You wouldn’t get on a plane if your weren’t comfortable that the pilot budgeted the amount of fuel needed for the trip. You wouldn’t enter into a long term lease in a strip mall for ten years without budgeting your restaurant cash flow to ensure you pay the lease since nonpayment may lead you to bankruptcy due to personal guarantees. You wouldn’t sign a contract with your food supplier without budgeting your profit margin that might cause your food costs to generate a negative cash flow immediately? And on, and on, and on.
Setting up a budget may be one of the few ways you can seize control of your restaurant finances before allowing matters to drift towards disaster.
Disaster can take many forms, such as:
- Not being able to take advantage when opportunity knocks like a greatly reduced piece of equipment that would double your sales
- Having your credit tarnished, or worse
- Seeing yourself forced to file for bankruptcy due to cash flow shortages
- Routinely spending more money than you earn
Budgeting can help ensure you don’t spend more money than you earn. A budget is simply an accounting of your income and expenses during a certain period of time, usually a month or a year. It involves looking at how much money you expect to earn and then determining what you can afford to spend.
Having a budget does not prevent you from spending money, using credit cards, or taking out a loan for special purchases. Instead, a budget encourages you to be certain you can afford what you’re buying and guides you through what lifestyle changes, if through what lifestyle changes, if any, you’ll have to make in order to pay for it.
Having a budget does not prevent you from having fun! On the contrary, a budget gives you greater freedom to spend the money you earn. Trust this advice: It is a far better thing to have control of your budget, than to have your spending control you!
“I don’t have time to sit down and work on my budget! I just wing it and I have done just fine! I operate the restaurant by my gut.” Here is the reality. Every employee, organization, vendor, customer who comes into contact with your restaurant is expecting the owner at the helm to ensure that sound business decisions are in place to not be hurt by doing some form of business with you and your restaurant. You are creating trust with each one of these parties. Frequently comparing your actual results to an established budget allows an owner to possibly raise a white flag for help sooner than later. Toss the ego aside and become accountable.
First of all, a budget is the place where you tie all of the rest of your planning down to numbers and also timing. For example, if you need to buy a piece of equipment, you need to know when you are going to order it so that you can have it on time to open the business and you also have to plan for the money necessary to buy that equipment. So the budget becomes the place where you can tie all those things together.
The budget is the roadmap where you believe you want to go so it helps you set goals in terms of what revenue you want to achieve and is also a way to track those goals. It provides a great tracking tool and beyond that, it puts a discipline on yourself to do all the homework necessary to get into business. You have this opportunity to look forward and ask: What do I need to buy? What do I need to have in place? Finally it’s a way to measure your success against your expectations.
Where do I start? First, start tracking your cash flow for the next thirty days. Start identifying monies in and monies out. If you have a point of sale system you can start accumulating menu items that are moving and ones that are not. You can perform some basic food costing to ensure your profit margins are adequate to pay for your fixed expenses. Keep a diligent record of your cash in a spreadsheet form. Balance your checkbook in entirety. Don’t give this responsibility initially to your outside accountant. Do it yourself first.
Secondly, now you are in the habit and this process of tracking your monies monthly needs to continue until you start seeing a trend. Restaurants are affected by outside environments: holiday, school, birthdays, weather, events, so you get the point. Therefore when you have tracked each month based on your activity at your restaurant you now have a roadmap of expected activity to budget and look forward to anticipated revenue and expense for your restaurant.
Finally, sit down with your accountant and compare your budget to actual results that have been reported on the entity tax returns in the prior years to fine tune the expected revenue and expenses you alone have identified. History has a way of repeating itself and numbers don’t lie! Ask “why” about every revenue and expense identified. If you are a new restaurant then you must accumulate data from the national restaurant association or some other reliable source. Many local cities have demographic information based on buying patterns of consumers of existing restaurants. The SBA (small business administration) has agencies that can assist in free demographic studies which are then used in the creation of budgets for lending purposes.
Create a culture at your restaurant that tracking numbers is important to your restaurant! Managers make bonuses. Employees make bonuses based on even cash drawers. It all starts from the top. If it’s important to you it will be important to all employees in the restaurant operations. Think of budgeting as a tool that will provide a roadmap to one question all owners say to me, “Where’s my Cash?”