Step 2 of The 4C Strategy is: Cost
When you have developed your concept and written a clear restaurant business plan, you need to turn your attention to costs.
Some estimates suggest that 60% of restaurants go out of business in the first year and the average profit margin of a restaurant is just 6.2%.
So, controlling costs and managing cash flow issues should be the first thing on your mind after choosing your food concept! The best way to grow a food business successfully is to engineer your costs before you get started.
Let’s dive into the 3 Critical Cost Engineering Factors for Successful Food Businesses:
1. Planning your menu
Choosing Cost-Effective Ingredients for your Menu
When purchasing ingredients, you need to consider availability and seasonality. Fresh ingredients that are in season will be readily available and more affordable, so try to build your menu around them if possible. You also need to consider the quality and how this aligns with your restaurant concept. Fine dining establishments must use high-quality ingredients to justify the prices that they charge.
Streamlining Your Menu Offerings to Reduce Costs
Streamlining the menu is an effective way to manage costs. A large menu increases ingredient costs and also leads to more waste, so keep it limited where possible. Cross utilization of ingredients is also very cost-effective because you can reduce waste and buy ingredients in bulk.
Eliminate Potential High Costs with Market Testing
Testing your new menu before launching your restaurant ensures that it works before you invest too much money into it. Getting testers to fill out questionnaires about the menu or even catering a local event are both good ways to get a feel for what works and what doesn’t. You can then go back to the drawing board to tweak the menu and make it perfect.
Finding a Consistent, Reliable Supplier
When the menu is finalized, you need to start choosing suppliers. Make a list of potential suppliers and write a budget for the menu. You can then compare prices and look for the best deals. Although quality is important, finding affordable options is key to increasing profit margins and managing cash flow. You should also look for suppliers that you can build a long-term relationship with because consistency is important in restaurants.
2. Managing your expenses
Understanding what your expenses will be and how to manage them is the difference between success and failure in the restaurant industry. At the very core of a business, there must be profit to survive! Here are some of the main things you need to know when managing your food business expenses:
Understanding PnL (Profit and Loss)
A profit and loss statement is a financial tool used to measure the total expenses and income of your restaurant over a given period. This will tell you whether you are bringing in enough revenue to cover your expenses and turn a profit. Familiarizing yourself with these financials and keeping a constant eye on you is the only way to manage your expenses properly. If your spending is much higher than revenue, you will soon be in trouble.
Variable And Fixed Costs
Some costs in the restaurant industry are fixed and predictable, while others are variable. Understanding what those variable costs are helps with future planning and avoiding financial issues.
Your fixed costs include rent, mortgage, salaries, loan repayments, and insurance premiums. These are easy to budget for because the cost is the same each month.
Variable costs include things like hourly wages, food costs, and utilities. Initially, these can be difficult to predict but after a few months of operation, you should have a general idea of how much they will cost, you can manage your budget more effectively.
Over-budgeting for variable costs is the best way to stay on top of your finances. When engineering your food business costs, remember to include a 15% budget for marketing and promotion.
3. Implementing research and development
The research and development process is designed to alter your menu and your restaurant operations to find ways to cut expenses while also delivering quality and value to the customer.
Brainstorming new menu ideas, considering potential challenges, and exploring ingredient options and costs are all important steps before testing new items and launching them.
Researching new restaurant technologies to help you automate your food business and streamline operations can also improve efficiency and reduce costs even further.
You also need to conduct constant audience research so you can keep improving your brand.