It’s Foodie Friday and the topic today is business. I know: that’s pretty much the topic every day, but let me explain. I read an article on one of the restaurant sites I frequent that spurred a thought that goes beyond the restaurant business.
The piece was all about the financial statistics a good restaurateur needs to watch. I’m always surprised when a place with good food in a great location goes out of business but it seems to happen a lot. Sometimes it’s that the chef leaves and things slide downhill but more often than not it’s because the business part of the food business overtakes the food part of the food business.
One needs only to watch an episode or two of the show Restaurant Startup to see how a food business is not especially different from any other startup. I assume what I’m seeing on the show reflects the new restaurant world at large and today’s article confirms that belief. Many of the contestants have no clue about the first, and maybe the most important statistics any startup needs to grasp: Cost Of Goods Sold. In a restaurant, that’s food. In a service business, we usually call it cost of sales. In either case, it’s the cost of producing whatever it is you’re selling. You’d be surprised how many businesses don’t know this number.
That number is part of a bigger one called overhead, which includes rent, salaries, services such as accounting and legal, and things like keeping the bathroom clean (your restaurant has one; hopefully, so does your office). These numbers are critical because if you charge too little for what you provide you won’t be in business very long, and you can’t figure that out unless you know your monthly nut.
Once you have the Gross Profit (or Gross Income) number, you can subtract your expenses to get Net Income or Net Profit. Divide that by your sales and suddenly you have a profit margin. That’s something you can use to benchmark your results against other businesses of the same type. In the restaurant business, it’s generally not very big, which is all the more reason why a complete grasp of the numbers is critical. There isn’t a lot of room for error.
I spend a lot of time with my clients on their numbers. It’s not just so that they can present themselves well to potential investors either. Like your web traffic or any other piece of data, they can illuminate a lot and help you make critical decisions. Ignore them at your own peril.
By the way, I’m writing this as a sort of thank you to my late brother who was my CPA and who beat accounting into me many years ago. He passed 5 years ago next week and I miss his guidance and the clicking of his calculator every day.