what you can change. Can you change your menu to reduce your food cost? What systems are you going to implement on the line to reduce food cost, prevent theft, to prevent waste, and order on budget.
As the months go by, you start lowering that number based on a system you put in place and holding your management accountable to it. Look for ways to reduce costs in food and labor going line by line by line. When we notice your janitorial is way out of control because you haven’t been paying attention to it, you can act on it. You have a kind of crystal ball telling you what you can do to lower your expenses and increase profitability.
When you have your budget and your PNL, each month you can put them side by side and measure and make changes from there. If one month you were supposed to make $14,000 and you only made $7,000, you can make a plan to make up that $7,000 in the next few months or the rest of the year. Make sure your managers are following the systems, retrain them if necessary and make the small changes that will help you recover that $7,000. If you are doing everything right but still miss the sales mark, start putting more systems in change to recapture that money month by month. It’s not a one and done deal.
Your budget is incredibly important because it allows you to measure your success and change your plan. You’re actually creating your plan for success, not somebody else's, not some industry average, but your plan. You're going to have the ability to measure your success, and more importantly, you're going to be able to change your plan and stay on the path to success.
If you want to achieve restaurant prosperity, freedom from your restaurant, the financial freedom you deserve, then a budget is a must.
