Viewpoints

Nine Ingredients for Guaranteed Failure – A Recipe for Family Owned Restaurants

Bruce Zicari

Originally Published In:
BUSINESS STRATEGIES MAGAZINE
2003
Author: Bruce Zicari, CPA

Mama’s favorite recipes and the grand designs you have for ambience won’t be enough to turn your family owned restaurant into the success you’ve envisioned. It’s a sad but true fact that while there are an estimated 850,000 restaurants across the United States – 70% of which can be considered independent or family owned –  almost 8 out of every 10 will fail or change hands in the first two years leaving nothing more than just a memory and an outstanding bank note.

Here’s a recipe for guaranteeing that your family owned restaurant will fail:

1. Open a restaurant “just for fun” 

Operating a restaurant can be a fun and rewarding experience, however many new restaurant owners do not possess the basic business knowledge necessary to succeed. 

The solution: When opening a restaurant always evaluate your own ability first, identify your weaknesses and build a support system for success. You can overcome  faults by surrounding yourself with  a strong experienced management team.

2. Turn your back on cash flow

In today's changing environment, many restaurant owners find themselves short of cash and often wonder what happened. By relying on monthly or quarterly financial statements instead of cash flow reports, you’ll find yourself pondering this question as well.  

The solution: Supplement your monthly financial statements with a weekly cash flow report that will provide more timely information so you can react quickly to changes in your business and predict your cash flow needs before it is to late. When estimating your cash needs, always estimate high and develop financing alternatives early on.

3. Ignore your customer’s concerns

Your restaurant will slide down the slippery slope of failure in direct proportion to how well you treat your customers and how responsive you are to their concerns.  The true personality of your restaurant is always evident in the owner's absence.

The solution: Always hire the best people available and ensure that everyone is focused on being a champion for customer service. Utilize a formal procedure for relaying positive and negative customer feedback to your employees.  Positive feedback will reinforce qualities that customers find appealing. 

4. Pick an "OK" location

Selecting a poor location is a key ingredient to guaranteeing the failure of your restaurant. Even the best concept coupled with the best advertising won’t save an establishment that is poorly located.

The solution: Every restaurant must focus on selecting an excellent location through an appropriate market analysis.  Refine your concept first through a formal business plan, determine the demographics of your customers, and then find a location that fits.

5. Ignore technology 

Many small restaurants utilize "cigar box" cash registers to run their business.  Without an automated point of sale system providing real time operational and financial information, you will miss critical data and opportunities for making improvements.

The solution: Leverage technology, through selecting an automated POS system that will allow you to monitor; menu and sales mix data, customer counts, average check amounts per customer, labor, inventory and product usage, accept credit cards and even monitor how long the cash register drawer is open.  In addition, many systems allow for tracking of specific customers information allowing a more one on one marketing approach. 

6. Avoid monitoring sales trends

Restaurants often are surprised by what they perceive to be a sudden failure.  More often, failure results because sales warning signs are ignored.

The solution: Comparing sales results to prior periods is essential to identifying and reacting to trends.  On a daily basis sales and guest checks should be compared to the prior week and the prior year.  You can utilize this information to monitor the success of a marketing campaign, local competition changes or the success of up selling appetizers or desserts with an entrée.

7. Advertise using only “word of mouth”

Most restaurants rely on word of mouth for promotion.  While both positive and negative word of mouth can have a significant impact on a restaurant, ignoring traditional marketing and promotions can provide the added boost necessary to make your business fail.

The solution: Utilizing promotions should be an integral part of the sales process.  Marketing initiatives will help retain existing customers, attract new customers, increase sales during slower periods and increase the average sales per check.

8. Fail to monitor food and beverage costs

Monitoring food and beverage costs can be one of the most challenging aspects of managing a restaurant.  Since food generally represents 30% or more of a restaurant’s costs, failure to manage this area can be the difference between profit and loss. Focusing only on product availability and quality can create unacceptable profit margins. 

The solution: Establish a food and beverage cost budget on a weekly basis, investigate variances over a predetermined threshold and be diligent. Negotiating with vendors on pricing is critical and continual so you must work with them to reduce food costs.  Often by varying the delivery frequency or delivery size, substantial savings can be achieved.

9. Assume your labor costs are fine 

Labor can represent 30% or more of your total restaurant costs as a percentage of sales.  Labor is the most controllable and measurable cost and alack of monitoring labor hours and labor dollars will result in labor overruns and certainly guarantee failure.

The solution: Consider establishing a payroll scheduling "grid" where you chart allowable scheduled hours based on anticipated sales volumes.  Schedules should be reviewed and approved by the owner and compared to the payroll scheduling grid before the workweek begins.   This tool will minimize labor overruns and maximize labor accountability.

The excitement of owning and operating a family owned business is one of the strongest drivers of entrepreneurship in our area. Right now in New York State, there are approximately 50,000 establishments with annual sales exceeding $19 billion. A year from now, the majority of these will be gone-replaced by either new establishments or new ownership.

A great concept, a fantastic location, aggressive cost control and leveraging technology represent opportunities for success, just as their converse are the ingredients for failure. Keep your vision alive and thriving through sound management practices and you’ll be cooking up a storm for years to come.

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