If a restaurant operator spends the first five days of the month reliving the past one, they are looking in the rearview mirror instead of looking out for the windshield and driving the business in the direction it should be moving in that week/month, not afterward.
“Easier said, month-end is month-end,” Johnessa Hardyman, VP of Finance at Morrissey Hospitality in St. Paul, MN, told Modern Restaurant Management (MRM) magazine. “We’re back to waiting for a preliminary income statement and month-end inventory to appear. If you are monitoring sales and labor daily and using a declining balance, you should be able to predict your Gross Operating Product (GOP) or Net Operating Income (NOI) within three to four percent before these reports are issued.”
Pay Attention to Primes
On an ongoing basis, operators must pay close attention to their primes, which consist of labor and cost of goods, she said. If you can achieve less than 70 percent per month, you are doing OK; every percentage under that, optimally in the low to mid-60s, means you are operating very efficiently.
The best tool for any operator is to use daily sales reports and labor reports. Both give you a snapshot of the week you are in and allow you to make real-time changes to adjust for peaks and valleys you experienced and anticipate in the coming days, said Hardyman. The second most valuable tool is using your budget and GL, as it lets you create declining balances for every line item and shift your resources or spending based on where you anticipate the week and month will lead. Think of it in simple terms, just like a checkbook, she suggested.
Avoid Common Mistakes
Common mistakes operators make regarding financial management include waiting for a preliminary monthly income statement and purchasing, she said. Once that statement is released, there is nothing more you can do except check for errors, which experience says are usually not material, pore over inventory, and hopefully not take your first look at your General Ledger.
“All of the time wasted explaining the previous month means you are not focused on the current week and month ahead.”
When it comes to purchasing, being fearful of having to “86” an item and overstocking items because you anticipate a surge in business or you are getting a deal on buying two cases when you only need six bottles creates waste and increases what is sitting on your shelves (inventory is cash) and is rarely worthy of depleting your monthly cash flow, Hardyman pointed out.
“If you have any bread in your freezer, you will know what I mean. Bread wasn’t meant to be frozen.”
Uncovering Hidden Costs
If revenue is up, but profit is flat, operators can play detective to uncover hidden costs or inefficiencies, she said.
“Portion control, yields, and waste are your target areas when looking at your Cost of Goods. As for payroll, your largest expense, a simple rule of thumb is that if your schedule for the week ends up being the exact same number of hours worked, it means you never adjusted up or down during the week based on revenue nor improved the productivity of every hour worked. It must be looked at and adjusted daily.”
The next step is more proactive, and that is the concept of flowthrough, Hardyman said. For every dollar in revenue that is above your budget or forecast, how much of it did you keep? A good target for flowthrough is to keep 50 to 60 percent minimum, and the opposite for flex is to spend less than 25 to 40 percent of the dollars you did not take in.
“Each dollar is a bonus, and the higher the percentage you bank, the more you are prepared for the weeks and months to come, when you might have to flex (revenue is down, and for each dollar you did not receive, how much did you not spend), which is inevitable.”
Manage Cash Flow
Determining the appropriate emergency funds for a restaurant operator depends on several key factors, Hardyman said. Much of this depends on your operation’s size, cash flow, and accessibility to either reserve funds or a line of credit, especially considering seasonal fluctuations in demand.
Payroll is your number one obligation, and if you are fortunate, having the next two payrolls in reserve is optimal, she suggested. Keeping to the terms set by your vendors is the next most important item, as well as payment of sales tax and other associated federal, state, and local taxes.
“There is no question that restaurant margins are very tight, which means active awareness and management of cash flow is paramount to balancing the tightrope of our industry, especially post-pandemic. If you cannot pay your vendors for product nor your people to prepare and serve it, no amount of reserves can keep you afloat for long. Having too many funds in reserves also means you are not reinvesting in your business.”
Engage with Staff and Budget Wisely
Talk with staff to get them on board for inputting cost-cutting measures, Hardyman said.
“Solicit their ideas. They are your front line, and chances are good they will have great ideas as to the hidden costs and efficiencies mentioned above. Why waste time being a detective when you already have them? This source of information is invaluable.”
Developing effective short- and long-term budgeting strategies is essential when facing rising and unpredictable costs, she said.
“Know your market, understand your demographic, accept that in our industry customer spend is mostly discretionary, and do not create “blue sky” revenue to increase your GOP or NOI in your budget and never backload it in hopes you will sneak it over the finish line.”
Finally, do not take the previous year and assume you will do better by a large margin, Hardyman said, because you’re only setting yourself up for 12 miserable weeks explaining to your stakeholders why you didn’t achieve it.
Reference: https://modernrestaurantmanagement.com/monitor-financial-warning-signs/
