Starting A Restaurant

When starting a restaurant, it's easy to get so caught up in great food and excellent customer service that you forget to leave enough time to focus on the finances of your business.   Don't get me wrong, great food and customer service are vital to your restaurants success, but money is its lifeblood.  Money is a fickle companion, and if you don't spend enough time paying attention to it, it will leave you.

I've long been a proponent of doing what you are good at doing, and hiring someone to take care of your weak areas until you do learn how to do it yourself.  Business finances are one of those areas.  While programs like Quickbooks are great, having a good bookkeeper to handle day to day finances will free up a lot of time to handle all of the other pressing issues you need to deal with.  The problem is, it's easy to allow yourself to become removed from your financial position, and when little problems begin to arise, you don't catch them until they become large problems.  You need to know how to review your restaurants financial statements, and understand what they mean.

The big 3 of financial statements are:

• Income Statement - This tells you how good your restaurant is at making money.
• Cash Flow Statement - This report tells you how your restaurant is paying for its operations, and it also shows you the restaurants future growth potential
• Balance Sheet - This give you an overview of what your restaurant owns (its assets), and what it owes (its liabilities).

This is just a brief overview of these statements.  Business students spend blocks of their classroom time devoted to each of these, and I won't be able to go into that much detail here.  This is just to give you a quick understanding of what you are looking at.  It is important for you to know as much as you can about the finances when starting a restaurant, or any other small business.

Income Statement

Business people are always talking about the "bottom line."  The income statement is where you find the bottom line.  It refers to Net Profits, which is the last line of the income statement.  In a nutshell, profit = income - expenses.  That is all the income statement is, just broken down into more detail.

It starts with your restaurants income.  Any money that comes in from any source is listed in the income section.  You would have your dining room sales, maybe have a category for take-out sales, perhaps catering, and maybe even merchandise that you sell in your restaurant.  All of these sources of income are totaled to give you Total Income.

The next section is your Direct Expenses.  This is any expense that can be tied directly to your sales.  This is typically food and labor expenses.  These are totaled to give you the Cost of Goods Sold.  For example, you have a dinner on your menu that is sold for $12.  To make that dinner you use $4 worth of food, and $4 worth of labor.  Your Cost of Goods Sold would be $8.  Subtract the Cost of Goods Sold from Total Income and you will get your Gross Profit.

The next section is Indirect Expenses.  This includes everything else except interest and taxes.  It covers building and equipment lease, maintenance expenses, insurance, utilities, etc.  Subtract the total of this section from Gross Profit to get you Earnings Before Interest and Taxes.  Subtract Interest and Taxes from that and you reach the bottom line: Net Profit.  That is the amount of money you have left after everything else has been paid.

Cash Flow Statement

The Cash Flow Statement shows you how your restaurant is making its money, and how it is using that money.  It basically looks at three sources of income: Cash flow from operations, cash flow from investing, and cash flow from financing.

Cash flow from operations includes the Net Income that you find on the Income Statement, as well as any changes in assets and liabilities.  These show up on the statement as numbers in parenthesis showing cash that is spent, and numbers without parenthesis showing the money that is coming into your operation.

The statement typically starts with your Beginning Balance for the time period the report covers, then lists every way that money came in to your restaurant operation.  This could be sales and services, sales of equipment, and loans and contributions.

The next section shows how the money was used.  This section includes salaries, operating expenses, loan payments, taxes, and money spent on purchasing buildings or equipment.  Subtract your total expenses from you total cash and it will show you your Net Cash Flow for the period the report covers.

Balance Sheet

The Balance Sheet is sometimes referred to as a Statement of Financial Position.  It shows the value of all of your restaurant assets (what it owns), liabilities (what it owes), and Ownership Equity.  Ownership equity, or Shareholder Equity is what is left after all of the liabilities are subtracted from the assets.

The balance sheet is a "snapshot" of the restaurants financial position at a specific point in time, such as the end of a quarter or a fiscal year.  This is different from the Income and Cash Flow Statements that look at a range of time.

When you subtract the liabilities from the assets, you are left with Net Assets.  Net Assets are then divided up among the different shareholders in the Owners Equity section.

This was just a quick overview, but hopefully it gives you starting place for your financial education.  It shows you that when you are starting a restaurant you need to be focusing on more than just menus and dish ware.