Forecasting IS A NONNEGOTIABLE

By Doug Radkey

Booming businesses understand that they must maximize every hour, every seat, every event, every day, and every food and beverage order. Costs must be controlled and revenue must be generated, so empty seats, declining take-out/delivery orders, or lower productivity is simply not good for business. That’s restaurant economics 101.

Gone are the days when you had to schedule meetings with your accountant or even be at your restaurant to access the information stored in your POS system to know your numbers. As we move into a new era with robust backend systems and financial integrations, advanced reports, and cloud-based POS systems, there is really no excuse to not know the financial health of your restaurant or hospitality business.

Whether you’re just starting out or you’re a seasoned operator, meeting your guests' demands, paying your bills on time, and living a ‘healthy’ lifestyle for you and your family is a necessary balance.

The first steps

Forecasting and budgeting is the first step to financial success and involves the accumulation of your historical internal data and your external market factors such as trends, socio-demographics, and hyperlocal competition, to name a few.

At the end of the day, restaurant forecasting isn't really a "nice to have" it's a step all successful restaurateurs must take. It is, in fact, a non-negotiable.

Studying this information will help develop patterns and make accurate predictions throughout different dayparts, weeks, months, and seasons. Inaccurate forecasts, however, can lead to upset shareholders, mismanaged expenses, and, potentially, running out of cash flow for your business.

When completing your forecasts for each day (yes, complete a day-by-day analysis), week, month, quarter, and year, for traffic, sales, revenue per guest, and all expenses including food cost forecasting, there is a strong, natural temptation to be optimistic when forecasting your growth.

While you want to have a growth-based mindset, it can lead to challenges.

Being Sensitive

That’s why it is also ideal to create a ‘sensitivity analysis’ along with a contingency plan that includes a minimum of two to three variations of your forecast based on a 10 to 50 per cent drop in traffic. How will your restaurant perform and strategically scale downwards in these situations? How will your operations and cash flow be affected? What steps will need to be taken for each of these variations?

The silver lining: due to the recent pandemic and the lessons learned, restaurateurs can now understand and be a step ahead of potential economic turmoil to plan more strategically around any significant drops in revenue.

Continuously Review

These forecasts should also not be ‘static’. Don’t make one at the beginning of the year and then ignore your theoretical forecasts for the next 12 months. Regularly evaluate how close your operating results mirror those forecasts and then make changes on-demand to reflect any new information provided to you.

You should have a side-by-side comparison (forecast vs. actual performance) created for each day, week, month, and quarter.

You must be prepared for a variety of financial scenarios through proper business planning and forecasting to detect a problem before it develops into a nightmare for you, your team, and your brand.

Key Performance Indicators

It is important to understand and know your projected break-even points, financial benchmarks, and other key performance indicators (KPIs) so you know how and when you can generate a profit for your business.

Using KPI benchmarks is a way for your business to quantify its forecasts and set objectives so you can regularly check up on your performance and determine where you are successful and where you may need to improve.

Some of the most useful KPIs in the restaurant space are: labour satisfaction, labour turnover, cost of goods sold, labour costs, food and beverage costs (theoretical vs. real), third-party commissions, third-party to first-party conversion rates, leasing costs, production timing, food and beverage waste, inventory, guest spend, marketing and advertising spend and ROI, debtstructuring, and profit margins.

Staff scheduling, inventory management, menu analysis, customer data points, guest satisfaction, profitability, and so much more rest on the shoulders of accurate restaurant forecasting and that is why it must be considered a non-negotiable.

To win in this industry, you must know your numbers. At any given moment, you should know what your costs and contribution margins are on each item, what your labour costs are, what your average guest spend is during multiple dayparts, whether you’ve broken-even for that day yet – just to name a few.

The Mindset

When you understand how your thinking, understanding, and forecasting (or lack thereof) are potentially holding you back, that is when you can make changes and plan for a more financially viable future.

Here’s where you learn to anticipate, prepare, and execute for your restaurant to perform at its best. It’s when you can start moving from three to five per cent average profit margin in Canada to 12 to 15 per cent profit margins (or better) even as inflation, labour costs, and rent continue to rise.

To battle these increases, you need to plan and forecast better. You need to invest in performance optimization, smaller and more targeted menus, marketing efforts that are geared toward your target audience, guest journey maps, efficient technology, and cost optimization.

If you want to be successful in today’s market, you need to re-engineer your processes, your planning, and your forecasting while reimagining the overall guest experience. There’s no better time to get started than right now!