How Do You Know What to Change without a Restaurant Budget
First there were business restrictions from a pandemic, then there were product shortages, then there was the Great Resignation and now inflation. This means for the past two years now you've been battling higher labor costs and higher cost of goods sold along with a bunch of profit-robbing expenses such as gloves and third-party delivery apps. As an independent restaurant owner and the leader of your business, you need to make changes to make money. How do you know what to change without a restaurant budget? Stay with me, and I’ll explain why you must have a budget.
Would it be an understatement if I were to say that it's never been harder to make money in the restaurant industry than it is today? If you've been following me for any length of time, you know that I believe with the rate that our industry has been raising prices over the last two-plus years to combat all the rising costs, we're starting to approach a scary point where your guests look on the plate don’t see the value in what they’re paying for.
So, what do you do? Do you continue to raise your prices? Do you start cutting labor? Do you start cutting expenses? How aggressively do you start cutting? Should you focus all your attention toward increasing sales volumes because sales cure all ills? How do you know what to change? What changes you should make without a restaurant budget?
The short answer is you don't. A budget is critical to your success. Let me share with you my approach to budgeting when I'm working with one of my coaching members.
Step one, we create a budget template. What we do is we grab your last 12 months profit loss statement and create a template that includes what your sales were, your sales mix, cost of goods sold, labor costs, fixed and variable expenses. Then we say if we operate the same way in the 12 months that we did the last 12 months, here's how much money you're going to make or lose.
I want you to hold that budget template like a dead rodent and go, “EW!,” I want to do better. And that's where the budget comes in.
Step two, before we go into creating a plan, we verify your numbers. We go line by line by line and say, is that accurate? We verify, verify, verify, so that we know the starting point is as good as it can be.
Number three, we start creating your plan for success. What systems are we going to put in place to achieve certain results? How fast will we achieve those results? How are you going to make changes in your business based on your location, your price point, your style of service, the quality of product?
Number four, as we create this plan, we start looking at your sales mix. Why is that important? Look at the sections where you sell a higher percentage versus a lower percentage to identify your biggest opportunities.
Step five, let's look at your cost by category, by percent. What stands out to you? Because in an example I just gave you, if 85% of your sales are food sales, and I come in and I see my food cost is high, let's say it's running a 38%, well, you know this is your biggest opportunity to make positive change in your business. You can identify that 85% of all your sales are food and your food cost is running dramatically high, so you need to make change. Then you create your plan for success with a bit of patience. (Watch the full video in this article to get in-depth examples.)
Step six, we're going to look at labor by position. What stands out again, maybe in this case, if you know your food cost is running 38% because it's 85% of your sales, it's your biggest opportunity. Let’s say your back-of-house labor is running at 15% just for line cooks, not including dishwashers or prep cooks. My goal for you is 10–12% in most cases. Sometimes it can run in the 13% range depending on the state you're in and what you're paying for your starting wages. There is room to cut labor, and I show you with a down and dirty dollars per labor hour work calculation. Without going through all the math, you can look on my channel and look for dollars per labor worked or the Labor Efficiency Finder.
Step seven, we look at prime cost. My goal for you if you do $850,000 a year or more in sales is a 55% prime cost or lower. If I do less than $850,000, I'm looking for a 60% prime cost. We look again at cost of goods sold and labor costs, one can be higher, one can be lower, but you need 55 points or less total. To get to 55%, month after month in your budget, you work your way there.
Step eight, look at your operating expenses line by line by line. That's everything else from your rent, your utilities, uniforms, paper, janitorial, credit card discount rate, marketing, everything else that's not food, beverage or labor. I bet you’re running high in a few of these areas.
Creating a budget is creating your plan for success. If you were to ask my members what the most impactful thing they get out of my restaurant transformation intensive group coaching program, they would all tell you that the budget process has a tremendous impact on their life and their business. Some would even say it's life changing.
If you're looking to figure out how and what you should change in your operation to beat back all the financial challenges restaurant owners face today, you must have a budget.
If you would like to learn how to own a restaurant that doesn't depend on you being in it to be successful, sign up for my free video course that teaches you three key principles to running a successful restaurant. If you're ready right now to make some serious changes in your restaurant, you can also book a 60-minute call with me where we talk about your challenges and figure out exactly what is holding you back from having a restaurant that doesn’t depend on you being in it to be successful.
Be sure to visit my YouTube channel for more helpful restaurant management video tips.