Many wide eyed culinary enthusiasts open a new restaurant concept before learning the financial side of the business. This directly relates to why many new restaurant businesses close their doors before the business is able to sustain itself with the cashflow it produces.
Preparing a pro-forma P&L is a must for anyone considering the challenge of starting a restaurant. Working through a pro-forma P&L will give a clear understanding to every financial aspect of the day to day operations. Taking the time to complete a pro-forma will determine if your restaurant concept will be profitable, and will help determine the right amount of money needed to start.
This section will cover and explain the following:
What a pro-forma is
The information and data needed to prepare the document.
How to understand and use a pro-forma
What is a Pro-Forma P&L?
A Profit and Loss Statement, or P&L, is the single most important financial statement looked at within the operations of any restaurant. A profit and loss statement communicates the revenue, expenses and the overall profit or loss of a business in a single document. Generally speaking it calculates the total revenues minus total expenses within a given range of time.
A Pro-Forma P&L uses estimated expenses and revenue projections as a means to model and predict financial outcomes for a business that is not yet active. A pro-forma will become a supportive and key document in a business plan to present to bankers or private investors as well as a key reference to track progress.
Once all necessary information is obtained and a completed pro-forma is analyzed, an informed decision to move forward (or not) can be made with better judgement. A pro-forma will render information needed to calculate a breakeven point, and also the rate of return on the overall investment.
If a decision is made to move forward with opening a proposed concept, the pro-forma can be helpful to track progress by comparing actual numbers to the numbers projected on a daily, weekly, monthly, and yearly basis.
This document will help determine the feasibility of a proposed concept, (or that it will be worth the time and effort). Furthermore it will serve as a key financial document in which to monitor and compare actual financial figures once the doors have been opened.
Each line item of a profit and loss statement will affect the operation’s bottom line. As most in the industry know, the majority of restaurants operate with very thin margins. All line items should be well understood and also thoroughly researched.
A standard P&L for restaurants consists of the following categories:
Revenues / Sales /
Food
Lunch sales
Dinner sales
Desserts
Appetizers
Beverage
Alcoholic
non-alcoholic
Total Sales
Expenses / Costs
Fixed Costs
Rent/Mortgage
Loans
Variable Expenses
Labor
Food Costs
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Gross Profit
Sales Projections (Top Section of a Restaurant P&L)
The sales and revenue section of a Pro-forma P&L will require work and thoughtful analysis. Like every business, there exists some speculation in projecting revenues. This is especially true for a restaurant that has yet to serve its first customer. Fortunately there are industry standards and strategies to use which will help increase accuracy and reduce uncertainties.
At this point in your progress of opening a new restaurant, you will have already done some market research to understand your potential customers.
Performing market research and knowing the demographics are key to
Expert Tip* Any new restaurant operator should plan to have at least six months of working capital available upon opening to give yourself the time to build sales without the fear of having the lights turned off. *
Topics that should be covered here:
How to estimate daily sales? Weekly? Monthly?
What mealtimes will the restaurant be open for? What days?
How to determine average check size? (number of sales / number of people who came into the restaurant)
Beverage sales? Bottle beer vs. keg beer?
Food sales?
Dessert sales?
What are some unexpected ways to get projected sales volumes? Are there resources available that list transaction amounts?
2. Determining Major Expenses
There are a few major expenses you will want to research in order to forecast projections that
are as accurate as possible:
A. Rent - Rent is basically a fixed cost once your lease is signed, but in the
planning stage of a restaurant, finding a suitable location and it’s cost are an
important part of determining your potential profitability. Do some research to get
an idea of rent amounts per square foot for the area and location type you have in
mind, or use actual numbers if you already have a location. Your rent amount
needs to make financial sense which is typically 5% to 10% of your estimated
sales volume.
B. Labor Cost - An industry standard for total labor cost including managers and employees of most restaurants will normally be between 30% to 35% of sales. Employee labor is
generally around 15%-18%, but you should plan for it to be higher than that when
first opening. Also, you must account for labor dollars to train your staff prior to
opening for business. The cost of training before opening can be accounted for in
your opening expenses and may not be on your first month P&L, but it is advised
that you create a budget for how much it will cost to train your staff. Have an idea
of what your labor percentage will be based on your concept and its staffing needs
C. Food Cost - Food costs will vary somewhat based on the concept and business
model of your restaurant, but are usually between 25% to 35% of food sales.
Have at least a general idea of the food that you will be serving and your intended
food cost percentage for your Pro Forma. To determine your ideal food cost
percentage, first have a menu and recipes established. Next contact several
different food suppliers to get some comparative pricing for the items you plan to
purchase. Then, using those prices, determine your recipe costs as well as your
menu prices. A basic food cost calculation is to divide the cost of an item by the
retail price. For example if you are estimating it will cost you $1.85 to make a
turkey sandwich that has a retail price of $6.95 - $1.85/$6.95 = 26.62%.
The three categories of Rent, Labor Cost and Food Cost discussed here make up around 70% or more of the sales a restaurant brings in. Let’s take a look at an example of a P&L to help demonstrate the additional expenses associated with operating a restaurant and how to budget for them. The example Pro Forma P&L given here is for one month of sales, basically demonstrating a break-even point with fairly low net earnings.
************Pro Forma P&L Example**************
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But What Does it All Mean? - Analyzing the numbers
If you’ve been diligent enough to carefully research and determine dollar figures for both expenses and sales income, your completed pro-forma P&L should give you a solid idea of what your restaurant’s financial standing will look like for a month in business. From there the potential viability for your restaurant’s concept in its given market can be determined with more accuracy. The decision to move forward or not to move forward and rather rethink the details, can be made without emotional interference and with confidence knowing that your bottom line will be worth your efforts.
If you’ve taken a good hard look at all the numbers and decide that your restaurant’s concept will be worth opening and operating, your pro-forma P&L can be used to help monitor the actual numbers that the restaurant is operating at. With a pro-forma P&L in place you will know what numbers you should be running at to maintain the results you’ve projected with.
Things to monitor for example might be variable costs such as your labor and food costs. But don’t take these averages as a number that should be used for every restaurant. These are line items that any operator or manager should keep an eye on and make changes if possible when they may be too high.
Other questions to answer:
How does this all relate to your calculations to determine when the restaurant will break even? What is a break even analysis? (seems obvious that it is an analysis of when the restaurant will have earned enough to pay back a investments) What are average timelines for repayment of investments?
As you can see there are many expenses that go along with operating a restaurant or any business for that matter. The example P&L you just read through is for one month, to get an idea of sales, expenses and possible earnings at that sales level.
Remember when forecasting sales for a longer term to take into account seasonality based on industry standards and the specific location you are planning to open your restaurant in. Colder climates may have slow winters where as an area that is warm most of the year may not have that issue.
Be diligent with market research to determine how potential sales will be affected throughout the year so your quarterly and annual Pro Formas will have sales projections with data to back them up. Take a hard look at your operation plans and be realistic about the size of the staff you will need to run a shift so the labor % is manageable. Get quotes on items like workers compensation and general liability insurance for your specific market and concept as these numbers will vary by region and how safe the work environment is (or isn’t).
Again, the best advice I can give is do your homework on your proposed restaurant financials before you get tied up in lease deals and other obligations. Preparing a Pro Forma P&L Budget is the best map you can make on the road to opening a new restaurant, while providing the confidence that your concept is worth the time and effort you plan to invest in it. Remember that although you may be passionate about your ideas, having a good plan and the proper funding can help you avoid undercapitalized, one of the “3 Most Common Mistakes to Avoid When Opening a Restaurant”.