Too many startup restaurant entrepreneurs leap before they look. Following passion without doing the necessary research required to actualize their dream of opening a restaurant is a disaster on the horizon. If you want to be a restaurant owner, you need to know two things before you get started, how much it's going to cost to open and how much of your own money do you have to put in. Without this information you have no idea where to start or if you need outside investors or loans. In all likelihood, you'll run out of money before you get out of the gate! This guide shows you how to estimate your personal investment and teaches you how to project total startup investment for your restaurant.
Here are sources of outside funding for opening a restaurant and what you should know about them:
The 4 Basic Financial Financial Statements Every Restaurateur Needs to be Successful:
P&L - The Profit and Loss Statement is also called Income Statement, Revenu Statement, Earnings Statement, Operations Statement and Performance Statement.
Balance Sheet - Also called Statement of Financial Position and Statement of Assets and Liabilities.
Cash Flow Statement - Also called Statement of Cash Flows
Changes in Equity Statement - Also called Statement of Owner's Equity, Statement of Retained Earnings, Statement of changes in equity.
Quarterly and Annual Financial Statements
Each of these reports should be done quarterly. That is every three months. They only contain the financial data for how the business did during those three months.
You should also prepare an annual version of the same reports, looking back at the whole year. Eventually you will also create statements comparing data from multiple years to see how the restaurant's financial health has improved or worsened. The Period is the timespan the financial document is recording either the year or the quarter.
A “P and L” is a profit and loss statement for the restaurant. It is a very simple formula that tells you is how much money you've got left after you account for all the costs associated with the business.
A simple concept, but this may the most important number! You would be shocked that some restaurant owners don't know the answer to this question.
In business, terms are sometimes interchanged on a P&L, so it is important to know what people are talking about. A P&L can also be referred to as an Income Statement. Sales are sometimes referred to as Income or Revenue. Costs are also listed as expenses. Your Profits can also be called Net Income. Keep this in mind and it will all be much simpler when these terms are thrown around at a meeting.
It's a good idea to break Sales and Costs into sub-categories that are meaningful to you. Such as viewing sales by service-type (Dine in, Takeout, Delivery) and Costs divided into food cost, utilities, rent, etc.
Example Profit and Loss Statement:
A balance sheet is a way of representing the net worth of the restaurant. You can think of a balance sheet as a set of scales showing Liabilities on one side and Assets on the other. The purpose of the Balance Sheet is to see which way the scale is tilted. That is, if you're losing money, making money or breaking even.
Another name for Liabilities is Debt. When you receive a loan it will be recorded in the Liabilities column of the balance sheet, but the lump sum of cash given to you by the bank is recorded as an asset. Equipment or property purchased by the business is also be recorded in the Assets column, even if you're still paying it off.
In this example, your Assets and Liabilities should “balance” because the debt is roughly equal to the assets.
To complete a Balance Sheet for your restaurant, list all your Assets in one column and all your Liabilities in another. Subtract your liabilities from your assets.
What is left over is your restaurant's Net Worth. If it's a negative number, that means your restaurant owes more than it has. This is what they call “being in the hole”, “upside down” or “in the red”. Ideally, your assets outweigh your debts. However, when you are starting a new restaurant there will likely be a period where this is the case. This is why a new venture is risky, it takes a large amount of capital for the business to start generating it's own income. The key is to make good decisions and not overspend!
Here is an example Restaurant Balance Sheet:
In the startup phase, you will likely be spending a portion of the money that comes from loans on operating costs rather than on assets.
To keep your balance sheet (and your net worth) from getting outweighed by your liabilities, reduce operations costs and spend loaned money on assets that maintain their value. Not on services and disposable items that do not retain value.
Cash Flow Statement
A Cash Flow Statement is used to get a handle on money going in and coming out of a business. In other words, it tracks the flow of cash. The cashflow statement and gives an impression about the health of the business and helps you understand the difference between having money “on paper” and actually having dollars in your accounts.
Cash coming into the business is called inflow and may also be referred to as cash in. Money going out of the business is outflow or can be called cash out.
Because the cash flow statement it is a tool for understanding how cash enters and leaves the business, accounts receivable (sales made on credit) are not counted as Cash Inflow until they are actually paid. Debts that the restaurant has are recorded when service on the debt is paid as Cash Outflow. The balance of the total debt is not recorded because it does not affect available cash.
There are three components of restaurant finances that are examined in the Cash Flow Statement; operational activity investment activity and changes in debt/financing
- Operations - Most inflow and outflow recorded will naturally be part of the core business operations. All activity related to the core business and keeping things running is operational activity. From payroll to advertising, to buying dish soap, these are examples of operational cash out. Sales will be your primary source of operational cash in.
- Investment - Changes in investments are things like buying or selling real estate or equipment.
- Debt / Financing - Gaining a new loan will change the amount of cash-out.
To calculate restaurant Cash Flow, start with a record of your restaurant's Net Income at the beginning of the period.
Add all operational cash outflows, also called receipts. Also add your investments and debt outflows. This is your total cash outflow for the period.
Likewise, add the amount of cash inflow from sales of food, drinks, merchandise, and other services your restaurant provides such as delivery charges and event hosting. Record investment inflows from sales of any assets. This is your total cash inflow for the period.
Subtract cash out from cash in. In financial documents, if a number is less than zero, it is represented with parentheses. In other words, it's a negative number.
Total all the values to see how Ending Cash compares to Beginning Cash and record the difference. The difference is the Net Cash Change and is the final number showing the restaurant's cashflow.
Here is an example Cash Flow statement:
Changes in Equity Statement (Statement of Owner’s Equity)
The changes in equity statement is a way of measuring the restaurant owner(s) contributions to the business as well as measuring the increasing or decreasing value of the restaurant.
The report begins with the Beginning Equity at the start of the period. On the first Equity Statement, this amount would be zero, because the restaurant doesn’t exist until the owner uses their money to start it. Whatever the equity amount is at the beginning of the recorded period is the Beginning Capital.
Record all the financial contributions to the restaurant that the owner has made within the period; the dollar amount and what they were for. These are the Additional Contributions.
Record Net Income also called total profit. This is how much money was made during the period that you get to keep. This number comes from the restaurant’s P&L statement.
Record any Withdraws from the restaurant’s account that the owner made for personal expenses during the period.
The formula for calculating Changes in Equity: Beginning Capital + Additional Contributions + Net Income - Withdraws = New Equity Amount
The New Equity Amount is the owner’s equity at the end of the period. The difference between Beginning Capital and the New Equity Amount is the amount of Change in Owner’s Equity stake in the restaurant.
Example Changes in Equity Statement:
Now that you know how restaurant financial statements work and you understand what the four basic financial documents are, you are ready to get to work on projecting costs, projecting sales and writing the rest of restaurant business plan!