How to Create a Winning Restaurant Business Plan by Joe Erickson A business plan is your roadmap for the future

of the business. Not only does it provide direction, it requires you to consider all the pitfalls and opportunities of your prospective enterprise, well before you open its doors. It is your script of how the business ought to be. ithout it you are unlikely to receive funding from anyone other than the most trusting or unsophisticated sources of financing. In short, many restaurateurs agree that having a sound business plan was the single most important ingredient in making their new business a reality. !o why do so many restaurateurs forsake this critical step, without which many entrepreneurs wouldn"t even open a lemonade stand# $or one, restaurateurs often want to get the ball rolling quickly. %oo many operators put all their planning into simply getting financed. %hey then want to open the doors as fast as possible to create cash flow. &nfortunately, some operators don"t understand how crucial a well'planned opening is to the success of their concept. (ard work, great food, and the will to succeed are not enough. )ou need proper training, established operational procedures, and a creative marketing plan, before you open. %hese may be more important to a successful opening than menu design or table and chair selection. here to start# )ou can wade through thousands of articles, software programs and books that can be purchased on the Internet or in the business section of your local bookstore*coffee bar. !ome of these guides are valuable, although you might have to dig a little to find information created specifically for restaurateurs. %his article is not meant to be the first and last word on the business planning process+ however, it intends to give you an overview of the key, basic components of a strong business plan. e"ll tackle the basics here ,e-cept for how to create financial pro.ections, which is deserving of a separate article in a future issue/. So, Who's Going to Read It, Anyway? 0ost business plans address the same basic areas+ however, there are a variety of ways to organi1e and format them. %he overriding goal is to structure your plan in a logical and easily understood manner. 2onsider that it will be your roadmap for development, and prospective financiers '' be they institutional lenders or 3friends and family3 investors '' will want to review your business plan as part of their due diligence, before they open their checkbooks. 2onsider the ways that your business plan will be used before you begin writing. %hese include the obvious4
Acquire investment capital. Get a bank loan.

Obtain lease space.

And the not so obvious4

Convince your prospective managers to believe in your concept. Gain respect and confidence from prospective employees. Allow management to concentrate on execution rather than "plan as you go." Create a blueprint for operating your restaurant.

If you want to achieve your ob.ectives, keep your business plan simple, but make it easy for the reader to find the answer to specific questions they may have. ,As with any good reference, you will want to provide a table of contents that outlines the content in the plan./ First, Put Down Your Pen and Breathe $or most business people, the most daunting aspect of creating a business plan is the writing process. 0ost folks have a deadly fear of the blank sheet. %his is the part where many would'be operators and e-perienced restaurateurs struggle. %heir e-pertise, in many cases, stems from their ability to conceptuali1e their dream of . . . 2reating a business plan for the first time is too daunting of a pro.ect for most newbies. -- Big Dave Ostrander owning a successful restaurant. hen it comes to documenting their dream, however, the enormity of the task can be overwhelming. 32reating a business plan for the first time is too daunting of a pro.ect for most newbies,3 says 5ave 6strander, who is known as 3%he 7i11a 5octor.3 3Even we "6ld 8ri11lies" often shudder at the task. It takes big hunks of time and lots of research to create a great one. Anything less than great has a big chance of being turned down.3 %hat"s a lot of pressure. 9ela-. )ou might not be (emingway, but once you have adopted a structure for your business plan, 3fleshing out3 the content will flow more easily than you anticipated. Address the following points below, and you"ll find that the skeleton of the plan will take shape. 0ind you, there is no shame in hiring assistance from a consultant, for whom writing a business plan is routine. Not only is the consultant producing a much needed document, but he or she is helping to plan the operational strategy and opening process as well. 2onsider this icing on the cake. 9egardless of who drafts the final version of your business plan, have another set of eyes '' preferably someone who understands the process '' rigorously proof the final version.

hile this is not 0s. 2rabapple"s English composition class, typos and misspellings reflect poorly on your attention to detail. Is this enough to cause a lender to deny funding or a prospective partner to lose confidence in your diligence and ability to e-ecute a comple- pro.ect# 0aybe not, but : The E e!uti"e Su##ary Almost every business plan, regardless of business type, includes a one' to four'page introduction that gives the reader a summary of the business plan components to follow. %he e-ecutive summary should be written last, after you have completed the other components of the plan. %he summary should effectively convey your identity, your concept, why the concept will be successful, your plan to make it a reality, its cost, and the anticipated return on investment. &se this opportunity to capture the reader"s interest, and as a sales tool for your business plan. Avoid too many details in this section. 5etails will be addressed later. 5iscuss only the key aspects about your restaurant concept. 9emember, some readers never make it past this part of the business plan. A well'written summary can convince the reader to thoroughly e-plore the rest of the plan. !ome plan advisers suggest that a confidentiality statement precede the introduction. After all, much of the content you provide is confidential and cost you a lot of time, effort and e-pense to produce. $o#%any Des!ri%tion Legal structure. Establish early on the ownership structure and capitali1ation plan of the proposed restaurant. %his section should include a brief description of the legal organi1ation. $or an independent business, this will typically be an !'corporation or limited liability company ,;;2/ ,rather than sole proprietorship or partnership/ since these 3entities3 allow for multiple ownership interests and can shield managing investors from personal liability for claims against the business. Site lease or purchase. If a definitive site has not been chosen, list the area or city the restaurant is to be located. 7erhaps there is no business in which location is more critical than a restaurant. Informed prospective investors will look at site selection very carefully. Also, the financial, including ta- consequences of a lease versus purchase is critical in any new venture. A detailed e-planation of the rationale for selecting either is warranted in the business plan. $or e-ample, a significant attraction of the deal might be the investment value of the real estate. %his section can be updated, if needed, once a site has been selected. Capitalization needs. 8ive an overview showing the estimated capitali1ation needed to open the restaurant and the planned sources for funding it. <eep this section to the point,

and don"t clutter it with minor issues. 5etailed pro.ections and investment requirements will be e-plained in the 3Investment Analysis and the $inancial 7ro.ections3 sections of your business plan. Business concept. As critical as this aspect is, writing your concept description is typically the most fun. hat you want to do here is to paint a picture of what the e-perience will be from the guests" point of view. Just as a menu can whet one"s appetite, creating an image of your restaurant concept can peak a reader"s interest. hile you might envision serious investors and bankers as dispassionate number crunchers concerned only with income pro.ections and returns, in fact, they need to be sold on why your business is a great idea. %hey need to be convinced that the concept should succeed in appealing to diners. 9emember, everyone understands what makes a restaurant enticing. If you can"t get them e-cited about your concept, don"t e-pect them to invest. riting a vivid concept description is a lot like telling a good friend about a fantastic new restaurant you have visited. &se descriptive, enticing language to describe the following features of your concept4
ervice style! such as fine dining! casual upscale! fast"casual or quick"serve. i#e and seating capacity. $%cor and furnishings. Operating hours and meal periods. Atmosphere! ambience. &ighting and music. General menu theme. 'oints of difference or unique selling points. (elated products and services such as catering! delivery! and retail.

In addition to describing the food, be sure to mention interesting design elements, unique furnishings or other attractions. And let"s not forget the service. A good descriptive summary of the service style, as well as the promptness, is necessary to properly communicate the conceptual image of the restaurant. %he writing style you use should resemble that of a restaurant critic, albeit one who has only positive things to print about your restaurant. 5escriptive remarks about the overall atmosphere you want to pro.ect helps to solidify the conceptual picture you are trying to create. )our narrative should inform the reader of other key factors such as the restaurant"s price point, hours of operation and service style. Alcohol service, if provided, should also be pointed out. =e sure to e-press any unique selling points or points of differentiation the restaurant may have. 7oints of difference can include anything from food to d>cor to entertainment.

%ypical distinctions are often made for signature dishes, ethnic cuisine new to the area, unique service styles or unusual d>cor. )ou should also inform the reader of the si1e of the restaurant and its seating capacity. 0ake sure to mention the presence of a bar or banquet room, e-plaining the seating capacity, d>cor and any significant factors about them. $inally, be sure to enlighten the reader of additional services the restaurant may offer such as catering, delivery or retail merchandise.

Sample menu. Include a sample menu in your plan. A well'written and attractively designed menu can help to sell your concept. hether your concept is a fine dining table service or a quick'service fast'food restaurant, the menu is your No. ? selling tool. 2ustomer perception, though influenced by several factors, is largely formed based on the appeal of the menu, whether it is a printed menu or a menu board. If you are opening a quick'service concept, consider the inclusion of your menu board design. And remember, it is not the number of items you have on your menu, but the design, variety and appeal that makes an eye'catching menu. Building design and layouts. Architectural drawings, floor plans, and artist renderings can also help you create a visual image of your concept. Include visual components of the concept if available. &anage#ent Tea# '"er"iew %he success of any business relies on sound management. 5on"t believe it# %alk to any venture capitalist. A good story is .ust a good story. %hey want to know who is going to e-ecute and drive the plan. A lot of great business concepts have been turned down by investors, both 3friends and family3 and institutional lenders, because the prospective managers did not seem to possess the e-perience, skill, education, and*or discipline to make the business work.

%he restaurant business is no e-ception. 2ontrolling cost, managing employees and servicing customers requires e-perience and talent. %his section of the restaurant business plan is intended to convey the background and e-perience of the managing partners or owners as well as key management personnel that will operate the business. )ou should include a r>sum>'styled summary for each of the management or owner*management persons. Rsums. %he summary should begin with the name of the person and a brief description of the role or position they will have in the management of the business. 7rovide a summary of his or her e-perience or qualifications. )ou might choose to insert actual r>sum>s in this section or list them in the Appendices section of the business plan. Management agreements. 0anagement agreements, though not mandatory, may be used to lay out the e-pectations of the manager, the incentive plans, if any, and a termination strategy. )ou should disclose if there are to be any management agreements in place between the company and owners, hired employees, or third parties. Include a copy of the management agreement, if available, either here or in the Appendices section of the plan. It is also acceptable to state that while a management agreement will be in place, none has been drafted as of yet. )ou should consult with your attorney before carrying out a management agreement, since they are binding on the organi1ation, and are a frequent source of litigation. $urthermore, you might not want to enter into an employment contract with certain managers, and instead, keep the relationship 3at will.3 ,$or more information, see 35on"t ;eave 0ad, Just ;eave@4 $iring ;egal 7itfalls, and (ow to Avoid %hem,3 9!A8 Archives./ Business En"iron#ent Ana(ysis 0any restaurant entrepreneurs share an e-ceptional attribute that enables them to visuali1e a restaurant concept they fervently believe will have popular appeal to the dining public. After all, passionate belief in their concept is the driving force that can turn a dream into reality. (owever, passion must be balanced with reality when it comes to creating a sound business plan. In'depth market research is needed to substantiate that conceptual assumptions are in line with market conditions. %here are four basic factors to consider in your market analysis. $irst, you need to be aware of current industry trends and customer spending habits. Ne-t, identify your target market, the market niche to which your concept appeals. %hird, compare the customer base for the chosen location with the target market you are appealing to. $inally, identify the local competition that may contend for the same customer base. ndustry o!er!iew. Although there has been a dramatic shift in dining habits over the last BC or so years, the change has been gradual, reflecting a constant evolution of the industry. In the &nited !tates, the National 9estaurant Association ,N9A/, www.restaurant.org, has been the premier source for identifying changing trends in consumer habits. Each year the N9A publishes, among other things, its annual 39estaurant Industry $orecast.3 %he forecast provides a glimpse of the industry through

anticipated sales, customer spending habits, dining traits, operational trends and industry workforce trends. %he &.!. =ureau of the 2ensus, the 5epartment of ;abor, and %he ;ibrary of 2ongress are also good sources when analy1ing population growth, ethnicity mi-, labor and economic conditions+ however, organi1ations such as the N9A and restaurant'based publications provide more relevant information about our particular industry. 8iven the pro.ected growth of the restaurant industry, this aspect of your plan paints an optimistic future of your chances for success in a very competitive business. "arget mar#et. 2areful evaluation should be used to determine the preferred target market that your concept best appeals to and how that relates to the overall restaurant market with respect to diner demographics, preferences, and habits. &se this section to describe the ideal ,targeted/ customer profile for the concept. 2onsider the demographic characteristics for your ideal customer such as head of household age, income, household si1e, ethnicity, single or multifamily housing. Identify the preferred market si1e of residential and business population and their pro-imity. Establish desirable traffic count thresholds or a preference for a specific industry such as tourism. 5etermine the importance of traffic generators for your concept such as malls, theaters and universities. Location analysis. !ome business plans, probably most, are created before a site has been selected. %herefore, the location analysis may be limited to the general area or city for the proposed concept. As suggested earlier, site selection is often considered the most crucial aspect of the business planning cycle. %he location analysis should describe market conditions that e-ist in the location ,or general area/ you have selected. Information gathered and displayed here should include demographic statistics, description of local industry and economic outlook, location traffic counts, traffic generators, residential and business population and pro-imity. )ou should also draw comparisons between market conditions for the selected location, and the targeted market characteristics of the concept. ;ist the surrounding neighborhoods, points of interest, and area businesses. 5emographic and other information about a specific market can be found through various sources, including eb sites. 2ontact the local chamber of commerce, the &.!. census bureau, the departments of labor ,&.!. and state/, and the comptroller"s and clerk"s office of your county. 6ften the most useful information though will come from your real estate broker. %hey have access to demographic information that is more specific to the immediate area surrounding the location. %hey can provide you with reports for one', three' and five'mile

radiuses. 9eal estate brokers oftentimes subscribe to services that speciali1e in collecting and analy1ing data that is not publicly available. Competiti!e analysis. 9esearching the local competition, in terms of pro-imity and similarities to your concept, is an important factor when estimating your market share. %he competitive analysis should show the e-tent of market saturation, the type of other restaurants in the area, and restaurants deemed to be in direct competition with your concept. ;ist the unique aspects of your concept that give you a competitive advantage over each. &ar)eting Strategy A comprehensive business plan includes a sound marketing plan. 6wner, investors and bankers want to know you have a proactive plan to grow your business. )ou can"t rely on instant popularity and simple word'of'mouth marketing .ust because some restaurants, but not many, open their doors to instant success. &se this section to paint a picture of your restaurant"s marketing strategy before and after you open the doors. 5istinguish your plans for the grand opening marketing from ongoing marketing. 8ive an introductory summary of the marketing philosophy that will guide your marketing program. %his introduction should convince the reader that a well'thought'out, workable plan is in place. &se a descriptive, enthusiastic approach to verbali1e the plan. 6ver the years, restaurateurs have found creative methods to market their concept. e"ve covered many of them in this maga1ine, and will continue to discuss them in future issues. !ome of the methods you may want to consider are4 Build a customer data$ase. %he cornerstone of direct marketing efforts such as loyalty programs is to build a customer database. 6perators have used imaginative tactics to gather names such as business card drops or promotions that entice guests to sign up. %re&uent diner programs. 6therwise known as loyalty programs, automated frequent diner programs are now available with many 76! ,point'of'sale/ systems. %here are also a variety of services available that help you track and reward repeat customers. '(mail campaign. E'mail as a marketing tool has been a growing phenomenon for a few years now. &nfortunately, spammers have infiltrated this market to the disdain of all. Nevertheless, e'mail can be an essential part of your direct marketing plan. It"s ine-pensive and promotions can be created quickly without the time and cost associated to produce mailers. 7romotions can include monthly newsletters, specials, announcements, etc. ,$or more information, see 3)ou"ve 8ot 0ail,3 9!A8 Archives./ )irect(mail campaigns. 5irect mail remains a highly effective tool to reach new customers. It can also be very effective when used in con.unction with a well'maintained

customer database. !imple practices, such as mailing birthday and anniversary cards to e-isting customers, help to build customer loyalty. Community*charity in!ol!ement. 2ommunity involvement helps build name awareness as well as loyalty. 5iners tend to frequent establishments that give back to the community. !ponsoring charities has always been a great method to build support for your restaurant and provide help to others. 2ontributions can be financial or the use of your resources such as your banquet hall for meetings or serving equipment for events. 6ther community efforts include supporting the local sports teams, churches, and fund' raisers. ,$or more information, see 35oing ell by 5oing 8ood,3 9!A8 Archives./ Building $usiness relationships. =uilding solid business relationships can lead to big bucks for aggressive owners. )ou can build tourism traffic by establishing relationships with hotel concierges. A strategic relationship with a ma.or employer can help to draw lunch traffic from employees or from e-ecutive entertainment. 2atering revenue is enhanced when you know who books the catering. 5elivery to area businesses at lunch helps the business guest and you. +%our(walls+ mar#eting. In'house marketing is one of the most effective tools you have to keep e-isting guests coming back. %hink of ways to promote your restaurant from within such as table tents, menu inserts, displays or signage, suggestive sales tactics or frequent diner promotions. ,$or more information, see 3!elling to a 2aptive Audience3 9!A8 Archives./ Pu$lic relations ,PR-. Effective public relations takes creativity and work. )ou may choose to handle this aspect of marketing yourself or hire a 79 firm. hichever method you choose, briefly describe how 79 will be handled. ,$or more information, see 3%he Dalue of 79,3 9!A8 Archives./ .d!ertising. All restaurants advertise in one form or another. !imple signage with the name of your restaurant is advertising. hether or not you are a proponent of advertising your plan should be described here. !ome operators may choose to use this section to e-press a view against e-cessive advertising, choosing instead to bolster other marketing techniques. Either way, investors or bankers will be interested in your viewpoint, if only because advertising can be a huge e-pense. ,$or more information, see 3And %hey ill 2ome4 7icking and 2hoosing 0edia Advertising for )our !uccess,3 9!A8 Archives./ '%erations P(an %he operations section of the business plan should convey a general description of how the restaurant will be operated on a day'to'day basis. 0ost chain restaurants have systemati1ed their operations. %he system is then documented in an operating manual that the management team and employees must follow. %his way everyone is on the same page.

Although it is not always realistic to complete an operating manual before the business plan is written, it is important to acknowledge the systems and controls you intend to put in place. 5ocumenting the systems and procedures can take place during the opening process. %he operations section may be the most critical to the success of your restaurant+ not so much from the investor"s and banker"s perspective, but as a comprehensive plan to share with management and employees. <ey considerations for describing your operations include4 Sta//ing. %his section should list the staff positions, the number of people needed for each position and the average rate of pay for the position. ;ist any recruiting plans or services you will use to hire your staff. 5escribe the hiring standards and interview process that will be used. %his is not intended to be a labor cost pro.ection. %hat will be addressed in the 3financial pro.ections3 section of the business plan, to be discussed in a subsequent issue. "raining. 7rovide an overview of the training programs that the staff will undergo. Include in'house training and third'party training such as a state'mandated Alcohol Awareness 7rogram servers may have to attend. =e sure to reference employee handbooks, training manuals and training tools. )aily operations and production. %his section should describe, in summary, the day'to' day operations of the restaurant from opening to close. It should convey to the reader that management has a sound plan for operating the restaurant. =riefly e-plain operational issues such as scheduling, departmental .ob functions, ordering and receiving, menu production, service, general safety procedures and maintenance. Customer ser!ice. 5escribe plans for establishing service attitudes and policies. Include an overview on how customer complaints will be handled and how the restaurant will go about getting customer feedback such as surveys or through mystery shoppers. Suppliers. )ou should list suppliers for specialty products that make your business unique. !how contingency plans for replacing key suppliers. If your concept relies on unique products like $lorida stone crabs, 0aine lobster, or imported items then you"ll want to have a backup plan readily available. Management controls. 6perating a restaurant on a day'to'day basis requires established systems and controls. 0any seasoned restaurateurs have established systems to help them control cost and maintain e-cellence. &nfortunately, though, some startup restaurateurs open their doors unprepared to handle the day'to'day challenges of operating a restaurant. Incorporate management controls, tasks and support systems into your plan. !ome startup restaurateurs are undecided about how they might run the restaurant. %hey may have

plans to hire a general manager or chef before making operational decisions. (owever, it is important that you acknowledge in your plan some of the basic controls such as4
'O system to track sales. )ime and attendance tracking. cheduling. Operations checklists. Ordering procedures. *nventory control. Cash control procedure. ecurity measures. afety policies. &iability reviews.

.dministrati!e controls. Establishing systematic administrative procedures is equally important as putting in place management controls. 6ne might view management controls as tools for management whereas administrative controls are tools to measure management"s performance. Administrative tasks such as accounting and payroll processing are vital to the financial success of restaurants. 0any owner'operators use a bookkeeper, accounting or payroll service to handle some of the administrative tasks such as the preparation of daily and weekly reports, profit'and'loss ,7A;/ reporting, bank reconciliations or payroll processing. Investment partners may want to know 3who is guarding the henhouse.3 %o address their concerns you might consider the incorporation of these financial controls4 )aily cash control. Adopt a system whereby sales and receipts recorded by the 76! system will be compared with actual cash and credit card deposits on a daily basis. Establish acceptable over*short amounts. 0onthly totals should be compared with actual 7A; statements for accuracy. Wee#ly prime cost report. 7repare a weekly report that shows the gross profit margin after the cost of goods sold and labor cost has been deducted from the sales revenue. %he prime cost, depending on the type of restaurant, is e-pected to range on average from EE percent to FE percent. 7roper control of the prime cost is the single most effective measure of management"s ability to operate the restaurant. eekly monitoring allows for quick reaction to adverse cost ratios. Purchasing records and account paya$les. Establish a system to process and record invoices and credits daily. 9eports detailing cash e-penditures, payments by check, and accounts payable transactions should be readily available. 2onsider how check disbursements will be

prepared and to whom check'signing authority for the general operating account will be given. .ccounting system*ser!ice. Allow for the timely preparation of monthly financial statements, including the monthly 7A; and balance sheet. %he plan should state who will prepare the reports, such as the bookkeeper, 27A or accounting service. Payroll processing. 7rovide an overview on how payroll checks will be processed. 2onsider how often checks will be issued such as weekly, biweekly, or semimonthly. Acknowledge your preference of preparing payroll in'house or to have a payroll processing service. *ee% It +nder Your ,at hen submitting a business plan for review by potential investors, bankers, and prospective partners, you should consider having reviewers sign a confidentiality agreement. In the critical planning and negotiating stage of a new operation you need to protect your trade secrets and confidential information. 2hain restaurants use them in standard practice+ however, independent restaurateurs should consider them as well, particularly if the concept is novel and involves significant proprietary market research. It Does &atter Whi!h Way You Go 2learly, this article only provides an outline. %he real sweat begins when you address each issue. %ry not to think of creating a business plan as a dry academic e-ercise, but rather painting a detailed and vibrant picture of how you see your operation unfolding. $eel free to bring your 27A, attorney, spouse, and committed investors into the process. %hey may bring up issues that you might have missed, and provide that critical ob.ectivity that often escapes us when we are too close to a pro.ect. 0oreover, you will not feel as alone as you chart your course. No doubt, a business plan takes time and effort. It is well worth it, as the final, polished document will give you, and your investors, confidence that you really can reach your destination4 a successful restaurant. (( Restaurant Startup 0 1rowth

"he 'asiest Way to Cut 2our %ood Cost 345

by =ill 0arvin, %he 9estaurant 5octor

hile there are few absolutes in this business this is one ' 3Engaging in ongoing competitive bidding practices to get the lowest prices actually leads to higher food costs, not lower.3
)hat+s right. Contrary to what most of us! who have grown up in this business have been taught! having an ongoing purchasing process that revolves around using lots of vendors! comparing bids! price shopping and buying from the lowest bidder ,O) only doesn+t save you any money but ends up costing you in several ways. )o prove my point! how many professionally managed! large chain operators employ ongoing competitive bidding practices- ./(O! ,O,/! ,A$A0 /very large chain uses one primary purveyor to supply 123 " 4223 of it+s food products. 5ow many independent operators do this- 'robably less than 423! easily less than 623. And who makes more money at the restaurant level! the typical chain or independent restaurant- According to industry averages published by ,(A the average independent nets about a nickel or 73 of sales before federal and state income taxes. 5aving worked with several chain operators and from perusing the annual reports and 42"8s of many publicly held chains! the average restaurant level net income before corporate overhead and income taxes is around 463 " 473 of net sales. )he fact that chain restaurants are 6 to 9 times more profitable than independent operations may not be entirely due to purchasing practices but *+m sure it+s a factor! possibly a big one.

Distra!tion -ro# ,igh.Return A!ti"ities

Another factor to consider is the amount of time it takes to constantly evaluate bids! deal with lots of vendors and put away lots of deliveries! lots of small deliveries! that is. :sing a prime vendor frees up management time that can be better spent on high return activities like taking better care of your customers and developing your people. *n my mind! trying to save 67 cents on a case of green beans is hardly a high return activity worthy of much owner or management time.

What Deter#ines Su%%(ier Pri!es?

)here are four basic elements that go into the pricing formula of most suppliers.

Product Costs; <hat it costs the vendor to purchase the products from their suppliers such as manufacturers! growers and other wholesalers. )he more they buy!

the lower their costs are so there+s a built"in incentive for suppliers to move lots of product. Administrative & Selling Costs; *ncludes the cost of servicing the account and processing the orders. =actors that can affect these costs include order processing time! lead time! order frequency! number of invoices processed! specialty products needed and credit terms. Another point is that these costs are basically fixed and suppliers want to spread these costs over as many sales dollars as possible. Delivery & Handling Costs; )his boils down to cost per drop. )he drop cost to deliver 4 case to your back door is about the same as it costs to deliver 422 cases. )o a supplier! bigger orders mean less delivery cost per dollar of product delivered. ,umber of deliveries per week and the time of the day you will accept deliveries can also affect these costs. Profit on the Account; )his is the percentage mark"up or gross profit in dollars the supplier needs to make an account profitable after considering all the factors discussed above and the potential volume on the account. )he key point is that if you find ways to lower the vendor+s cost of servicing your account and give them the opportunity to make more profit "dollars"! they are usually willing to work on a lower "mark"up." As a result! you get lower overall prices and other important benefits too! which *+ll discuss further below.

Gi"e Su%%(iers the '%%ortunity to &a)e &ore &oney on Your A!!ount

>es! you read that right. *t+s in everyone+s best interest to position a supplier to make more money on your account in return for something . . . LOWER PR CES! 5ere+s how it works . . . mart suppliers don+t ?ust look at the percentage mark"up on an account. <hat+s more important is the potential total gross profit in dollars they can make. =or example . . Assume you buy around @A22!222 of food a year. >ou currently spread your purchases around to 6 or 9 broadline distributors and several specialty suppliers. >ou spend about @422!222 a year with $istributor A and $istributor A is adding a 623 markup to everything they sell you BCase "C. $o you think $istributor A might be willing to work on a smaller margin percent if they could get more! a lot more of your businessAs you see! it makes economic sense for $istributor A to work on a smaller margin 3 # it means converting you from a @422!222 account into a @722!222 account. >ou can see in Case $! $istributor A has the opportunity to more than double their gross profit dollars on

the account even though they gave up a large slice of their average markup 3 to get more of your business.

A $ase In Point
<hen * took over as the =ood D Eeverage $irector of the :. . Olympic )raining Center BO)CC in Colorado prings they were using lots of suppliers. As many as 47 to 62 vendors a week. ensing the need to do something different! * invited the ma?or vendors in the area to submit a proposal if they were interested in being considered as a prime vendor. *n short! the program would be a year"long! non"contractual agreement whereby the O)C would agree to purchase a ma?or portion of its total food purchases B723 to F23C from one supplier in exchange for a fixed "mark"up" Bnot priceC on their products. *n a notice to the prime vendor candidates! * included a quote sheet Bcalled the 'rime Gendor Huote heet belowC outlining the products and specification of the O)C+s principle products and the quantities purchased in a typical week. /ach vendor was asked to quote their current prices on those products and how they would determine their mark"up on each product Bcost plus a percentage or cost plus a fixed amount per unitC over the term of the prime vendor program! which in this case was 4 year.

Resu(ts
<e noticed these benefits as a result of going on the prime vendor program; 4. Reduction in food cost; *mmediately after implementing the prime vendor program! the O)C+s food cost per meal dropped 423 while maintaining the same menu using the same ingredients. 6. #e%er vendors and invoices to deal %ith. *nstead of dealing with nearly 62 vendors and lots of deliveries and invoices! the number of vendors dropped to 7 or A. =ewer people and paperwork to deal with. 9. Less &urchasing activities; 'rior to the prime vendor program! the O)C had a full time purchasing clerk. )hat position was no longer needed and was phased out. I. 'etter vendor service. )he prime vendor became much more responsive to special requests and to situations that required immediate action. 7. m&roved &roduct consistency. =ood was now coming from one source! not the low"bidder of the week. )his meant better food quality and consistency.

A. Closer vendor relationshi&. )here was now the incentive for the sales rep to provide more attention! and to maintain a good working relationship.

/Yeah, But 0 0 0 /

One common response to a prime vendor arrangement is that the vendor will ratchet the prices up once they know you+re not watching them like a hawk. ure that+s possible! but now we+re talking about being a si#eable account which the supplier knows will be put out to bid again within a year. *f they do play games with the pricing! chances are you+ll find out sooner or later. )here is an element of trust involved in a prime vendor relationship. )he question you need to answer is! "will a supplier intentionally inflate prices if it puts them in ?eopardy of losing a big customer-" ure it+s possible but it+s hardly a smart business move on the part of any supplier who wants you as a customer over the long term. peaking of trust! in this type of arrangement trust goes both ways. >ou+ll always have another supplier come to you with a better price on a case of tomato sauce today or box of ribs tomorrow! but the point is sticking with the prime vendor as much as possible to get the lowest "overall" prices day after day Band spend your time in more productive activitiesC. Once you start cherry"picking the best deals out there product by product you defeat the purpose of a having prime vendor and it probably won+t work.

Does Pri#e 1endor &a)e Sense For Your Restaurant?

)here+s really only one way to find out! try it0 <hile not a panacea! virtually every operator *+ve met who has tried prime vendor! say they+d never go back to competitive bidding again. (estaurantOwner.com members can download the following forms and templates to make the prime vendor evaluation process faster! easier and enhance your changes of getting the best possible deal; Cover Letter (em&late " :se this to describe! to each prime vendor candidate! the prime vendor program your are proposing! how they can submit a proposal to you! and the basis you+re going to use to select your prime vendor. Prime )endor S&ec Sheet " )o get the best deal! you need to be aware of all the important factors to consider in structuring your prime vendor arrangement. *ncludes delivery frequency and time! order lead time! method of ordering! credit terms and other key factors you can negotiate on to improve your bargaining position and lower your prices. Prime )endor *uote Sheet " 5ere+s where you list the product specifications and average weekly usage of your principal products. )he vendor candidates use this to fill in their current price quote for each product and the formula used to determine each product+s price Bthe vendor+s cost plus a percentage or the vendor+s cost plus a fixed amount per unitC. Prime )endor Summary Sheet " )his is a summary sheet to collect and summari#e all the candidates+ quotes and pricing formulas. Jakes it easy to compare each candidate+s bid in total and product by product.

What '!ery Restaurant 6perator Should 7now .$out Managing Cash %low
$or many restaurant owners one of the most perple-ing and frustrating aspects of running their business is getting a handle on the ebbs and flows of their cash flow. All too often cash balances can be more than sufficient one week only to turn into a shortfall and potential overdraft situation the ne-t.
Cash shortages can be a real distraction from productive activities. A cash deficit can be disruptive to operations if lack of payment threatens key deliveries and services. And never underestimate the damage to your reputation and credibility when your lenders and suppliers don+t get paid in a timely and consistent manner. <hile managing cash flow can be a constant challenge in unprofitable restaurants! it can also become an issue in profitable restaurants as well. 5ow do you go about keeping up with what your cash situation so you can smooth out those cash flow peaks and valleys- =irst let+s look at the dynamics of cash and how cash flow differs from income and expenses on your 'D&. Cash #lo% is Different (han +et ncome &et+s start with the 'D& which is very easy to understand. )he dynamic of income is one of "magnitude." >ou want more income and less expenses to maximi#e the amount of ,et *ncome you earn.

Janaging cash flow! however! is primarily a "timing" issue. *t+s about managing "when" the money comes in and when it+s paid out. =or example! in the image below you can see that based on a simple pro?ection of cash coming in and going out it this business is looking at a cash shortfall of around @42!222 at the end of Jonth 6. )he quickest and usually easiest way to fix the problem is to start exploring ways that cash could be received quicker! in Jonth 6 rather than Jonth 9 or delay some payments scheduled for Jonth 6 until Jonth 9.

*f part of the @422!222 of cash receipts expected in Jonth 9 is due to catering or banquet sales! maybe deposits could be collected in advance of the events. *f @7!222 of receipts could be received in Jonth 6 instead of Jonth 9! then our shortfall is down to @7!222.

Another possibility is to delay some payments scheduled for Jonth 6 to Jonth 9. <hile some types of payments like payroll and sales taxes need to be paid on or before their due dates! some liabilities! like vendor accounts payables may offer some flexibility. *f you approached a few of your vendors ahead of time Bvery important to give some advance noticeC and explain you+ve got a short term cash crunch and need some more time to pay! many! if not most vendors are happy to cut you some slack with some extra time.

*f @7!222 of payments due in Jonth 6 could be rescheduled to Jonth 9 the shortfall is gone. ,o more problem. <hile this is obviously a simplification the key to being able to fix the problem is knowing that you have a problem "ahead of time." uppliers and other creditors are loathe to give you much wiggle"room or sympathy if you come to them when you+re desperate and in trouble. )he key is in giving yourself "time" to manage it properly ahead of the problem.

One ,ey to -anaging .our Cash <hile working with many restaurants over the years! some with horrendous cash challenges! *+ve found the best thing any operator can do first is to set up a simple worksheet that estimates weekly cash receipts and cash payments. Jost restaurants+ cash flow can fluctuate dramatically from week to week primarily because of the timing of payments like payroll! sales taxes! and rent. )he reason to take some time to set up a weekly cash pro?ection is to see what+s coming so you have some time to do something about anticipated shortages. )he only thing worse than having a cash shortage is having a cash shortage that was a total surprise. Ho% to Pre&are a Wee/ly Cash Pro0ection >ou start the process by estimating your cash receipts from all sources by week.

CASH +#LOWS 1RECE P(S2 Cash D Credit Card (eceipts " ales 'lus; ales )ax &ess; 'aid Outs 5ouse Account Collections *nterest *ncome &oan 'roceeds Other " )hen estimate your cash payments by week. CASH O3(#LOWS 1PA.-E+(S2 Gendors " =ood Eeer! &iquor D <ine Other upplies D ervices 'ayroll " ,et 'ayroll 'ayroll )axes ales )axes &iquor )axes :tilities Occupancy Costs " (ent 'roperty )axes *nsurance /quipment &eases ,ote 'ayments B'D*C Other " :se your actual cash on hand or a good estimate as a starting point . . . )he thing to remember starting out is that this is a '(OK/C)*O,. *t+s never going to be 4223 accurate! but you+ll quickly find that doing this a whole lot better than doing nothing and essentially being in the dark. $o this for several weeks or months out into the future and * think you+ll quickly see what a helpful tool it will be and how much you+ll learn about the cash ebbs and flows of your business.

Sur!ey Results8 How ndependent 6perators %inance "heir Restaurants

(ave you ever wondered what it costs to get a restaurant open# As part of our 3$inancing )our $irst 9estaurant3 survey, we asked 9estaurant6wner.com members to tell us how

much they spent getting their restaurant open. %his survey yielded nearly ECC results, creating a valuable resource for those planning to open a new restaurant. %he cost to finance the opening of a restaurant can vary greatly. %he following table illustrates how various factors affect the overall investment based on the type of venture and whether the restaurant is purchased or leased. : o/ Respondents =>? B?B F? E 3F3 KC MK B =? BE J ' =@ Leased Space Purchased Land 0 Building 6ther .ll Respondents Leased Space Purchased Land 0 Building ?M G M F>= JM? ?BC 5 o/ 6!erall @A5 GFH BBH BH C45 FMH JEH ?H D5 LKH ??H ' @5 EFH BLH ?FH 3445 GBH BEH Median ; Spent ;=@4B444 IBEC,CCC IECC,CCC ILC,CCC ;3D4B444 I?EC,CCC IBBE,CCC I?EE,CCC ;C44B444 IJCC,CCC IMBE,CCC ' ;F@4B444 IJEC,CCC ILCC,CCC IJBE,CCC ;=@4B444 IBCC,CCC IJEG,ECC .!erage ; Spent ;@43B=CD IJG?,?K? IKGB,KFG IBFC,CCC ;=?3B3=? IBE?,CJJ IJM?,EE? I?EE,CCC ;F@3B>?D IJGM,LCC I?,CKJ,JJJ ' ;D>CB@=4 IMLF,BLE I?,?CG,?MJ IEGC,CCC ;FF3BD>@ IJMM,MFL IGBE,KGE

9enture "ype Created <ew Concept Leased Space Purchased Land 0 Building 6ther "oo# 6!er 'Eisting Concept Leased Space Purchased Land 0 Building 6ther Purchased %ranchise Leased Space Purchased Land 0 Building 6ther 6ther

6ther

??

BH

IBCC,CCC

IJEJ,FJF

e also asked respondents to tell us 3how3 they raised the money to get their restaurant open. %he response was tremendous, resulting in se!eral hundred in depth testimonials on how these operators raised capital. 0oreover, each of the respondents share the lessons they learned on everything from budgeting, finding money, and pitfalls you should try to avoid. %he results have been grouped based on the amount spent.

1iew !o##ents 2 resu(ts -or restaurants that !ost3 456,666 and (ess 457,666 . 4766,666 4767,666 . 4856,666 4857,666 . 4566,666 4567,666 . 47,666,666 &ore than 47,666,666 'thers