"You might think that owning a restaurant generating a couple of million dollars a year means you're managing millions. In reality, you're still managing pennies." This insight from Glenn Dunlap, host of the Best Metrics podcast, encapsulates the financial tightrope restaurant owners walk daily.
In an industry where a slight increase in food costs or a dip in customer traffic can spell the difference between profit and loss, how can financial professionals guide their restaurant clients toward sustainable success?
Glenn spoke to Jabbar Daniels, CPA and founder of Chester & Daniels, a firm specializing in the hospitality industry. Jabbar brings a wealth of knowledge from his early days in Las Vegas's casino scene to his current role advising restaurant clients in Atlanta.
Imagine a business where a 5% cost fluctuation could mean thriving or shutting down. Welcome to the world of restaurant finance.
Restaurants must focus on two critical metrics: Cost of Goods Sold (COGS) and labor costs. COGS typically ranges from 20% to 40% of revenue but can sometimes reach up to 50%. This wide range reflects the diversity within the industry, from quick-service restaurants to fine dining establishments.
Understanding where and why a client falls within this range is crucial for financial professionals. Jabbar emphasizes breaking down these costs into detailed categories:
"If you have alcohol split out as a line item for revenue and then you have the cost of alcohol, you can compare those two and say, 'Our markup is working just as it should be,'" Jabbar explains.
This granularity can reveal insights obscured in aggregate data. Jabbar shared an experience where overall COGS appeared healthy, but a breakdown showed food costs significantly higher than beverage costs. This led to targeted interventions in menu design and supplier negotiations.
The volatility of input costs adds another layer of complexity:
"When things are going well, costs are pretty steady, and dollars are rolling in. But when the industry takes a hit and costs go up, those margins might get tighter," Jabbar says.
For financial professionals, the key takeaway is clear: advising restaurant clients requires a deep dive into these metrics, not just a surface-level review of profit and loss statements.
The difference between a $15 and a $16 entrée might seem negligible to a restaurant customer. Still, it can significantly impact the bottom line because different menu items have varying profit margins. As Jabbar notes, "You can mark up alcohol a lot. A lot of folks rely on that."
While a glass of wine might be priced at the cost of the entire bottle, food items often have tighter margins. The challenge is to create a menu that's attractive to customers while ensuring profitability.
Pricing strategies can't be static. The volatile nature of input costs necessitates a dynamic approach. Jabbar explains:
"If margins are down, the first thing you look at is material costs that fluctuate. If you have to print new menus and raise prices by just a little bit, that's something you may have to do."
This flexibility becomes critical during economic fluctuations, like those the restaurant industry faced during the COVID-19 pandemic. Restaurants that survived often quickly adapted their pricing and business models.
The learning opportunity for financial professionals? They should work with clients to implement regular financial reviews and scenario planning. Jabbar advises, "Understanding what those problems may be when the time comes and being able to adjust is definitely a big part of it. We see clients neglect that when things are going well, and then they don’t know what to do when a problem comes along. It’s imperative folks get to that early."
A quarterly pricing review with your restaurant clients might include:
By helping clients stay ahead of pricing challenges, you become a partner in their business success.
Effectively managing labor costs can mean the difference between success and closure in an industry where profit margins often hover around 3–5%.
The practice of tipping introduces the concept of tip credits. Jabbar explains:
"If they're a tipped employee, you guarantee them a minimum wage salary. Let's say you guarantee them $10 an hour, and then they get tipped $15 an hour on average. Your hourly wage will go down to $2.13, and their tips cover the $10."
This system, while potentially beneficial for managing costs, is complex. Jabbar explains, "I have seen it where the restaurant will not even consider doing those tip credits. So they're just paying them a wage, and they're making tips on top of it, and it can really hurt the restaurant."
Equally crucial is cash flow management. Jabbar emphasizes maintaining at least two months of cash reserves.
"It may not always be there, but if it's something we can control, then yes, at least two months. If you can extend that out even more, that'd be great," he says.
Building these reserves can be challenging, especially given the difficulties restaurants face in securing traditional financing. Jabbar says most lenders still want restaurants to have been open for at least two years to qualify for financing.
For financial professionals, these challenges present opportunities to add significant value:
By helping clients navigate these complexities, you're partnering in the delicate balancing act of restaurant financial management.
Mastering restaurant finance isn't just about number-crunching—it's about understanding the industry's unique challenges. Every aspect requires a specialized approach, from the nuances of tip credits to the critical importance of cash reserves.
As Jabbar articulates, financial professionals play a crucial role in transforming the tiring task of penny-pinching into a strategic approach for long-term success.
Ready to elevate your expertise and become a pivotal player in restaurant finance? Don't miss the full Best Metics podcast episode featuring Jabbar Daniels. Learn from his real-world experiences to offer insights that add value for your restaurant clients.