Finance

Restaurant Economics: What Every Restaurant Operator AND Their Employees Should Know

By Jim Laube, RestaurantOwner.com

Unless you’ve made a point of telling them, most of your employees are clueless about what it costs to operate your restaurant. In fact most of them probably think you’re making a killing unless you’ve made an effort to enlighten them about basic restaurant economics.

During my consulting engagements, I always try to bring this point to light by asking three or four employees, one at a time, how well they think the restaurant is doing. I take a dollar bill out of my pocket and ask, “Out of every dollar in sales that comes in this place, how much do you think the owner gets to keep?” Typical answers range from 30 to 60 cents. The least I ever remember hearing was 25 cents.

When employees think your restaurant is a high margin, extremely lucrative business, it can effect their attitudes, behavior and work habits. Employees that assume the boss is pocketing 50 cents out of every sales dollar (when in reality it’s probably less than a nickel), may find it easier to rationalize carelessness, waste and even theft.

Following are some suggestions for educating your people and bringing them into the real world as far as the financial realities of the restaurant business is concerned.

A Glimpse of Reality

Show them where the money goes. I know of several operators who demonstrate to their employees what happens to the money. They start with a stack of dollar bills on a table, say $100, representing “sales,” or “what came in.” Then they begin paying the bills (“what went out”). $30 to the food vendors, $28 for payroll, $5 for payroll taxes, $4 to the utility companies, $6 to the landlord and so on until there are four or five dollars remaining, which approximates what a typical independent restaurant owner get to keep.

A demonstration like this can help employees understand why you go nuts when a case of lettuce gets miss-rotated or when a request for extra napkins is met with a handful of a dozen or so. 

Open your books.  Granted this is extreme for most restaurant owners but it’s a true story. In addition, I’ve been told first hand accounts of other operators doing essentially the same thing in terms of informing their employees about how their restaurant is performing financially.

An owner of three independent Mexican restaurants in California was struggling with what to do with the last restaurant he’d opened. After two winners he had a real dog on his hands. The third restaurant was performing so poorly that after being open nearly a year, he was almost ready to close it.  Before he pulled the plug though, he tried something fairly radical for our industry. He got all of his employees together and showed them the restaurant's latest Profit & Loss Statement.

He took the time to explain just what a P&L was, what the major expense categories were. When he got to the bottom line, there was a fairly large number with brackets around it. “This number” (Net Loss), he explained, “is approximately the amount of money I have to take out of my pocket each month to keep this restaurant going.”  Jaws dropped, several people gasped, lots of eyes opened wide. Most employees were just plain shocked. Nobody had any idea the restaurant was losing money. 

The owner continued the discussion by talking about the functions of each group of employees (servers, line cooks, bussers, etc.) and described how their efforts are connected to and ultimately reflected on the P&L, line by line.

The operator said after the meeting he noticed some pretty profound changes in the restaurant.  First, no one had the nerve to ask for a raise for nearly a year after the meeting. He also noticed changes in attitude and behavior. People were much more conscious in portioning and handling products. He saw people going out of their way to bend down in a trash can to pull out a knife or fork, something he had rarely observed before. He said his margins started showing improvement.

He successfully implemented a new marketing strategy and within six months, the restaurant got close to break-even for the first time. Within a year it was actually turning a small profit. He has continued showing his employees the monthly P&L to educate, inform, motivate and even reward.

Educate & Inform

At minimum, let your employees know, in terms they can relate to, that this is a “low margin” business. Educate them and let them know what's going on and they will usually do the right thing. The problem is that when you withhold information, people are forced to make assumptions and as you can expect, those assumptions are usually wrong

Bio:

Jim Laube is the founder and president of RestaurantOwner.com, an online resource center for independent restaurant operators. He specializes in working with operators who want practical advice to make their restaurants more profitable and improve their business management practices.

Jim began his restaurant career at the age of 15 working for a quick-service restaurant and earned his way through college as a server and bartender. After earning his degree, he worked for a regional restaurant chain and an independent fine dining restaurant. He has been a restaurant manager, controller, CFO for a regional restaurant chain and is also a CPA.

As an author, Jim has contributed to Restaurant Hospitality, Nations Restaurant News, Foodservice.com, Pizza Today, Restaurant Startup & Growth, the Society for Foodservice Management's “SFM Source,” and the American Express “Briefing” newsletter.

Jim is also a popular industry speaker having conducted over 500 presentations to thousands of restaurant professionals in the U.S., Canada and Europe. His clients include Red Lobster, Papa John’s Pizza, KFC, Marriott, , Hard Rock Café, SYSCO Corporation, Cornell University, Aramark, the National Restaurant Association and many state restaurant associations.

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