As Kit Chapman, restaurateur/owner of The Castle Hotel, Taunton, Somerset and of the Brazz brasseries, and countless others in the business says, ‘making money is the first priority.’

Other reasons for opening a restaurant come into the equation. They include creating a restaurant to suit your personality, offering hospitality and being in a trade rather more interesting than the average thanks to its high profile, sexy image. Is opening a restaurant a romantic ideal or a profitable business proposal? Can the two meet?

CREATING INCOME

The advice of successful restaurateurs is to never lose sight of your livelihood – and that of your partners, family and staff. Wise words. It is so seductive being your own boss in this entertainment/food world that it is quite easy to lose the prime plot: your income.

Curb your naturally generous instincts with friends when they visit your restaurant. It is all very well offering wine on the house, a meal, coffees. They may come to expect it, such is human nature. Instead, become shrewd and be aware of margins and curb your bountiful nature.

Take a leaf out of corporate industries’ practice and have a loss leader on the menu. Shop around for good, quality produce and equipment rather than succumbing at the first shopping expedition to the jauntiest fridge with all the bells and whistles. Negotiate. Haggle. It still does happen in the western world. Be armed with good information, prices, and an understanding of the market when dealing with any part of the restaurant’s finances.

In the honeymoon period the curiosity value of a new restaurant brings in diners. Once this is over the finance part of the business may need to be revised, and long-term strategies with stages of development built in to the picture.

Steps to developing a financial base

Some restaurants don’t lose that honeymoon period but create enough interest to attract a growing band of loyal and new customers. They continue to develop a working financial base and have put into practice the art of producing consistent quality food, good service, conviviality, atmosphere and value for money. Constantly analysing, updating and re-inventing your business is as important as never losing sight of the art of hospitality.

This finance chapter deals with:

• raising capital;
• creating a business plan;
• forming a company;
• planning overheads;
• trading projections;
• financial records;
• and tips.

It deals with issues like raising capital, business partner advice, capital expenditure and steps in funding. Accountancy and getting to grips with good book-keeping practice, legalities, insurance and VAT are other essentials for sound finance.

The chapter also discusses service charges, menu supplement charges and what these extras, hidden or not, say about your business.

Help with the national minimum age payments, pensions and other staff issues are in Chapter 8.

A BUSINESS PLAN

First, you need to work out your initial proposal of the type of restaurant you wish to run. For example:

• Its name, location, concept.
• Who your customers will be.
• What is on your menu and your drink list.
• Your staffing and purchase costings, rental and projected income per day.

Business plans are recommended by most experts, the banks in particular demanding them for further discussion. However, many entrepreneurs operate without them. But if you are not 100% sure that your restaurant plan will work without one, then think of a business plan as being an asset, your strength.

These plans are, of course, not a guarantee for success but by identifying the strengths and weaknesses of your idea, you will greatly improve your chances of succeeding. The plan, however, needs updating as it is a working tool. It’s your map to success. But there comes a time to stop planning and to put your goals into action.

To build on the initial proposal follow these steps:

• Executive summary: describe the business in general terms in approximately one page.
• Overview: your mission. What are you looking to achieve? Why do you think it will work?
• Introduction: your restaurant’s purpose, your expertise and history and those of your partners, your staff (should you have a chef lined up, for example), and your critical success factors (what is going to make it work).
• Business environment: your market research into your type of restaurant, its potential re location, problems and possible solutions, the competition and an expansion potential (running outside catering, for example).
• 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.

FORMING A COMPANY

If you decide to operate as a company, you will have to pay corporation tax and make company tax returns. The corporation tax self assessment from the Inland Revenue deals with this. Soon after the end of the accounting period they will send you a notice asking you to make a company tax return.

You must normally pay any tax due by nine months and one day after the end of the accounting period. If you have not yet completed your company tax return you must make an estimate of what you think is due and pay that.

Send a completed tax return, including your accounts and tax computations, to the Inland Revenue by the filing date which is usually 12 months after the end of the accounting period. If the return is not delivered by this date, a penalty will occur.

Maintain proper business records and keep these for six years after the end of the accounting period.

Speak to your accountant or tax advisor to decide on the accounting period and tell your tax office. Work out the dates by which you need to pay tax and make your company tax return.

Plan ahead to make sure that accounts and tax computations are prepared in good time for this, but always communicate with your tax office if you fall behind. Make sure it’s a two-way dialogue for peace of mind.

CALCULATING MENU COSTINGS AND PRICES

Getting menu pricing wrong has been the downfall of many a new restaurant and, as a general rule of thumb, successful restaurants work on a 65 per cent gross profit (GP), excluding VAT. Once you have calculated the costs of any dish, multiply them by 3.3. You can’t go too far wrong but, of course, there are exceptions to the 65 per cent gross profit rule.

To calculate your gross profit margin, it is first necessary to work out the cost of each dish on the menu. But first, get price lists from wholesale companies and other suppliers including pricing goods at retail shops, farm shops, specialist mail order food companies and other sources such as van drivers delivering produce in the area.

If you are going to specialise in fresh fish, for example, are there any good suppliers in the area or do you need to source quality fish from further away? Ask for advice from a friendly, trustworthy restaurateur who they use, look up fish suppliers in the Yellow Pages in your area and further afield like London and Brixham.

Working out the costs

Calculate everything that goes into that particular recipe including the garnishes if using any, the butter the fish might be cooked in, the VAT and time involved to make this dish. It obviously takes longer to make a real lemon tart than scoop out bought-in ice cream.

Ask yourself the following after calculating the recipe costs and menu prices:

• Can the market withstand my pricing?
• What is the competition like?

At the beginning of your business, there could be a degree of wastage which will have an impact on your GP margins, but this will be resolved in time with good management practices once the business gets going.

Some items will be cheaper than others to prepare. Do offset more expensive dishes by lowering the GP on these dishes and increasing the GP on the cheaper dishes. For example, it is hard to make 65 per cent GP on some dishes which use more expensive meat, game, shellfish, fish and foie gras. This is loss-leader practice and will help to increase the sales of the more expensive item but shore up the cost by making a larger GP on cheaper dishes.

Before the net profit is calculated the cost of overheads is deducted from the gross profit including wages and running costs, leaving you with an average profit often to 15 per cent. Then deduct the loan repayments, interest and tax.

Bear in mind that interest rates can vary, and the amounts paid to staff, the owner and partners are equally unknown at the initial stage of the business.

Wine bar/restaurant trading projections

Mon-Thurs	Covers	Cost	Multiply by	Total
Morning café	20	£3	4	£240
T/o lunch*	20	£4.50	4	£360
Lunch	15	£10	4	£600
Evening meal	20	£25	4	£2,000
Wine bar	20	£5.50	4	£440
Total				£3,640

Friday	Covers	Cost	Multiply by	Total
Morning café	30	£3	1	£90
T/o lunch	20	£4.50	1	£90
Lunch	20	£10	1	£200
Evening meal	40	£25	1	£1,000
Wine bar	50	£7.50	1	£375
Total				£1,755

Saturday	Covers	Cost	Multiply by	Total
Morning café	35	£4	1	£140
T/o lunch	10	£4.50	1	£45
Lunch	45	£10	1	£450
Evening meal	45	£25	1	£1,125
Wine bar	50	£10	1	£500
Total				£2,260

Sunday	Covers	Cost	Multiply by	Total
Breakfst/brunch	20	£8.50	1	£170
Lunch	40	£15	1	£600
Wine bar	30	£10	1	£300
Total				£1,070

Total for the week	£8,725
Monthly average	£37,808

Monthly costs
Rent/rates	£2,500	Laundry	£300
Wages	£8,000	Breakages	£200
Food	£10,000	Promotion	£500
Wine	£600
Utilities	£750
Loan servicing	£2,500
		Total	£25,350
Monthly average less monthly costs £12,458 less VAT @ 17.5% = £10,602

Cover charges, menu supplement charges and service charges

These charges can sound two alarm bells in customers’ minds: once when looking at the menu and seeing extra charges for bread, steep pricing for vegetables and the so-called optional service charge. The next time is when they ask for the bill and see hidden charges added on the total.

You may lose customers in the first instance, as seasoned diners-out can spot those extra charges a mile off while scrutinising the menu. They will think twice about going through your doors. The resentment that is caused will rocket when those hidden charges are there in black and white on the bill. Those customers who feel they have been ripped off will hardly return. Customers naturally prefer to know in advance about all the charges.

Cover charge

The old-fashioned cover charge is sadly alive and well. It is mainly found in tourist hot spots where unsuspecting tourists from here and abroad may not notice it. The restaurant covers itself by saying it is for linen, glasses and staff. Really, any excuse will do. But then that same restaurant will charge for bread and add a service charge. It is an iniquitous charge which I and countless other customers – and, to be fair, many restaurateurs – find totally unacceptable.

Extra charges

A medium-range Portsmouth fish restaurant I have reviewed has a nice little greedy policy: charge them for the sauces to go with the fish, charge them for the bread and the vegetables on already high prices and slap on a 15% service charge.

The price per head for a very dull two-course meal of no particular expertise at this restaurant is the price for a superb three-course set menu with well-chosen produce at Gordon Ramsay’s Royal Hospital Road London restaurant at lunchtime. No contest.

Another restaurant in the same area as Gordon Ramsay’s has a set menu but many of the dishes featured attract a supplement, boosting the price by some 20-25 per cent on the total bill. This is unacceptable practice. Fine, maybe one or two dishes – the Scotch fillet of beef, the North Sea lobster – will be more expensive to buy in, but with all these supplements it is far better and fairer to have an a la carte menu.

If you feel you must charge for bread then make sure it is excellent bread. If you feel you must charge for any extras, do offer the very best produce if you want repeat business.

Service charge

The service charge is a vexed question and, before we go into it, there is no legal control on how you charge for service. This charge, added to the bill before VAT is added, is usually 12½ per cent of the bill, although it does rise to 15 per cent. The word ‘discretionary’ usually goes before this percentage. However, most people pay up without fuss and don’t query the said service.

This is a very common practice and in lower priced restaurants this may be a fixed amount added to the bill, but in many restaurants it is that 12½%. Some restaurants pass it on to their staff (waiting and kitchen) if wages are low, and this is promised at the start of employment, or it is seen as part of the revenue if staff are better paid.

Most staff, however, prefer the tips and a distribution of the charge. But, increasingly in this more sophisticated and enlightened eating-out climate, customers are catching on to the fact that if they pay the service charge, they don’t leave a tip. Why pay twice? They assume that the service charge is just that: the money going directly to the waiting staff.

Customers are within their rights not to pay the service charge if they have been let down by poor service. This, of course, may not be the fault of the waiting staff but the slowness of the kitchen. My advice is to remove the service charge without quibbling if the customer asks for it.

Voluntary service charges

There is great concern within the hospitality industry that many diners are feeling they have been tricked into paying twice for service by restaurants who leave credit card slips blank for tips. Trading standards officers report that many customers are being caught out because of the widespread use of credit cards.

A survey was done in London by trading standards inspectors who found that half of the 68 restaurants visited left the credit card slip open for a gratuity despite already adding a service charge.

Restaurants that impose voluntary service charges are in breach of a code of practice brought in alongside the Consumer Protection Act 1987 which seeks to abolish the charges and have them incorporated in a single bill.

If restaurants fail to show the cost of eating out clearly and legibly this could result in fines of £5,000. Trading Standards are not looking to ban service charges but want to ensure that customers have a real choice of whether to pay – or not.

Conclusion

An optional service charge is acceptable, but the practice of leaving a credit card slip blank for a tip when the customer has already paid service is not.

A duped customer can see it as one the most objectionable aspects about dining out and it can sour a very good restaurant experience. Avoid following this – sadly, widespread – underhand, greedy practice.

TIPS FOR ATTRACTING FINANCE

To attract financing it pays to have the following:

• sales goals;
• customer profiles;
• economic environment (is there an economic slump or boom?);
• knowledge of trends in the restaurant trade;
• analysis of 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.

Again, this vital paperwork need to be well presented in relevant titled folders and handed out with confidence.