The Basics of Start-Up

Start-up Costs

When discussing the start-up costs of a restaurant, it is imperative to establish the type of restaurant and the size. In addition to the expenses that readily come to mind when opening a restaurant, it is crucial to remember the costs that are essential for success but easily overlooked by a novice restaurant owner. As established in the article by Guta (1) the following is a compilation of significant costs for a successful start-up, some are obvious, and some fall under the forgotten expenses category.

Salary for Owner

The first cost that is generally overlooked is the salary for the business owner. The ideal situation would be for the business owner to be paid from the profits the restaurant earns, but these profits do not usually come in the beginning. It is vital for the business owner to be able to survive to see the restaurant through the start-up phase. The current needs of our business would be around $25,000.00 per year.

Administrative Costs and Permits and Licenses

These costs are meant to include everything from the permits, fees required by the state and county in which the business will operate, incorporation fees, attorney fees, and any government fees. A safe estimate of this expense would be $9,000.00 in the beginning.

Rent and Renovations

Finding an acceptable location is essential. Once the location has been established, there are the renovation costs. Even if the new restaurant owner is fortunate enough to rent a restaurant space, there will still be costs associated with revamping the space to suit the dream that began this quest. While factoring the cost of rent, it is crucial to remember the variable costs such as electricity, gas, and water. A suitable estimate for this expense in our area would be $4,000.00 per month.

Equipment and Supply Costs

In many cases, the restaurant owner chooses to lease restaurant equipment rather than buy it outright. This decision can save the new business owner substantial capital in the beginning when funds may be hard to come by. Leasing also provides a level of protection in case something breaks. Cooking equipment is not the only significant cost in this section. Workspace equipment, utensils, dishes, serving materials, furniture and bar equipment, are also part of this expense. Assuming the space we choose does not have any equipment, the basic monthly cost for leasing all the equipment needed would be around $7,000.00 per month.

Insurance Coverage

This expense is sometimes one of the forgotten or overlooked expenses, but it is vital for the safety of everyone in this business. The types of insurance that could be required are Product liability which is useful if the equipment is not leased, liquor liability, workers’ compensation, the commercial vehicle if the restaurant delivers, restaurant insurance, and loss of income insurance. A safe estimate of insurance costs would be around $6,000.00 per year.

Accounting

Proper accounting is essential for any business, and there are many options geared toward helping small businesses. Most of the software will not require a substantial financial investment, but time and know how are necessary. QuickBooks Online has a function to allow it to link with POS technology. The combination of quality accounting software and POS technology can increase accuracy and efficiency. The online software is $60.00 per month.

POS Technology

For most new business owners POS technology is an afterthought or forgotten altogether. POS technology can save time and money, but it does not have to break the bank. POS technology should be ranked with quality staffing, and superior marketing for it is the heart of the business. The initial purchase is about $1,500.00 with monthly fees based on usage.

Staff and Training

Happy customers lead to good reviews, and that can be the key to success. Quality staffing and consistent and thorough training are vital to the happiness of customers. Proper training can lead to staff that feels empowered and appreciated. Superior team is essential to success and in the long run worth the added expense. A safe estimate of staffing costs would be $8,000.00 per month.

Marketing

Marketing has evolved with the escalation of social media. In today’s social media connected world it is not necessary to spend thousands of dollars on a top notch and aggressive marketing campaign. A quality web site should be created as soon as the permits and address have been established. The handy idea is to reach out to local colleges to find students that know how to create websites and offer to pay them rather than pay a large firm to do the work. The article recommended television commercials and radio advertising as a way to promote the business, but social media seems to reach a wider audience. Whatever the choice never skimp on marketing. With online advertising being so efficient an aggressive marketing campaign should cost around $4,000.00 for two months before launch and six months after opening.

Best Financing Option

The first avenue that we will be investigating for financing and grants are from the Small Business Association and the Veterans Administration. The grants are a quality option because they do not require repayment. Grants require a great deal of preplanning; they take time to gather all of the information required and for approval.

The next avenue for financing would be to find a couple of angel investors that have substantial restaurant experience. According to (Leach, 2), while angel investors are not an ideal choice in the developmental phase of a new venture, they are one of two formal external sources for venture capital. The most appealing benefit of the angel investor is their experience; they usually share their expertise because they negotiate to receive a portion of the profits. If the business thrives so do the investment returns.

Financial Ratios

The best financial ratios to use in the startup stage of a business are the Cash burn rates and liquidity ratios (Leach, 2). As Leach (2) states, should angel investors not be used in this phase and the capital comes from family and friends it may not be necessary to invest the time into the financial ratios, but if angel investor is utilized it is a safe assumption that they will be interested in the tracking of financial indicating the venture’s progress.

The cash burn rate is a measure of how quickly a venture is spending the capital. The cash burn rate is measured over a specific amount of time which is generally monthly. Cash build is tied to the cash burn rate. Cash build is the net sales after the increase in receivables is factored.

Liquidity refers to the ability of the business to maintain the burn rate to meet short term financial obligations, and they are due. The primary function of liquidity ratios is to compare assets that can be quickly converted to cash when needed for liabilities that require cash in the short term (Leach, 2). Liquid assets are defined as the sum of the business’s cash and securities that possess marketability plus the receivables tabulated for the business.

References

1. Guta, M. (2018, March 24). Report Reveals the Costs of Starting a Restaurant. Retrieved from https://smallbiztrends.com/2018/03/costs-of-starting-a-restaurant.html

2. Leach, J. C., & Melicher, R. W. (2018). Entrepreneurial finance. Boston, MA: Cengage Learning