When you are thinking about starting your catering business, it’s easy to be put off by the daunting task of organising your finances. But, as any business person knows, this crucial part of your business must be dealt with meticulously, and on a regular, on-going basis.

If you don’t have a head for figures, make sure that you have a partner who does or that you can rely on an accountant to deal with the necessary sums.

This chapter covers:

• your business plan;
• talking to banks;
• finding other sources of financing;
• overheads and costs;
• bookkeeping, accountancy and financial records;
• methods of payment for suppliers and from customers;
• insurance;
• business rates;
• VAT;
• staff wages, the national minimum wage and pensions.

I’ll try to make this as engaging and informative as possible. Pay attention at the back!

YOUR BUSINESS PLAN

Having a business plan is not only important for your bank, it’s also a great way to focus your ideas and work out if what you’re planning really is viable.

The first thing you need to do is work out an initial proposal. In this you will need to include:

• name and location;
• who your customers will be;
• content of the menu and drinks list;
• staffing costs;
• purchase costs;
• rental;
• projected income.

Business plans are, of course, not a guarantee for success but they help to identify the strengths and weaknesses of an idea, and will greatly improve your chances of succeeding. When you have finished your initial proposal, you can build on it to create a more detailed plan. You should include the following information.

Introduction: your catering business’ purpose, your expertise and history and those of your partners, your staff (should you have a chef lined up, for example, if you’re not doing the cooking yourself?), your Unique Selling Point (what is going to make it work and make it different?)

Executive summary: this describes the business in general terms. Make this short and to the point to make it easy for others to follow.

Overview: your mission. What are you looking to achieve? Why do you think it will work? Make this as clear and as short as possible too.

Business environment: market research into your type of catering business, its potential location, problems and possible solutions, the competition and expansion potential (selling at farmers’ markets, for example).

If you are asking for a bank loan make your presentation professional-looking. A messy jumble of ideas randomly put on paper will not improve anyone’s chances of getting to the next stage of discussions. Instead, choose a business-like font, put ideas under headings, check the spelling and present it in a titled folder with perhaps some clear drawings. Make several copies to hand out.

ESTIMATING YOUR START-UP COSTS

First of all, estimate your start-up costs. These checklists are a guideline.

Your capital costs:

• your business premises (if not run from home);
• the equipment needed to start your business (see Chapter 3);
• your marketing tools (e.g. printing of cards and menus, telephone, mobile, website, computer, printer);
• initial office supplies (e.g. filing cabinet, bookkeeping book);
• basic food and supplies (start-up basic ingredients such as dry goods salt, pepper, flour, rice, pasta);
• required tools (see Chapter 3);
• any legal costs if setting up dedicated premises;
• accountancy costs;
• loan charges if applicable.

Once you have made a list of these items, make a list of the estimated operating costs:

• utility costs (water, electricity, gas);
• insurance coverage;
• business rates (if applicable);
• employee salaries;
• rent (if applicable);
• taxes;
• equipment maintenance (put a sum aside for this).

How much do I need?

Once your catering operation is up and running with initial start-up costs covered, you will be in business. You will have an income and, with this, expenses. You will need to establish whether you have sufficient capital to deal with expenses for at least the first three months of business. A six-month reserve is, of course, even more desirable.

A significant number of small businesses fail because they are under-capitalised, i.e. they start off without enough backing to pay monthly fixed expenses when the business isn’t up to its fighting weight. Make sure you do your budgeting carefully and thoroughly before venturing into business.

The following things will help as well:

• Having a working husband/wife/partner who can cover household expenses while your business gets going; or if you are able to support yourself during the start-up months.
• Having some clients already in the pipeline to start your business. If you do, when can you expect payment? If it’s a month or two down the line, cash flow will become a problem. Think about what else you can do.
• Keeping your operating costs at a bare minimum until you are established.

ESTIMATING YOUR BUSINESS FINANCE

It is important to estimate as accurately as you can but sometimes you just have to guess in business, however unsound that seems. Forecasting exactly how many catering jobs you will get is difficult.

When you are estimating, think about the following.

• Are your projections believable and based on facts? Get someone (a friend who is in a profitable business, for example) who is knowledgeable about figures to check your projected costs as you may have missed something out. They might see a flaw or agree that you’re on the right track.
• Beware of carrying too much stock. There is no need to have too much of anything as you will buy in stocks for a specific event. You may be tempted to buy in some bargain wine, for example. But you must bear in mind that you may not be able to sell it on if it isn’t what the customer wants.
• Don’t underestimate. Underestimating a catering package for a specific event can mean less profit or, worse case scenario, a loss. With experience you will become a master of estimating everything from how many rolls you will need to bags of ice.
• Always estimate each and every cost including rent, rates, staff, travel costs and insurance for example.
• Don’t forget quarterly expenses – e.g. telephone, utilities, bank charges.
• Payment. Will it be immediately after the event or a month or two down the line? Put your stipulated trading conditions on the quote and ask for a deposit. For example, if it is a big function, ask for 50 per cent up front, the remainder to be paid within 28 days. For a small function such as a dinner party for ten, I always present the bill at the end of the evening (having discussed with the customer in the confirmation letter when payment is due).
• Always review your finances and re-consider your options. Can you find a better rate for a loan? Avoid financing that is too complex.

YOUR ASSETS AND LIABILITIES

But before you go to the bank with your business plan for your catering business, you need to think about your net financial worth. What are your assets and liabilities?

Assets: What do you have, either short or long term? A short-term asset is what you have in your bank account, or something that can be turned into cash within a short period of time. If it can’t be available for the foreseeable future, i.e. for several years, then it’s a long-term asset. Examples of assets are stocks, bonds, saving certificates and premium bonds. Also your car, house, furniture, jewellery and equipment.

Liabilities: A liability is something you are responsible for financially. For example:

• any outstanding loans;
• credit card payments;
• instalments on furniture, appliances and other household items;
• outstanding taxes;
• mortgage.

Your assets should be greater than your liabilities. Go to your bank for advice on how you can calculate this, and then you will be clearer as to how to proceed in financing your venture. You may discover you don’t have enough to start your business, or you might have enough to put into reserve until the business really gets going.

DEALING WITH SEASONAL PEAKS AND TROUGHS

If you have only been involved in a large catering business, it may come as an unwelcome surprise that for small to medium catering businesses the work is very seasonal.

Generally speaking, catering companies make their profits during the obvious times of the year: Christmas, Easter, summer and summer weddings. The rest of the year is punctuated by other smaller catering jobs in the corporate or private sector. Naturally, this fluctuation is difficult to handle, and post-Christmas blues often set in.

This is your time to:

• take a break;
• do some effective marketing;
• train staff;
• paint the kitchen;
• try out new suppliers;
• create new menus;
• keep in contact with customers by sending out these new menus;
• set up some cookery classes;
• get to grips with your accounting.

It is, therefore, essential to put some of the profits you have made during busy periods by so that essential bills can be paid and that there is adequate cash flow. Put some of those profits into a saving account so that it isn’t unintentionally frittered away.

CALCULATING MENU COSTINGS

It is essential to cost your menus to build in a profit margin. In order to do this, you need to know the cost of each item that goes into a dish. This includes the butter or oil you may have used for the preparation of the dish, the garnish and the seasoning. Take into account tax and VAT (if you are not VAT exempt).

The average GP (total profit) is 60 per cent, your costs being 40 per cent. (If you are running a more upmarket catering company and sourcing top quality produce, aim at 65 per cent GP.)

Some items will be cheaper and quicker than others to prepare. For example, a bacon and mushroom salad is cheaper and quicker to make than a salmon and prawn terrine. Lower the GP on expensive dishes and increase the GP on the cheaper dishes to make more profit. This is loss-leader practice, and is done by catering companies, supermarkets and other retail businesses.

The net profit (the profit after all costs have been taken out) is then calculated. The cost of overheads is deducted from the gross profit including wages and running costs. Then loan repayments, interest and tax are deducted.

But first, you will need to price items. Get price lists from wholesale companies, retail shops, farm shops, specialist mail order food companies and other sources such as van drivers delivering produce in the area.

When starting your business, a degree of wastage (too much bread or salad is bought, for example) will have an impact on your GP margins but this will be resolved in time once the business gets going with good management practices. Buy the food when you have secured your first customers; then you will feel confident enough to have some non-perishable stock onsite.

How much to charge

When making an estimate, take into consideration the following:

Raw materials. Make notes of what every item costs from the pepper, salt, oil, butter and other basics such as flour to the main ingredients. Add the presentation costs too (herbs and anything else you may wish to accentuate the food).

Overheads. These are rent, insurance, taxes, water, gas, electricity, cleaning materials, employee time taken to help with the food preparation and any other expenses such as paper napkins, cocktail sticks, rubbish bags. When starting up, this may not be an exact science. After a period of trading, you may be more exact by adding up these expenses to find out what you will add to each catering job. As a rule of thumb, you should be looking for at least 35 per cent profit.

Simplicity. Don’t make life difficult for yourself by devising complicated menus and time-consuming dishes; your own ‘wage’ will be small. Don’t go for labour-intensive food if you value your sanity, especially if you run a busy catering business. You won’t be able to fit all the work in.

Fresh ingredients. More and more, clients are looking for simplicity, quality and good food sourcing and won’t be tempted by cheap food disguised by a blanket of sauce and poorly presented.

Amount. If you are catering for a small party, you will make less profit unless you charge more. Common sense, naturally. For a larger party, over 50, for example, the price can be reduced. Charge according to the time of year too. If you have little business in some periods of the year and are keen to get some to see you through a lean patch, you may wish to reduce your prices.

Invoice charges. Separate the charges for the food from the charges for equipment and staffing. You will be passing the latter on directly to the client and they should be itemised separately on the invoice unless you wish to include them. (See the example in Chapter 7 which shows an invoice with these included.)

Reception/buffet charges. If you give a list of canapés or buffet dishes to the client at an estimated price per head, price their choices and give an exact quotation. If you have only general prices they may unwittingly choose only the expensive items, leaving you with a diminished profit.

Your competitors. How much does a similar catering company charge? If you go for quality, you may find you have to charge more than your com-petitor(s) but make sure that you put in your sample menus what type of ingredients you use (free range, organic, locally sourced for example).

Value. Sell value, not price. If you want to stand out from the crowd, make sure your clients get their money’s worth, and that they can trust you and rely on you. Offer services that other catering companies don’t. Keep your premises clean, neat and hygienic and turn questions of price into answers reflecting value and quality.

RAISING CAPITAL

Aim to raise more money than you need. You often have only one chance of raising money – it is very difficult to ask the same source a second time around for more funding. If your figures are too low your business proposition may not work long-term.

Work out exactly how much you need and for how long. Re-mortgaging your house (should you have the luxury of owning one) isn’t suitable if you need money for the short-term. To cut equipment costs, consider renting and leasing options.

DEALING WITH BANKS

The competition between banks to do business with you can be buoyant so search for deals. But negotiate too. Stipulate your needs and suggest a rate of interest when you can start paying back the loan. It never hurts to ask.

BUSINESS PARTNERSHIP

If you are going into business with a partner, or forming a company with investors or lenders, think about the following:

Choose your partners or investors with great care. Look for investors and/or partners who respect your strengths and weaknesses and vice versa. Clearly define areas of responsibility at the outset. These may shift as the business progresses so discuss these changes in full when they arise.

Aim for majority control with partners or investors as minor shareholders. But remember that you have to convince them that you are capable of running such a business.

Communication is all. Your partner(s) must, for example, be completely up to date with any transactions you may have made on behalf of the business.

Outline and protect personal investment as well as the agreed split of assets and liabilities. Get it down on paper and get a lawyer. (See legal tips in this chapter.)

CAPITAL EXPENDITURE

Note that this list may not fully apply if you are running a business from home.

The property:

• the property – its rent deposit and on-going rent or cost to buy;
• renovation and building costs including labour and materials;
• plumbing and electrical costs including labour and materials;
• toilet upgrade costs;
• floor covering, window blinds;
• lighting;
• heating, air conditioning, kitchen extractor fan;
• fire extinguishers.

Catering equipment:

• kitchen equipment large and small – from stoves to spoons (include rental equipment costs if leasing rather than buying);
• glass, cutlery, crockery;
• cleaning costs (including vacuum cleaners);
• rubbish removal costs;
• opening stocks: food, alcohol, cleaning materials;
• opening party costs (a good marketing launch pad for prospective clients).

Ancillary costs:

• telephones;
• gas and electric costs;
• office equipment;
• printing costs for menus, cards, publicity handouts, bill heads;
• advertising costs;
• promotional costs;
• graphic costs.

Accountancy and other costs including legal fees:

• accountant’s and bookkeeper’s fees;
• legal fees;
• rates;
• insurance;
• permits: fire, health, business licence;
• staff costs – waiting, kitchen, cleaning;
• breakages;
• contingency fund (for tax, emergencies).

NEXT STEPS IN FINDING FUNDING

It’s time to persuade others to fund your venture with your business plan and capital costs worked out. The lender will want to see that the business will survive, so they can recoup the loan and the agreed interest.

You will need to satisfy the lender that your business has the right people running it and you have done good research into the projected customer base.

Tips for attracting financing

When you want to attract financing, it helps enormously to have the following well prepared and presented:

• sales goals;
• customer profiles;
• economic environment (slump or boom?);
• trends in the catering/food trade;
• competition;
• marketing strategy;
• key person resumés – you and your partner’s strengths and background;
• your chef’s background and expertise (if you have a chef on board);
• cash flow projection;
• revenue projections;
• taxes – VAT included;
• financing requirements: amount needed, detailed budget, repayment options;
• bank documents.

Tackling difficulties in raising finance

Even with a viable business proposition, it can be hard sometimes to persuade banks or other financial institutions to support your application. But do persist and if you are unsuccessful at first, try again. It may well help to revise your plan if necessary; take on board things that have come up in your discussions with the bank.

As well as banks, look at alternative sources of finance. Make sure you have applied for all the help that is available from government and other public sector organisations such as Business Link, the National Business Advice Service, The Enterprise Centre (www.enterprise-centre.co.uk) and other helpful institutions.

The Enterprise Centres, for example, will help. You can crystallise your ideas in confidence by bouncing them off someone who knows what it means to start a business. You can also get one-to-one advice on running and financing your business as well as technical, legislative and practical help, and join a range of start-up workshops, seminars and one-to-one advisory services.

You can also get step-by-step support on how to:

• put your business in action;
• research your ideas;
• plan your business;
• understand and plan finances;
• raise capital;
• understand and plan your marketing and sales;
• get your message across by marketing.

Business Link’s ‘No Nonsense Guide’ is an invaluable tool with information on forming a business, sorting out your tax and national insurance, what VAT means to you, trading regulations, employees’ rights and government advice and support. You can order a copy by phoning 0845 600 9006 or by going on the website www.businesslink.org.