Financial Planning Should be a Tool in Every Chef’s Skill Set

 
No business owner should ever know less about his operation than the accountant does.
No business owner should ever know less about his operation than the accountant does. Thinkstock

The restaurant industry is a notoriously difficult place to do business. There are many reasons why first-time operators fail, but one of the most overlooked factors might just be the simple day-to-day bookkeeping. Understandably, most aspiring professionals, especially those chefs who want to open their own restaurant someday, don’t approach the subject of financial planning with exorbitant enthusiasm. It can be cumbersome work, and a talented culinary leader would probably rather be working on his menu than tracking expenditures. But there’s little doubt it’s a crucial tool for employees at all levels of the industry if they want to survive.

When students walk into my Personal Finance class at The Culinary Institute of America, I challenge them with what sounds like a simple task at first glance: For the next 30 days, financially speaking, track everything that comes in and out. This can be difficult for a lot of people. However, it’s the first step toward setting an honest budget. And having legitimate financial benchmarks can make or break any career, especially one as dynamic as the restaurant profession. In this industry, definitely more so than most, you can watch the bottom line soar and plummet with alarming regularity. This is true of all workers, from a tenured restaurant owner to a first-day server. Given the myriad of fluctuating factors tied to success, such as seasons, sourcing, and changing trends, there are going to be bountiful weeks, and there are certainly going to be difficult ones. With that in mind, understanding how much money is flowing in each direction is vital to developing the foresight to understand what needs to be saved and what should be spent.

Patience is another critical factor that isn’t stressed enough. Trying to do too much, too soon, can be a recipe for financial disaster. Instead of attempting to open a restaurant right out of college, it might be better to accrue some real-world experience and develop a network of positive mentors. I think the perception that most restaurants fail because they don’t have enough start-up capital is misguided. I believe most falter because the owners involved are not paying close enough attention to day-to-day finances. It’s the budgeting and planning part that turns out to be their downfall, not necessarily lacking a stellar bank account.

If this all sounds daunting, the reality is that operators don’t have to be accountants. There are software and third-party options available. Approach with caution and be sure to stay on top of the books, however. No business owner should ever know less about his operation than the accountant does.

Alternative financing is another hot topic. There are relatively new options, like crowd sourcing and Kickstarter, as well as your more traditional methods. I look at it this way, though: Chances are, if a bank turned down your request for a loan you should reevaluate your finances. Being denied credit is a chance for reflection. I always encourage operators to stay away from the quick, high-interest options that will step in when banks shut the door. In that scenario, it might be best to ask yourself, “Is this the right time to do this?” instead of seeking out other lenders.

One financial area where I do suggest seeking outside help is payroll. If a business owner has more than one or two employees, it’s always best to outsource this work. The penalties and interest for filing payroll taxes incorrectly are really harsh, and can be more than if someone files their income taxes incorrectly.

This is also a business where a lot of income goes unreported—and that is stating it lightly. My position as an accountant is to report everything, from the smallest tip to the biggest multi-unit transaction. We spend a lot of time talking about taxes, and it’s a concern that can surely catch up to you later in life.

Like we hear all the time at the CIA, it all comes down to mise en place. This unquestionably applies to finances as well as kitchen prep. Keep everything in order, develop proper habits, and the rest will take of itself. Then, in line with the original goal, chefs can get back to doing what they love most: making food, making guests happy, and, of course, making money.

Cameron Rabe is an assistant professor of business management at The Culinary Institute of America. He teaches the Personal Finance, Corporate Finance, and Intraventure Planning courses in the CIA’s Food Business Management major.

Comments

Amazing sir really great article.That's why CIA is world most best and prestigious culinary institute.

You can't stress enough that you should hire s pro to do your taxes and accounting. Another big area beside the high interest loans, is high cost order/delivery service -when they charge you 20% or higher per order you will go broke in no time.
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Thanks for this great article. If I may, I'd also like to add that choosing a poor location is the death knell of many a restaurant. As a commercial real estate broker and attorney specializing in restaurants, I see restaurants make a lot of mistakes in site selection. This is most often the case with local and regional restaurants, but I've seen it with national restaurants (and celebrity chefs) as well. Too often, restaurants choose locations for the wrong reasons. I've seen them go into brand new projects in areas with a very high median household income because "there's a lot of money in this town". Meanwhile, the rich only have one dinner a day, and most of them don't eat in the same restaurant every night (or even every week). If the market doesn't have the population to sustain your business, then it doesn't matter how high the median household income is.

Other operators simply look at how many people you have within three or five miles of the location and what their median income is. You need to further analyze the demographics of the population that surrounds your location to make sure that the people most likely to eat in your restaurant (your target market) can easily and quickly get to your location. If your concept is hip and designed to appeal to a younger crowd, then you need to make sure that you are locating in an area where they live, work, and/or play. It seems somewhat obvious, but this basic tenet is breached constantly. If there are other "hot" areas closer to where they live, work, and play, then studies show that they will often not travel a further distance to go to your location.

Too often, it is simply a matter of the chef and/or owner saying "I like this space" with little or no analysis of the market or the location.

I also see restaurateurs choose spaces simply because they are second generation restaurant spaces or because the rent is low. They are myopically focused on saving money on their tenant improvements and minimizing their rental risk in case the worst happens and they are on the hook for the remainder of the lease term. As such, they end up ignoring the fact that the space is not in a great location for them.

Other mistakes I've seen are (i) opening a dinner-oriented restaurant in a thriving urban business district where nobody lives and everybody has gone home by 5 or 6 p.m., (ii) opening a location simply because it is close to the owner's or chef's house, and (iii) opening in the wrong spot within the traffic patterns. On that last point, if you have a heavy trafficked street where everybody is going downtown in the morning in one direction and everybody is coming home in the opposite direction, don't open your coffee shop on the side of the street where everybody is coming home in the evening. Studies show that people will not make a u-turn on their way to work to get coffee at your shop, and very few people are buying coffee on their way home from work. In thirty years, I've seen all types of wrong moves...most of them based on lack of information and knowledge on the art of site selection. Doing it yourself in the site selection game is a poor business move unless you are both very knowledgeable and very practiced at it.

Powerful article. I couldn't agree more. I'd love to chat with you Cameron to dive deeper into this.

ARoss@Nix86.com

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