Running a successful and profitable restaurant requires a proper alignment of internal and external considerations – which is not a simple task. The fact is, the majority of restaurants, even when they have a lot of the essential ingredients for success, will fail. Often, the reasons that are given for this are either “undercapitalization” or “poor financial planning.” But what exactly does that mean? What kind of capital should they have come up with? What financial constraints should they have planned for?
Below is a list of 10 unexpected costs, given in no specific order, which might seem minor in the scheme of the overall investment, but could be the difference between succeeding and failing, if not handled properly.
Restaurants need to abide by rules and regulations from an array of state and local governing authorities, such as the department of building, department of health, department of labor, income tax, sales tax, payroll tax, and liquor law, to name a few. The time and fees associated with each of these authorities can add up in a hurry. Having either someone with experience, an attorney, or an accountant involved in organizing these can be very helpful.
As a byproduct of complying with so many different authorities, construction often gets delayed due to license and permit issues. Adding an extra month to the construction (especially if the lease has commenced) can quickly add and extend pre-opening costs, reducing the return on investment. Consider hiring expeditors and try not to commit to any recurring expenses (i.e. salaries) until you are confident about the opening date.
Even after all of the licenses and permits are in line, you never really know what’s behind the wall you want to knock down. It’s important to get an engineer in the space (perhaps even before signing the lease) and going through the assessment of your intentions of the space and “what could go wrong here?”
You can have the most amazing kitchen in the world but there will always be a significant need for pest control, fire prevention, and appliance maintenance to prevent the day where everything in your walk-in fridge is spoiled. You can negotiate contracts but don’t sacrifice quality.
Even with the proper mechanisms in place to avoid spoilage, between 4% and 10% of what a restaurant purchases from purveyors will not be sold to a customer. Many factors, such as weather, quality of purveyors, or even a large party that canceled their reservation last minute on a Saturday night, can contribute to spoilage.
Underestimating premiums when establishing insurance policies will lead to unexpected insurance audit adjustments, which are due in a lump sum. If sales and payroll are higher than you were expecting, be aware that you will likely receive a bill after the insurance company performs an audit.
Say you bought taxable goods from a vendor outside the state where you do business - a set of custom-made dining chairs, as an example – and you were not required to pay sales tax on those chairs in the state where you purchased them. If you intend to use those chairs in your business and your state charges sales tax on furniture, then you are required to pay a use tax in your state. The fact is, most tangible personal property is subject to sales tax, so just because someone doesn’t charge you sales tax, doesn’t mean you aren’t obligated to pay it.
Generally speaking, approximately 80% of a restaurant's sales are from credit card purchases. This is somewhat dependent on your average check. If your average check is over $150, it’s likely that your credit card sales are closer to 90% or higher. This increase is important because you are going to pay the merchant processors about 2.5% on those sales.
Unless you are a fine dining restaurant, offering food through an online delivery service is essential if you want to keep up with your competition. However, a sponsored listing on these sites can cost over 25% of the order, which starts to threaten your profitability. Before employing this service, take a look at your local competition and see if they’re passing a delivery fee on to their customers to manage these costs.
When you buy a song on iTunes, you aren’t buying the song, you are buying the right to listen to that song privately. Once you play music in a business, it is a public performance and must be licensed. These costs are not very significant as long as you comply and do not face back charges and penalties.
None of us can tell the future, but teaming up with advisors that know when and where the obstacles and pitfalls typically lie, can often lead to a much smoother path to success.