Economics of owning a restaurant

Economics of owning a restaurant

Many different costs and factors contribute to making a restaurant successful. Nearly 60% of hospitality establishments close within three years of opening. The biggest financial risk to your restaurant business underestimates the capital you need to start operations and continue to generate positive cash flow.

Initial costs

The initial cost of buying or starting a new restaurant is your most important consideration before making the commitment. When planning for these costs, it is important that you have sufficient cash on hand beyond the projected initial costs. You have three options: Franchise, buy an existing restaurant or start from scratch.

Opening a franchise

Franchising with a successful national chain can bring immediate brand recognition and often several weeks of coaching and support with new employees and the grand opening. With these value-added services comes a franchise fee that can average between $20, 000 and $65, 000 per restaurant. In addition, some well-known national chains are likely to have liquid assets of more than 500.000 U.S. dollars required. This can put franchising out of reach for the average mid-sized business owner.

Buying a restaurant

The purchase price of a restaurant depends on the quality, location and profitability of the property. The quality of the building can save you thousands in potential remodeling costs and repairs. The location should be ideal for your concept, unless you are buying the restaurant just for its equipment and furniture. If the restaurant is more profitable, the upfront costs of buying the restaurant are likely to be higher.

Starting at Scratch

Whether the cost of franchising is too high or you want to start with your own ideas, starting from scratch has many fixed and potentially unexpected costs. Common costs include equipment, furniture, fixtures, initial equipment and inventory, signage, insurance, build-out, security deposits, and the first month's rent and utilities. The advantage of starting your restaurant from scratch is a clean slate for your own ideas and no royalties or upfront costs from franchising.

Operating costs

Building a new franchise location or a new restaurant building has similar construction and expansion costs as hiring and training employees. If you buy an existing restaurant, it can be a turnkey operation with positive cash flow from day one, but it may not be an exact fit for your needs and desires. Operating costs such as salaries, marketing, inventory and maintenance are often underestimated, especially for new restaurants. These costs typically account for about 80% to 90% of total sales in high-yield operations.Significant declines in sales or increases in costs can quickly lead to negative cash flow.

Tips for cutting expenses

When shopping for equipment and utensils, look at secondhand options. Many of the restaurants that fail liquidate their inventory and equipment to restaurants that sell them for less than you would pay if you bought new.

Use all of your available word of mouth tools to promote your restaurant. This includes using social media, which is often free of charge. Use energy-efficient lights, appliances and fixtures. It may cost a little more up front, but it will pay off over time.

Secondly, food is the biggest expense for restaurants. For high-volume locations, it pays to hire a qualified manager to ensure proper inventory management and employee scheduling. Standing employees and bad food will already thin profit margins of an average of 10 to 12% for the industry erase.

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