Monte Silva Shift Happens.

Building the top line is where you create cash flow.

Why the Old P&L Model Has Set Restaurants Up for Failure

Operators need to make time to think about growth. 

Editor's note: This is the seventh article in a new column from restaurant expert Monte Silva. More on the series can be found here. The first story, on Why Underpaying Restaurant Employees is a Recipe for Disaster, is here. The second, on Why Marketing is Not Expensive, is here. The third, on people-centric leadership, is here. The fourth, on Why Working 70-Hour Weeks in Your Restaurant is Not the Answer, is here. The fifth, on How to Provide Hospitality in a High-Tech, Low-Touch World, is here. And the sixth, on ‘The Convertible Culture’ in Restaurants, is here.

I don’t know about you, but percentages were beaten into my head by most of my bosses. Food cost, beverage cost, labor cost, and controllable costs. Everyone wanted me to get a 60 percent prime cost (cost of goods and labor combined) and that was the only metric they cared about. That is except for my very first restaurant mentor Tom Bryan. Tom taught me the valuable lessons I’m about to share with you. Do these things and you WILL run very profitable restaurants. 

The very first few lines on the P&L are the sales lines. This includes food and non-alcohol sales, alcohol sales, and merchandise sales. Tom taught me that my first and most important priority was driving top line (sales). You’ve probably heard the term “Sales cures all ills”. This is not entirely true but it’s a great start. While sales may not change your percentages on food and beverage costs they do help lower the percentages of labor, rent, and several controllable categories. 

Building the top line is where you create cash flow. It should be the No. 1 priority of any restaurateur wishing to run a profitable restaurant. All decisions should prioritize sales. That means you may take on a third-party delivery business if it substantially grows your top line. You should offer incentives to drive traffic into your building if it significantly drives revenue. Seventy percent of your focus and decision making should be on driving top line.

If you disagree, answer this question for me: do you really care what your cost percentages are when deciding if you prefer $50,000 hitting your bank each month instead of $30,000? You don’t deposit percentages in the bank. You deposit dollars. Percentages don’t pay your bills. Cash pays your bills.

Yes, we should care about percentages. They help us determine how well we are managing the money flowing through our business. Having goals of 60–65 percent prime costs or staying under 7 percent controllables are OK goals. The problem occurs when they become more important than sales you will begin a spiral down to the bottom instead of building a bigger pie and bigger bank account.

I saw this mistake played out twice in my career. The first time was when I worked at a Mexican restaurant. This company decided that the best marketing plan was to run two for one coupons. 

Unfortunately, they were so committed to this marketing plan that they got to the point that every time they went off the coupon, sales dropped considerably. So they ended up running two-fer coupons 50 weeks out of the year. They only didn’t run them Valentine’s week and Mother’s Day. I also had a regional that was so focused on percentages that he actually reprimanded me even though I had the highest sales and profit (dollars) in his region.

The second time I saw this played out was a little different. It was when I worked for steakhouse.  This time, instead of focusing on percentages, they focused on guest counts. The result was also catastrophic. They lowered the prices and quality of food to get guest counts up. The result, they maintained the same sales but raised their operational costs bringing less dollars to the bottom line.

We as individuals, spend more time thinking about how to get more money personally than how we spend our money. We think about raises, promotions, and side businesses. We fantasize winning the lotto. We understand that we have to pay rent or mortgage, car loans, utilities, gas, groceries, cable bills, cell phone bills, and fun money. In an article they quote a GOBankingrates report that says one in 4 Americans said that money is the thing they think about the most on a daily basis—and another 1 in 4 spent most of their time thinking about work.

Why don't we carry this focus into our business? Why don't we look for ways to increase sales? As restaurateurs, much of our time is spent on costs, day to day paperwork and floor responsibilities and obviously all these things are important, but we really don't make time to think about growth. That is until we are in a financial crisis and we are bleeding money. Work more ON your business (driving sales) and less IN your business focused on cost cutting.