Budgeting is important for any business. It allows you to better understand your financial situation, predict upcoming challenges and, ultimately, grow the business. However, creating a budget is especially important when you’re starting up a venture. Your outgoings will be significantly higher than any income you get in the first few months, so it is vital to organise your finances responsibly in order to reach a return on your investment before the business starts to break down. In short, a budget can be the key to profitability.
But budgeting and compiling financial spreadsheets does not come naturally to everyone, so let’s take a closer look at some of the most important aspects to consider when making a budget. Here, we’ll talk about budgeting in reference to restaurant businesses.
- What to Consider When Starting a Restaurant
- Dine Out On The Benefits Of Owning A Restaurant Franchise
- The Benefits of Consulting a Franchise Accountant
- How to Buy a Franchise with a Limited Budget
- Budgeting For Success: Understanding the Cost of Franchising
- The Truth About Making Money As A Franchisee
- Restaurant Business Plan: It's Easy with Franchising
How do you calculate a restaurant budget?
First of all, let’s ask:
A business should establish its own accounting period. This period can either be measured as 12 months or 13 lots of four weeks. The latter option is useful because there is exactly the same number of each day of the week. Because most restaurants experience custom that fluctuates consistently throughout the week – with Friday and Saturday being the busiest days – it can be simpler to budget with the latter option. The start and end of the accounting period differs for every business, but many budgets are created in the final months of the year, from October to December.
A budget should be a record of every penny you gain and every penny you spend. It should include the cost of renting the premises, buying and using kitchen appliances, paying staff and sourcing food, as well as any franchising fees the business owner is required to pay. It is important to bear in mind that these costs can be divided into three categories:
Fixed costs: These are non-negotiable costs that you must pay on a regular basis, such as rent, insurance and any loan payments.
Semi-fixed costs: These are costs that you must pay on a regular basis that are different every month. This includes staff salaries, utility bills and food costs.
Non-fixed costs: These are costs that vary depending on the restaurant’s success. Examples include tax, marketing, delivery and repair costs.
In each of these categories are controllable and uncontrollable costs. Restaurant owners can cut down on expenses by reducing staff salaries, or the amount they spend on marketing or supplies. However, if the uncontrollable costs – such as rent, tax and insurance – are too high in comparison to the restaurant’s income over the long run, the business could face closure.
According to RestaurantOwner.com, restauranteurs should consider four main factors when compiling a budget:
Sales: This is the amount of money you make from your customers. It is likely that this will fluctuate, not only over the week but also over the month and year, due to working patterns, national holidays and the weather. Therefore, you should compare sales to the same period of previous years to get an accurate idea of how the business is doing.
Prime cost: This is essentially an estimate of the company’s definite outgoings; i.e. the sum of the fixed costs. This could take into account rent, employee salaries, benefits and taxes. Do not include non-fixed costs as these can be difficult to calculate and could make the budget inaccurate. When the prime cost has been calculated, make sure that it represents less than 65 percent of the sales.
Controllable income / operating income: This is the realistic calculation of the restaurant’s income taking into account the fixed costs. This ignores any factors that are outside of the restaurant owner’s control.
Net income: This is the final profit made, considering every outgoing. If the business is not doing well, this could be a negative number, indicating that the restaurant has spent more than it has earned.
These factors can be immensely helpful when it comes to evaluating your business in different ways. For example, by subtracting your total investment from your net income, you can discover your breakeven point, after which your business starts to make an overall profit. This is also called your return on investment (ROI).
Luckily, there are a number of things that can help you when budgeting. The first is a point of sale (POS) system, that tracks sales, menu choices and table reservations. It can also incorporate accounting software to make budgeting and forecasting a little easier. Another option is to appoint a specialist accountant or bookkeeper. They will be full responsible for managing your financial records, able to analyse your business’ performance and flag up any areas where you are not meeting industry standards.
Creating a Sales Forecast
This is all about estimating the extent of your restaurant’s future success – or otherwise. Make sure you think about the data collected by your POS system, competition from nearby restaurants, changes to the economy, including rising or falling wages or food costs, and any promotional events you plan to carry out in the future.
How to Manage Restaurant Budget
Once you’ve compiled your budget, you are in a good place to grow your business in the following year. Armed with new knowledge about the details of your finances, make an audit of your marketing strategy to work out what you need to do to maximise your success and profitability. Replace any strategies that aren’t working particularly well and take measures to boost the ones that are. Consider how effective your website, social media presence and email and print media campaigns are. Also, don’t overlook the value of attending special events and food festivals when trying to boost brand awareness and reputation.
Finally, if your budget has revealed that your business is not performing as well as it could be, you should try to reduce your expenditure. Do this by sourcing cheaper food suppliers, reducing the salaries of your workers, the number of workers or increasing the price of your meals.
Alice Tuffery, Point Franchise ©