|This article on creating financial projections for a new restaurant is a guest post, brought to you by the team at ProjectionHub. ProjectionHub is a leading provider of 50+ industry-specific templates thousands of owners have used to form plans and secure financing for their restaurants, bars, coffee shops, and other businesses. You can check them out at www.projectionhub.com.|
Travel to any city, town, suburb, or any other location that has more than a hundred people and you’re going to find a restaurant where you can grab a bite to eat. Sure, it’s a necessity to eat food, but I think we can all agree on the fact that sometimes (or many times) it’s nice to get out and eat a nice meal made by professionals.
It’s common to see new dining establishments come and go in different communities, and it’s clear to see—based on events like the pandemic—that the restaurant industry isn’t for the faint of heart. However, there are thousands and thousands of examples of our local favorite places to eat, regional staples, or national/global franchise empires that have stood the test of time and continue to serve beloved food all while earning the owners plenty of money.
We believe the recipe for success comes down to two things: 1) Good food. 2) A rock-solid plan. And that rock-solid plan starts with financial projections which we’re going to walk you through the why and how for your new restaurant.
At ProjectionHub we have helped nearly 50,000 businesses create financial projections for their new endeavors and several thousand of those businesses have been restaurants. Nearly all of the restaurants that we’ve set up with projections have utilized one of our CPA-developed restaurant projection templates which I’m going to use as a roadmap to demonstrate how to make lender or investor-ready projections.
What Are Financial Projections?
First, I’ll provide a quick explanation as to what financial projections are and why they are important for your restaurant. Whenever an established restaurant is seeking financing either to expand or purchase new kitchen equipment or for any other viable reason, the bank or lender will ask for their financial statements so they can see the historical track record of performance for the business and ultimately make a decision on its ability to pay back the loan. The same is true for a new startup restaurant; however, there are no historical financial records to share.
That’s where projections come in.
Financial projections are meant to create a realistic and expected picture of what the financial performance of the business will look like for the first 1 to 5 years. Lenders and investors don’t expect you to be able to tell the future 5 years out, but they do expect you to have a realistic plan for estimated restaurant startup costs when you’ll break even, and how will you repay your loan even in the event that your business does not succeed. Typically requested financial projections include an Income statement, balance sheet, and cash flow statement.
Starting Assumptions for Restaurant Projections
When starting to create your restaurant financial plan, there are some key assumptions we need to make, including the following:
- When the projections need to start
- What fixed assets need to be purchased (startup costs)
- How much you’ll be investing personally into the startup
- Whether you’ll need a loan and if so, how much are you going to need/ask for
- Whether any other investors will be contributing and how much are they investing
In our example here, I am assuming our restaurant will open on January 1st, 2023, and that it’s going to require $800,000 to get up and running with our build-out, necessary equipment, some furniture/fixtures, signage, and some working capital to get us through the first few months operating at a loss. These numbers are going to be completely based on your vision for your specific restaurant, your location, etc., so don’t take these numbers as an expectation. What is important is that your numbers are realistic and attainable and that you can show your lenders/investors that it’ll be a worthwhile investment.
Projecting Revenue for a New Restaurant
The most essential part of the financial projections you'll make for your restaurant is the revenue and cost of goods sold model. This is the part where you will demonstrate how the restaurant will make money, how much money will be made, how fast we will ramp up to that point, and how much is it going to cost for us to make it there. The key to the revenue projection is being realistic. We want to ensure we aren’t looking at the business opportunity through rose-tinted glasses just to make sure we secure financing or investment, but rather to make sure it is realistic for the market we are in.
Let’s jump in by making a few key assumptions for the revenue model. To do this, we'll need to work through the following questions:
- How many tables will your restaurant have?
- How many days per week will you be open?
- What is the average party size you plan to attract/serve?
- Will you serve breakfast, lunch, and/or dinner?
- How many hours each day will be split between breakfast, lunch, and dinner menus?
- What is the estimated average length of visit for breakfast, lunch, and dinner?
- What percentage of capacity do you intend to be at for breakfast, lunch, and dinner?
- Will you offer takeout or catering?
- Will you sell alcohol?
- What menu items will you offer, how much are you selling them for, how much do they cost to make?
- On average how often is each menu item (or category) being purchased?
I know that may seem like a lot to figure out. However, your answers will help you understand how much you'll spend and could generate. The math must work on paper. Otherwise, you could find yourself bleeding cash.
Below you'll see a screengrab from our fine and casual dining template revenue tab. We've zoomed in on the evening or dinner time section. Here, we're assuming our restaurant will be a little more upscale with 80 tables. It'll be open six days a week, and most parties will be groups of two. We estimate a 2-hour average visit length, and our dining room will be open five hours a night.
We also expect to be at 20% capacity (on average) in our first month. And, we anticipate that capacity will grow slowly over time but never exceed 70%.
A quick note: Sure, there are restaurants that are booked for months and always at 90%+ capacity but no lender or investor wants to base their investment on the best case. They’d rather see that this business is feasible at a lower volume. This helps them ensure they can mitigate their risk as much as possible.
Based on those numbers we estimate that around 1,000 customers will dine with us in a month. You can see we summarized our menu options into categories with average prices and costs. Here's why. Lenders don't need to know exactly what’s on our menus. They simply want to know that the numbers will work.
Based on these numbers, we predict that the average revenue per person will come out to around $43.40. Our average cost will be around $17.36 per ticket. That’s a 60% margin on the cost of the meal alone given our food cost is at 40%. According to this source, many restaurant owners shoot for 28-35% cost of food margin so we’re likely being a little conservative there. Nonetheless, we have our parameters set to calculate our revenue numbers. Based on our inputs, we'll generate just shy of $45,000 in our first full month in operation with our total cost of food and drink being a little over $18,000. Not too shabby!
Calculating Cost of Goods Sold for Your Restaurant Projections
Now we have our revenue projections lined up, and we understand what our food and drink costs will be in order to provide those meals. But we're missing one key thing to calculate our cost of goods sold. You guessed it. People. These will be the people who are specifically tied to creating and serving the food and are paid on an hourly basis. Servers, hosts, and cooks are the employees we will be planning around.
There are a few numbers we want to have in mind:
- The maximum number of servers we’ll have working per month
- The number of tables one server can handle in an hour
- The typical number of hours our employees will work
- The average shift length
- The normal server hourly rate
- The average number of chefs and hosts working per hour
- The average hourly rate for chefs and hosts
For our fictitious upscale restaurant, we decided we will have no more than 12 servers at a time and no less than 2. Each server can take care of 4 tables per hour and will work an average shift of 8 hours earning $8/hour. This model assumes we are paying severs a base rate and they are splitting or keeping tips but that happens outside of our model because tips are above and beyond what customers pay for their bill and does not apply to our projections.
We plan to have 2 chefs working at the same time on average earning $25 an hour and 2 hosts working at the same time earning $10 an hour. These positions may not earn tips so we expect to pay them a higher base rate. And we penciled in an average of one “other” employee per hour for some flexibility.
That brings our total direct labor cost to $13,844 for the first month and our total cost of goods sold number to just under $32,000. This allows us to calculate our gross margin, which is revenue minus the cost of goods sold and does not include other operating expenses. In this example, our restaurant’s gross profit is $13,312 in month one, or 29.41%. This number, of course, differs from your net profit margin which must account for your restaurant’s other expenses outside of food costs and direct labor.
Planning for Operating Expenses for a New Restaurant
A major component of figuring out if your restaurant will be fiscally possible is to understand the rest of the expenses associated with operating it. These numbers will vary considerably based on your marketing efforts, rent rates in your market, and things like utilities, subscriptions, and professional services.
The important thing is to make sure that your restaurant can generate the revenue needed to get the necessary gross profit margin. This way, by the time you account for all the other expenses, there is something leftover (or, at least, not much lost, especially early on). You can see a list below for reference but the biggest kicker will be your rent and marketing if you are trying to spread the word upon opening.
Salaries and Owner Compensation for a Startup Restaurant
You need one more piece of information to finish rounding out your projections. Will you have any salaried employees, and will you (as the owner) be paying yourself?
It is very common for one or more managers to be in a salaried position. In our example, we accounted for one general manager making $60,000 per year. However, in our example, we didn't project any compensation for the owner. This way, we allow for as much money as possible to stay in the business and move us towards profitability.
Of course, in your situation, you may need to compensate yourself early on. What's important is that your lender or investor will want to know how you plan to handle this important decision. The reason: It can have big profit implications.
Creating Financial Statement Pro Formas for Your New Restaurant
Now we’ve made it to the point where we wrap up our financial projections with a pretty bow and send it off to those we hope will invest in our restaurant dream. You may wonder how we'll take our assumptions and calculations and put them into a format we can read and draw conclusions from. This is where we want to build a projected income statement and balance sheet.
The income statement pro forma will demonstrate the monthly and yearly revenue and net income. Your net income will be the number you have after taking out COGS, expenses, and income tax. Your lender or investors may want to see this report for 3-5 years out to tell when you'll break even.
Next, your projected balance sheet will outline the assets your business has, and that will need to equal the liabilities and equity of your restaurant as well. It will demonstrate how much collateral your restaurant will have to secure a loan.
So, how do we actually make these reports? Well, that depends. There are a few ways we can go about doing this.
- You can create these projected financial statements with your numbers on your own by looking at some example statements.
- You could provide your numbers to an accountant to create financial projections for your restaurant.
- Or, you could use a high-quality template that'll help you calculate and compile your numbers and automatically generate the financial statements you need to provide to lenders and investors. This is exactly what ProjectionHub does. You can find this restaurant projection template here as well as other versions for a full-service or fast-casual restaurant, food truck, or bar, plus more than 50 other industry templates.
|For a limited time, you can save up to 15% on ProjectionHub's templates by using code OWNERACTIONS. Some restrictions may apply. Contact ProjectionHub for details.|
Financial projections are just one important piece of the puzzle when starting a restaurant. Work with Owner Actions and take advantage of all of the resources they have to offer in order to come up with a sound launch plan for your endeavor!