1. Unrealistic Goals: Revenue Cost Offset
Here is a Real Case Study from a Restaurant that I actually worked with.
Just like most folks Jim & Mary had a passion for food. They decided to open a restaurant. Jim took an early retirement package and Mary’s company closed down her division. Jim and Mary agreed that they could “Cash In” Jim’s IRA and mortgage their home to start up a restaurant. They envisioned making a healthy living until it was time for them to officially retire in 9 years.
The local shopping mall had an open space in their food court. Jim thought that he could actually start a Fast Food Restaurant. His logic was simple, at cookouts, everyone said that Jim made killer burgers and Mary made really good cupcakes. Armed with no restaurant experience Jim and Mary gambled their future on a dream.
From the very onset, Jim and Mary made a fatal error. They used a Revenue Cost-Offset Model to justify the type of restaurant they wanted. They calculated the cost of opening and how many burgers they would have to sell daily to cover the bills. In the beginning, Jim figured he could sell 100 Hamburgers a day and that would cover the cost of opening.
Payroll and Operating Expenses would be covered by an additional 50 Hamburgers a day and an additional 50 Hamburgers a day would go to paying their salaries. Any profit from that point would go to their retirement account. The total count was just 200 Hamburgers a day.
Jim even came up with a unique way of dealing with price increases. Instead of raising prices anytime the prices or costs increased he would just add a few more hamburgers to his formula. By the time they had finished calculating all their costs and expenses, and then offset them with Daily Hamburger Sales they were up to almost 500 Hamburgers a Day.
Never one to dream small Jim was sure he could turn out 700 Burgers a day. Mary was caught up in Jim’s dream of 700 Hamburgers a day. The pair never planned on selling anything less than 700 hamburgers a day. When they calculated the revenue generated by selling 700 hamburgers a day they saw they could upgrade all the kitchen equipment and give themselves a 50% Pay Increase before they even opened the door.
If all went according to plan Jim and Mary would never have another money worry again.
Here is where Real Life Comes in.
Quick Math: 700 Hamburgers a Day comes to 175 Pounds of Ground Beef a Day or 5323 pounds or 2.66 Tonnes of Ground Beef per Month.
The most hamburgers they actually sold after they were open was 35, on opening day. They actually sold on average 16 Hamburgers a day. After they started burning through their seed money and were borrowing from Mary’s IRA and Insurance Policy, they decided to start cutting back on everything except their own paychecks.
The Restaurant put a huge strain on their marriage and a few month after opening Jim & Mary decided to close. Jim took a security guard job at the Mall while Mary is working at a local Dollar Store. The restaurant equipment company and the shopping mall worked out a deal that allowed them to break their leases and pay a partial penalty.
Solution: If Jim and Mary had just taken few days to sit at the food court and count. They needed to count the actual number of people that walked past the space vs. number that actually bought something. This would have given them a better indicator of how many hamburgers they could possibly sell.
Using the total revenue or sales, minus cost of goods plus daily operating cost would have given Jim and Mary the ability to see if they could generate any profit. A Profit Cost Offset is a much better indicator of success than a Revenue Cost Offset. More importantly, traffic equals profits.
Use a Blank Worksheet to calculate your Profit Cost Offset for each item you sell. Do not confuse this with a Food Cost. Using Food Cost Percentage is for Bean Counters and Suckers. It’s nothing more than Bean Counter Talk for Profit. Never use a Food Cost Percentage to calculate potential profits.
Here is a quick example of a Profit Cost Offset Formula: (This may be a bit confusing so go slowly)
You need to break all your food items down to the penny. Here is an Example: A pound of Ground Beef cost $4.00 and makes 4 Hamburgers… The Raw Cost of Beef for your Hamburger is $1.00 each. The Buns are $3.60 a Dozen or .30 Cents Each. Add .20 Cents for Condiments and .40 Cents for Lettuce, Onions & Pickles. Finally .50 Cents for Customer Printed Wrapper, Bag, and Napkins. The Raw Cost of your Hamburger (Before Cooking) is $1.00 for Ground Beef Patty + .30 Cents for Bun + .20 Cents for Condiments + .40 Cents for Veggies + .50 for Wrapper, Bag and Napkins = $2.40 plus Daily Operating Cost: (Rent, Cooking Gas, Equipment Leasing, Taxes & Licenses, Payroll, Utilities and Insurance) = Item Cost
In order to find the Profit Cost Offset you need to have an accurate estimate of Daily Sales to Break Even. The only way to do this is to spend time at a competitor’s location and count the number of customers going in or driving thru the location. If you count 100 people then you can estimate that at lunch you can sell about 100 Hamburgers.
Your competitor sells hamburgers for $4.95 each. That means that you can sell your hamburger for $4.95 and Profit $2.55. If you multiply daily lunch sales (100) by your $2.55 burger profit you would be making $255 a day. If you open for 365 Days a year then you would make $93,075 a year.
The downside is that your Daily Operating Costs my eclipse the $93,075 a year, eating away all your profits.
You are looking for a “Trigger Point”. A Trigger Point is the break-even number that finally shows a profit. Keep in mind if you want to pay yourself $8.00 an hour and you work 12 Hours a Day at the end of the year you will have paid yourself, $35.040. If your partner expects the same, then you will have $70,080 in Payroll leaving you only $23,000 to cover Rent, Utilities, and other Operating Expenses.
If the Choice was Mine Here I would “Pull The Trigger” and Kill this Idea… HOWEVER…
If I could also sell a Beverage and a cold Side Dish such as Cole Slaw then I could sell a “Lunch Special” for $6.95 making a profit over $4.00 per Meal. Using the same 100 Meal Count I would pull in $146,000 a year… now we have some potential.
If you are interested in running your Restaurant Idea past Christopher he has Telephone and Skype Consulting for a Small Fee. Contact him at (412) 475-9313 or email at firstname.lastname@example.org