Running a restaurant used to be the dream of many chefs and restaurant managers- work for yourself, create your own menu, and answer to no one all whilst working fewer hours and taking a better salary. Unfortunately, this couldn’t be further from the truth for most business owners.
A recent survey carried out by Epos Now of their own customer database revealed that on average, UK restaurants make between £100,000 and £250,000 per annum. The vast majority of independent restaurants operate for around 50 hours per week over 5 days and elect to close for the quietest 2 days per week. For most restaurants, this is Monday and Tuesday, but we do have a number of clients that close for Sunday-Monday or even Tuesday-Wednesday. Other more specialised venues may be open for even less than this- we have a few higher-end restaurant clients that open for 5 hours per day, 5 days per week for evening service only, but this is more the exception than the rule.
Let’s be optimistic and take the £250,000 figure. If this is the gross amount of revenue generated per year, then £41,666.67 of this will be VAT, leaving net sales of £208,333.33. The typical spend on labour for a restaurant is around 33% (£68,750.00) including Employer’s National Insurance and Employer’s Pension contributions. You’ll probably be able to work a fair bit on your own, or at least with just one other person working with you, but over your busier days, you might need 4 part-time team members (including yourself) to run the restaurant and cover holidays etc. You might be able to squeeze out a higher labour spend here and there, but it’s unlikely that it’ll affect your take home pay very much, especially if you consider taking a holiday- you’ll need staff to cover the 50 or so hours that you’ve been working yourself.
Margins and percentage splits of food and drink revenue can vary massively between different businesses and so these figures are more of an average of our current client base rather than being indicative of the country as a whole: Food sales usually account for 60% of turnover, and wet sales for the other 40%. With our example above, that makes food revenue £125,000 and wet revenue £83,333.33. Typical margins as of February 2023 are 72 and 68 percent of food and drink sales respectively. This means that the average restaurant spends £35,000.00 on food stock and £26,666.67 on bar stock.
Rather than run through all of the individual costs, I’ve put together a typical P&L/ budget for a restaurant with a gross turnover of £250,000 to show you how it all stacks up. Please don’t take this as gospel, I’ve used average percentage figures from a lot of different clients across different geographical locations with varying opening times, team demographics, seasonal variances etc.
As you can see from the above, the bottom line figure isn’t amazing- it’s a lot of graft to make less than £17,000.00 in pre-tax profit, and all without even paying yourself a decent salary. The above P&L depends on everything going along without a hiccup. It doesn’t take into account any assets that you need to buy throughout the year- a new oven, dishwasher, windows, the list goes on and it’s very unlikely that £17,000 is going to stretch to half of that. This is where a fair number of hospitality business owners get stuck and start mounting up debt with HMRC and suppliers, or with overdrafts and bank loans. Debt becomes unavoidable and they’ll do anything they can to keep the dream alive- the dream that more often than not has turned into the reason for them being unable to sleep at night and feeling “done” during the day. No one likes admitting defeat less than a chef.
I suppose you’re now wondering what the point is in my fearmongering journey and whether this article actually serves a purpose. Unfortunately, there are no “life-saving” hacks to be applied here, and there’s not a lot you can do to cut back on the above expenses, in fact, what’s shown above is the bare minimum. You might be able to bring your accountancy fees down by several £000, but only at the expense of doing your own bookkeeping, payroll, and VAT Returns. The best possible scenario here is that you manage to do everything perfectly, but at a much slower pace than someone who is qualified. The worst possible scenario is that you massively fudge it and have to pay someone else to fix it despite you spending God knows how many hours working on your own accounts, or, you have an HMRC investigation and get hit with £000s in fines.
In my experience of dealing with hospitality business owners, it’s more often the latter that is most applicable- spending hours doing something that you’re completely unqualified to do at a far greater cost than the accountancy fees themselves. This isn’t me being biased- I’ve been on both sides of the coin, and I’m quite upfront with potential clients- we are more expensive than a lot of other local accountancy firms- I’d rather be honest and tell them that we’re more expensive than have them find out on their own and create a sense of distrust.
The best option you have of increasing the bottom line in this scenario, is to increase the top line proportionately. Read my article on Evaluating your sales data: Who, What, and When to help create your customer avatar so that you can begin to target the right audience rather than the whole audience. Doing this will not only give you a better idea of who you need to target and where you’ll find them, it’ll also help you to hit the reset button and allow you to start thinking about why you decided to open a restaurant in the first place.
Next, look at automation- automation is a dirty word in the hospitality industry, but it’s also a double-edged sword. Automation can help to improve your revenue as well as reducing your costs. A fair number of customers when eating out would rather be able to pay and leave without needing to flag anyone down- I’m a fan of this when I’m out with the family (3 young kids)- my wife and I always think it’ll be a great idea to take the kids out for lunch/ dinner but when we’re most of the way through we realise the error of our ways and can’t wait to leave. Simple QR codes and ordering apps can be a cost effective solution for those that want to enjoy their time out with as little social interaction as possible. There are 1,000s of examples of automation in restaurants without going to the extreme, but this one is my favourite- it’s quick, easy, and relatively inexpensive to get off the ground.
Advertising. You may have noticed in the budget above, that I haven’t included a line for advertising. Advertising as a rule of thumb, tends to swallow up around 8–10% of your revenue. I’ve purposefully left it out as it’s something that you shouldn’t even be thinking about until you’ve identified your customer avatar and target market- without knowing this you may as well refund 10% of all orders and call it quits, it’ll have the same effect.
Making changes in your business can be frightening and costly to get wrong. In most cases, I tend to do a “cost-to-benefit” analysis when looking at something new- is the benefit/ end result of what I’m about to do/ spend money on outweighed by the cost of it/ the amount of time I need to put in? More often than not, I’ve found it cheaper and more effective to let someone else handle whatever it is I’m looking to do. Don’t get me wrong, the amount of money that I’ll actually have to pay out to get my idea/advertising/product off the ground is far much higher than the £ value of doing it myself, but the amount of time it’d take me to set up Facebook or Google ads, or build an all-signing, all-dancing spreadsheet usually far outweighs the cost of outsourcing.
In conclusion, running a small restaurant can be a challenging and demanding venture. The profit margins are slim, and the costs can quickly add up, leaving little room for error. However, by identifying your target market, exploring automation options, and considering the cost-benefit of various business decisions, you may be able to increase your revenue and make your restaurant more profitable. Ultimately, while there are no guarantees of success, with careful planning, hard work, and a willingness to adapt, running a small restaurant can be a fulfilling and rewarding experience.