Seeing into the future

Building and following a good forecast, and the corresponding restaurant budget, is a key component to long term success in the restaurant business.  In any business really.  Just the process to develop your forecast forces you to evaluate the business in all the key financial areas.  And it reminds you where all the money is going that comes through the doors.  It is a good exercise to go through with your financial team on a recurring basis.  The process of making yourself think about all the financial elements of your restaurant regularly is incredibly useful, and that aspect of the forecast alone will pay off in spades.  But the true magic of the forecast is in the details.  Your forecast lets you budget.  It tells you that if x amount of revenue comes in, and you spend y amount of that on your cost of goods, payroll, rent, utilities, operating supplies, bank charges, staff training and retention, a vehicle lease, waste removal, repairs and maintenance, and all the other costs that are involved in running a restaurant, then you should expect to have z amount left over.  Or what we know as profit.  And if you take this a step further, you can incorporate profit into your forecast, much like an expense line item, and build a business model for your restaurant around achieving a certain profit target.  But delving into that is a whole separate article.

Restaurant Budgets help control the future

So you’ve built your 12 month forecast and you’ve used that to set your restaurant budget for your team so they know their cost of goods and labour targets, and how much they can spend on the next staff party.  And then you start tracking what actually happens against what you predicted would happen.  Maybe you even set up a best case, worst case and most likely scenario to track against.  And you feel good that you have a handle on what to expect based on what is actually happening in the restaurant.  And you know where to focus your energy when reality is underperforming your expectations.  You’ve given yourself an incredibly powerful tool to not only survive, but to thrive in the restaurant business.  And then the proverbial shit hits the fan.

But not everything is under your control

The global pandemic that started in 2020.  The recessions of 2008-2009, 2001, 1990-1991, 1981-1982, 1980, 1973-1975 (are you noticing a trend here?).  Or maybe something more local happens.  One of the large employers in your city shuts down or moves.  This can mean moving the plant and the loss of jobs or just moving from the downtown office tower to somewhere closer to the highway and the resulting loss of lunch customers.  Maybe it is a particularly harsh winter so everyone hibernates or maybe a particularly mild winter, so you don’t get the tourists in your ski town.  Inflation can spike and people go out less often or some politician says something offensive and a large and prolonged protest forms blocking foot traffic to your restaurant.  Cancel culture gets wind of something your bartender did a few years ago that you did not even know about and now you have people spamming your google and trip advisor ratings with negative reviews.  Or maybe it is just some combination of small things that have built into one large problem for you.  It doesn’t really matter what caused the problem.  It only matters what you are going to do about it.  Good thing you spent all that energy building a now irrelevant restaurant budget.

Remember your Zen state

Take a breath.  Have your meltdown.  Be upset.  And then get back to being the resourceful, hospitable, hard-working restaurateur that you are.  It is time to make a new forecast and set new restaurant budget.  When catastrophe hits a business the first inclination is usually to make deep cuts.  And that is generally a good idea.  What are you spending that you don’t need to spend to operate and deliver the quality that your customers expect?  Cutting those expenses is a good place to start.  And what can you do to drive new revenue?  We saw during the COVID pandemic that virtually any type of restaurant can come up with some version of take-out and delivery even if they depart from their traditional dine in menus.  The point here is to look for ways to boost sales during a time when they are falling.  You know your restaurant better than anyone else so, working with your team, you’ll come up with the best ideas for your situation.  Just remember, when bad things happen to your business you need to look at more than just cutting costs.  And revenue is not the only source of cash.  Look at your balance sheet for opportunities to find more liquidity to help buffer you through the uncertainty.  Can you do a push on gift card sales?  Can you negotiate longer payment terms with vendors?  Is there emergency credit in place that you can access if needed?  Can you reduce your inventory or sell through some of the higher priced wines in your cellar?  Do you need to call the CRA and give them a heads up that you will not be remitting your GST on time because you need the money to pay your staff?  Sure, they’ll still tack on all the penalties and send you threatening letters but at least they’ll have a record of it and when you get one of the reasonable agents on the phone later you’ll be able to set up repayment terms that make sense for you.

Like the Doozers on Fraggle Rock, we never stop building

And then build the new forecast that will lead to your new restaurant budget.  During normal years I typically update forecasts every quarter and add the following quarter on to the end, so we are always looking at rolling 12 month forecasts that have been adjusted to the small fluctuations in the market place.  But during uncertain times you will want to update your forecast more often.  You’ll need to track variances between your forecast and actual more closely and more regularly.  And, most importantly, you’ll need to stay flexible.  Looking at your forecast from a high level is vital during uncertain times.  You can not get bogged down in the details.  If you can’t maintain your labour targets, then is there something you can do about your cost of goods?  If you can’t negotiate a reduction in rent, can you negotiate some interest only payments on your long term debt?  Can you reduce the frequency of your dumpster pick up, or pause one of your software subscriptions?  You need to stay flexible and make sure you do not get hung up on one little thing.  Always be looking from a bird’s eye view and offset one section of your forecast with another.  The objective during uncertain times is generally to get through them and come out the other side in a position to be able to grow again.  Getting caught up on missing profit targets won’t help.  Focus on maintaining cash flow.

Understand your obligations

The balance sheet part of your forecast becomes even more important during uncertain times.  And you do not necessarily need to do a full out 3-way forecast where you update your income statement, balance sheet and statement of cash flows with each month’s forecast adjustment.  I tend to focus on cash flow during difficult times.  The income statement part of the cash flow always comes first.  And then I carry that over to a hybrid balance sheet/cash flow statement where you can see all your upcoming debt obligations and other non-income statement commitments.  This lets you get ahead of the issues.  If you know you are not going to meet an obligation, or you think it unlikely, you’ll know several months ahead if you are updating yourself regularly.  And you can contact whoever you need to contact and do something about it.  People are not stupid.  Almost no one is going to try to hold you to a few payments if it means you’re likely to close up shop and not make the rest of your payments.  Even banks don’t really want to repossess your assets.  It is a giant pain in the rear for them and not what they are in business to do.  So, get on the phone and start moving things around well ahead of time. 

Survival skills in the wild

During uncertain times, the rolling forecast and resulting rolling restaurant budget becomes your ally in survival.  You need to think about what is likely to happen and be ready to adapt quickly.  You need to make tough decisions and take some risks.  And you need to track the success of your actions.  Remember, when something beyond your control is having a negative impact on your business, and you are reasonably sure it will end within the next couple years, the main goal is to get to that end with enough energy and cash to start growing again when you can.  Going through the process of updating your forecast often and adjusting your expectations and plans is a huge step in making it there.  It will keep you hyper aware of your situation and will allow you to make the creative and difficult decisions you need to make to ensure that as many people as possible still have a job in the end.