How do I evaluate the success of my business?
August 1, 2013 3:33 PM   Subscribe

I own a restaurant in its first year of business. Some stretches I feel like we're doing just fine, whereas other stretches I feel like pulling out my hair. I'm having trouble evaluating the success of my business. We've very consistently turned a monthly profit, though I still own the bank nearly $150k, and I also have a large chunk of money invested myself, though I am paying myself $40k / yr.

We're highly seasonal: open 8 months of the year, with most of our business in the winter.

Open to date, we've made $13,000 profit, equal to a 6% profit. This is pretty low, but includes a bunch of one time costs and management mistakes. I'm confident that we can turn a 8-10% profit on $250k of revenue next winter. This summer is about break even, though I think I can turn a profit next summer knowing what I now know.. However, at this rate, it would take me 6 years to pay back the bank my 5 year loan..

Our food cost hovers around 36-38%, which I'm trying to improve upon. Liquor and beer is around 28-30%. Prime cost is 65%.

I have $15k in cash right now, with $10k left in my line of credit and also $10k in my personal account should things go awry.

My questions:
- Am I "making a profit" because I am turning a monthly profit, or do I not "make a profit" until after I pay back the bank and myself.
- Does my business appear to be doing okay? Should I be worried, and looking to implement changes in direction, or simply hold the course, turn out a quality product, and continue to build on the foundation?
- Do my cost percentages look okay? I'm taking steps to lower them..
- Any other insight or questions?

posted by masters2010 to Work & Money (12 answers total) 2 users marked this as a favorite
Are you making a profit? That depends who is asking. From a tax standpoint, you would likely include all your expenses both operating and capital ones. It does not sound as if you are from that standpoint. If I were evaluating your business to buy I would look at your operating revenues versus operating expenses and say yes you are. From your standpoint, if the $40k you are paying yourself is included in the operating expenses as if you were any employee and there is additional cash flow to pay down debt even if it a little slower than you want (or need), I would say you are doing ok.

This is from the perspective of a non restaurateur. The only experience I have at restaurants besides eating and drinking was my year as a bartender. It sounds like you are doing ok, but I am not qualified to answer your specific questions about the ratios and percentages.
posted by JohnnyGunn at 3:50 PM on August 1, 2013

You need the services of an accountant or a bookkeeper. You need at least someone to take a look at your books, if you are unsure if you're turning a profit, and project out what is going to happen, how to adjust costs and prices, and be sure you're on track.

Restaurants can be really risky, and margins are very tight when it comes to food, so I wouldn't wing it if I were you.
posted by xingcat at 4:13 PM on August 1, 2013 [1 favorite]

An accountant is, of course, the best person to answer these questions with specificity.

But if you are able to pay the bills AND pay yourself and still manage to break mostly even, you are doing fine.

And that's the question: are you able to pay the bills on time? If you make payroll and pay your vendors and bank on time, you are doing better than most first year businesses.

(However, rereading the question, I see that you aren't quite on track to pay the bank back. I would reduce my pay to the minimum possible until the numbers start looking more solid. Look at what your cashflow looks like month to month. You need operational cash available to cover the expenses during the slow months. I would make a decision: what do you use your cash on hand for, and what do you use your line of credit for? Some people use the LOC to cover the float between when bills are due and money comes in. Others use their cash for that, and save the line of credit for emergency repairs, etc. I would personally prefer building to a point where you have cash on hand to cover everything, and only using the line of credit for a double backup.)

Looking at it from a macro scale, what does your total credit look like? Are the balances going up or going down, including both bank loans and revolving credit, and vendor float? That should be a thing you are looking at month to month and year to year. If your total debt load is going down, then you are making some kind of profit.

Don't worry too much about the percentages. You aren't in business to make a percentage, you are in business to make money. You are better off making 10% on $1000 a day than 20% on $200 a day. Lowering your food cost to keep your numbers up might look good in the short term, but is quality suffering? Once you have a menu and price points optimized, your profit lies in eliminating waste without reducing quality.

(There is good waste and bad waste: good waste is making just a little extra so you are ready for any spikes in demand. Good waste is culling the shitty tomatoes out of the crate so your customers don't get bad ones. Bad waste is making too much when you know better. Bad waste is turning on equipment before you need it, and leaving equipment running after it isn't needed. Fryers and grills sitting there doing nothing are just burning money.)

Also, manage your labor well. Have a list of things for them to do when things are slow. Within reason, give your employees the hours they want, without hurting your overall labor percentage. (Which IS a percentage you should watch, since it is something that you can more easily control, as opposed to the cost of goods.)

As for the profit question, I think I would call that an operating or net profit, but not necessarily a profitable business. Once the loans are paid off, you will have a profitable business.
posted by gjc at 4:15 PM on August 1, 2013 [5 favorites]

It's unclear how your debt is structured. If you're making payments now, and you're cash-flow positive, then you can stay in business indefinitely, and eventually you will decide whether it's worth it. If you have a big balloon payment on the loan, then you're probably kidding yourself about being profitable.
posted by mr vino at 4:24 PM on August 1, 2013

If you are part of a restaurateur's association of some sort, you should be able to get some sample balance sheets and p&l's from comparable businesses, to get an idea of where your peers stand.

An accountant or a good bookkeeper is really important as well. I guess I would be thinking about how the near term affects the longer term. Debt is not in itself a bad thing as long as you are managing it. If you make those cuts in food costs and bring your margins up, how does that affect getting the debt paid off? What is the cost of the debt, and how does that affect your operating cash?

Otherwise I think gjc has a good answer.

Good luck!
posted by natteringnabob at 4:42 PM on August 1, 2013

You need a tax accountant. If you don't know whether you're making a profit or a loss, then you can't possibly know your tax liability, and there may be steps you need to take to reduce that liability or at least plan for it. The rest of the question depends entirely on how you're accounting for the debt, which is really ambiguous as stated. There's just not enough information here to answer general questions about business health without making a whole bunch of guesses and assumptions.

The claim that your business must be debt free before being declared "profitable" is also a red herring.
posted by kiltedtaco at 6:11 PM on August 1, 2013

First of all: congratulations for getting your business open and staying open for a year! That's a hell of a lot of work, and a lot of places don't get that far.

There's a lot I can't tell about your business and your specific situation based on what you've written in your question. That's part of the reason it's very important for you to consult with an accountant. Not only do you need tax advice, but you also need to be reviewing a profit & loss statement and a balance sheet monthly, and other numbers even more frequently than that. An accountant will be able to answer the question of whether or not you're really profitable.

That said, there are several things in your description that would concern me, and that you can start working on improving now. It doesn't necessarily mean you need to radically change direction -- it could be that just tightening up your operations will get you to where you need to be. A restaurant can leak money from a million different places, but there are a few factors that tend to make the biggest difference in bottom line. You should be monitoring these constantly and working on improving them every day. The biggest factors are probably ...
- top line sales (aka, are customers coming? buying? returning?)
- payroll (and especially the labor to sales ratio)
- cost of goods & pricing
- inventory

In places similar to yours, I've seen it take 18-24 months for the business to build up a good customer base. You may still be gaining new customers -- are you seeing top line sales increasing from month to month? It may be hard to tell given the seasonal ups and downs, but once you have a full year of data, you can start comparing year over year. In the meantime, you can guesstimate it based on the numbers you have. For a business that's still growing its customer base, you should be looking for pretty substantial improvements in the top line, both from month to month, and comparing each month's numbers to the same month last year.

If you're not still gaining new customers at this stage, you need to ask yourself two very important questions. Have you marketed your business adequately (aka, do people know where your business is, what your business is, and why they should try it)? And are your customers returning (ie, are you earning their love after one visit), or are they visiting once and never coming back again? If it's the latter, then you need to fix something about your service, your offerings, or your pricing.

How's your average ticket? How much does each customer buy on each visit? Any way to increase that number by offering additional options, making sure customers know what's on special, or some other means?

Are you the only employee? If you have other employees, you should be tracking your labor costs carefully -- and I mean daily. I suggest tracking two numbers: top line sales and labor cost. Record them in a spreadsheet and calculate the ratio (divide labor cost by sales) every single day. Average restaurant ratios run from 25-38%, but it's not just a matter of percentages -- it's about using labor money on the shifts that need it (as measured by sales). See what you can do with the schedule to trim your labor cost and/or move it around to where you need it most. This can actually improve your top line, too, if speed of service is an issue in your restaurant (and it is in most). Tracking the labor to sales ratio will mean that the busiest times get the most staff, and vice versa.

Some of the numbers you've listed are not making sense to me. Forgive me if I've missed something, but it looks like your prime cost (65%) is less than the food and the beverage costs added together (37%+29%). Where is your labor cost in that calculation? If 65% is just the combined cost of your food and bev, not including labor -- then I think you need to work fast to get those percentages down, either by reducing costs or by raising prices (or both).

Your food & bev costs strike me as very high -- maybe twice as high as they should be -- especially the bev costs. First question: are you pricing them high enough? Keep in mind it's totally common for beverage markup to be 300-500%. Check comparable restaurants in your area for comparison prices. Even a small price increase can sometimes help a lot. If you change your menu at the turn of the season, take that opportunity to bump prices up as much as you think is reasonable. You're no good to your customers if your prices are so low you go out of business!

Are you doing inventory weekly? Are you ordering just what you need, when you need it? Are you wasting any inventory? And is there any way you can simplify your inventory? The more different ingredients you need, the more inventory you will need to hold, the more waste you will have, and the less likely it is that you will be able to take advantage of volume discounts from your wholesalers. For instance, if you're serving foccacia and bagel chips and pita and pita chips -- is there any way you can narrow that down to just one or two options, perhaps prepared slightly differently for each dish?

One final note: I personally really like spreadsheets and data and ratios and percentages. If they feel overwhelming and paralyzing to you, then find some other way to be checking in on these major factors as often as possible -- and definitely find a good accountant! There's plenty you can do to improve your business without the spreadsheets, but you will need somebody around who can watch the financial details. Good luck!
posted by ourobouros at 9:46 PM on August 1, 2013 [1 favorite]

There should be a branch of the Small Business Administration in your area. They will have lots of useful information, and you may be able to get technical assistance at little or no cost. You definitely need expert tax prep assistance, and a bookkeeping system that will help you keep a handle on how you're doing.
posted by theora55 at 9:49 PM on August 1, 2013

You should consider the opportunity cost of making $40K salary instead of whatever presumably higher amount you would be making if you were working for someone else. So for example, if you would make $80K in another job, you are "losing" $40K per year. That being said, you could think of that money as being invested in building the opportunity for higher future income. Which leads to this question: what's the most revenue you think this restaurant will ever be able to generate? Higher than $250K? If you make 10% net margin on $250K, that's $25K, and if you take that as your own income, you now have $40K + $25K = $65K, which is less than the hypothetical $80K I mentioned. So it may be that your income potential is limited, HOWEVER if you have a much better lifestyle running this business than you would have working for someone else, that might be worth a lot to you and thus worth having a lower income.
posted by Dansaman at 10:08 PM on August 1, 2013

Is there a Business Management school in your area? I wonder what would happen if you offer yourself up as subject for a class project. I wouldn't count on this for any official legal or tax reasons, but if you just want to know how you're doing, it might help.

Or you could see if they have some classes for small business owners to take to help figure it out on your own.
posted by CathyG at 6:45 AM on August 2, 2013

Response by poster: Thanks for the thorough answers! Some more info about me and my business:

- I have a trustworthy bookkeeper that does a great job, and she handles pretty much all financial information. I also have a tax accountant, though we don't interact except for tax time.

- I pay all my bills on time, and have no problem doing so.

- I had a staff of 10 in the winter that dwindled to 5 in the summer. In the winter I work as manager, bartender, cook, etc. -- basically the component under most stress at any given time. In the summer I have been working as a cook, picking up half the shifts.

- I was originally paying myself less so that I could repay the bank as soon as possible, but to the urging of my friend / successful business owner, I started paying myself whatever I would pay someone else to do my job. This yields more accurate financials of the business, rather than inflating profits. This money is coming out of payroll before bottom line profit.

- I used the line of credit for startup costs. Now that I have a decent amount of cash in the bank, I don't plan to use the LOC unless for an emergency.

- Labor on a good day is about 20-22%. On a really busy day it can be as low as 15%. On a slow day in the summer when I'm not working in the kitchen, it can be as high as 40-50%. There were a couple days this summer where it climbed to maybe even 80%, but that was at the beginning of summer when things were really slow. Besides cutting someone and taking the shift myself, there is no other way to reduce labor on these super slow days -- we have just one bartender and one cook in the summer.

- My bank loan is at the prime interest rate. I have no trouble making the monthly payments on the loan, I just worry about being able to pay it back in 5 years.

- The business is in a very small tourist town. Our business is supported by the locals, pretty much all of whom know of the business and have been in to try it out. It's not for everyone, especially the younger crowd that don't want to pay an extra dollar or two for quality, but we have high customer satisfaction, and many return customers / regulars. Our average ticket is about $14. I've toyed with the idea of lowering prices to try to do higher volume, though I feel like our prices are as low as they should be.

- Note that I do tiered pricing in the winter: locals get $2 off all drinks and 10% of drinks. In the summer, all customers get local pricing.

- We have trouble getting people in the door, especially when they're looking around browsing. We're a bar that focuses on craft beer that also happens to serve really good food. I made sure to not cut any corners when it comes to quality, and we serve a simple menu of only 8 items. There's something for everyone, but people can't necessarily perceive our quality from the menu, even though I make sure to use really descriptive and tantalizing vocabulary. It seems that people see only 8 items and instead want to go somewhere with a larger menu, even though the quality of food at my establishment rivals all other restaurants in the immediate vicinity. Any tips to get people in the door? I don't want to offer too many items, partly because I like the focus, partly because it's a super small kitchen and a one (wo)man operation.

- COG: I think my prices are too low for what I'm offering, especially in the summer when I'm offering everyone local pricing, but the locals here are poor, and they're the ones that support my business. Perhaps I should raise the prices and offer local's 20% off food in both the summer and winter? We do some really reasonable happy hour specials, but it gets people in the door and it competes with some crazy deals at neighboring establishments.

- Inventory: I do inventory weekly, though I occasionally fall out of habit...Our ordering is pretty on point, and we hardly have any waste. It's possible that I can reduce COGS by switching up my inventory and looking for less expensive products of the same quality. I was over zealous when building a liquor inventory upon opening and some of the liquor really doesn't move. For example, I bought a case of Johnny Walker Red, which got me a few free bottles, though we've only gone through two bottles since opening...
posted by masters2010 at 1:14 PM on August 2, 2013

So you are paying yourself a fair market wage, paying the bank back at 80%, and still have positive cash flow? Give yourself a pat on the back, that's great for a new restaurant. And look at it from the bank's perspective: before, they gave a loan to a new business in a difficult industry with no way of knowing whether it would even open. If, a few years from now, you need to refinance the loan, you have an operating business and would be a much better risk for a lender.

You might consider, along the lines of Dansaman above, the amount of capital you had to bring the to table as part of your profitability. Interest rates are really low right now, but your money would have been returning something if you'd kept it invested outside the restaurant. It's a sunk cost at this point but worth considering if you want a full financial picture.
posted by wnissen at 4:30 PM on August 2, 2013

« Older FMLA + Layoffs?   |   Frindle, Anyone? Newer »
This thread is closed to new comments.