Case Study – Running a Restaurant
A few years ago, my client was excited to inform me he had just bought a Japanese restaurant. It seemed to be a turn-key solution to him. After a few months, he came to me again with disappointment because he had been losing money since his grand opening.
Any Tool to Diagnose The Issue?
He asked us how to make his business more profitable.
Honestly, how can I know?
I mean I am not trying to be rude, but without a timely financial statements, I did not have any tool to diagnose the problems. He regretted that his books were messy as he tried to do it by himself. He then hired us to catch up the bookkeeping for the last few months. We did it as quick as possible because both he and I were curious the reasons why his business was losing a lot of money.
Ratio Analysis – His Life Saver
Once the bookkeeping was caught up, we found the following issues:
1. Food and drink cost
The food cost seemed really high, it was about 40% of the sales. We knew it was not healthy. By our industry knowledge in restaurant, we know it should be less than 30%. He was surprised as he thought he got pretty good rate from his vendors already.
He got no clue.
We recommended he further review if there were too much food waste. Also, we suggested he examine if the portion for certain alcohol drink and meal were too much. The bartender and chef may be able to cut some portion.
With all these directions he tried to follow, his food and drink cost were able to reduce by 5%, which represents $50,000 to his business annually.
2. Labor Cost
We knew the labor cost (including the payroll tax) and employee benefit should be kept within 40% of the sales. He felt there was no way to improve as everyone was busy already. In fact, if I did not warn him about this ratio, he would have hired more people.
Then we brainstormed what else they could fix the issue. We then found out they paid too much for overtime which is 1.5 times regular rate!
He explained it was needed as there were many tasks to do.
We recommended he look for more part time employees to fill the position. By increasing the headcounts, he could avoid paying overtime to the current team, not to mention it is actually good for them by giving them better work life balance.
That saves him another 5% of sales.
His bottom line is turning black by these small fixes.
Almost like his CFO
He knows the operation of his business way more than we do. However, we always give him another perspective when we offer advice based on the ratio from the timely financial statements. He now no longer overlook the importance of having the books done right and timely manner. We can now monitor the business properly as we have the right tool.
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