The Truth About Restaurant Start-Up Costs

I recently read an article that goes like this,

“New restaurant ventures have a notoriously high failure rate, a fact of which financial institutions are well aware.”

This is some scary news alright. So I’ve decided that, for the time being, I’ll be talking about the first critical steps as well as the restaurant start-up costs of opening a new business.

The question: how much do you need to spend in restaurant start-up costs and ongoing expenses?

The answer rides on a lot of things. First and foremost you need to decide, as a future restaurant operator, whether you’re starting from scratch or fixing up an existing restaurant. Both sides have pros and cons.

It depends on how fancy your new place is. I’d say a blank slate should set you back around $130,000 to $330,000, more or less, for things like refrigerators, bar stools, tables, shelving, industrial cooking equipment, etc. Renovating an existing restaurant is much easier, but expect the rent to be higher since the value of the previous business is already baked in.

A reliable POS (point-of-sale) system is also necessary, unless your restaurant is going to run on the pen-to-notebook system. You’ll need it to collect payment and manage the floor and kitchen as well.

The POS will also allow you to accept credit cards. But to obtain the money from American Express or Visa, you must set up an account with a third party service. For example, Heartland Payment Systems. These services act on commission. That’s another 1.8% to 2.5% cut off your profit sales.

Finally don’t forget the small things like printing of the menus, good quality glasses and china, etc. These materials as restaurant start-up items are important too, and shouldn’t be undercapitalized. But even so, always monitor how much you spend on these items.

“People should ask themselves, ‘Do I really need this now to open, or could I wait three months?…”

…says John Vyhnanek, a professor and consultant at the Boston University’s Culinary Arts program.

About the ongoing expenses, the cost of ingredients is the main worm that’s going to slowly gnaw away at your revenue, around 25% to 40% of it. The payroll will take another 20% to 25%, just about. Then minus 8% for the rent. After all that plus taxes, if you end up with 5% of the profit margins, give yourself a good pat on the back. You deserve it for making it this far.

Anyone can see that opening a new restaurant is no walk in the park. I suggest you turn these numbers over and over again in your head and really give it some serious thought. Being a restaurant operator is a passion that requires you, when business is slow, to sometimes shell out your own money even after a few months of operating just to keep things going, hoping for the best, and not just during the restaurant start-up phase.

This entry was posted on Thursday, June 4th, 2009 at 11:56 pm and is filed under Offline Marketing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.