RAISING CAPITAL AND BUSINESS PARTNERS/INVESTORS

Aim to raise more money than you need. You often have only one chance of raising money so take a close look at what you think you will need. It is very difficult to ask the same source the second time around for more funding. If your figures are too conservative it may ultimately mean that your business proposition is not viable.

Raising the money

The bank is not your only port of call. There could be better and cheaper ways of raising finance. Work out exactly how much you need and for how long. Re-mortgaging your house (should you have the luxury of owning one) would not be suitable if you need money for the short-term. If you need money to buy equipment do look at renting and leasing options.

If you do choose to go down the bank route, shop around. The competition between banks to do business with you can be buoyant so you may be able to afford to look around at the deals on offer. But negotiate too. Don’t accept the proposals for what they are. Stipulate your needs and offer a rate of interest to the time you can start paying back the loan. It never hurts to ask.

However, banks can be wary of lending money to new restaurant ventures as the track record is less than successful.

There is no rule to say that you have to bank with the bank that gives you a loan. Perhaps there are better deals at another bank. And if the loan comes from a bank that doesn’t have a high street presence or is too far away from your business to make it practical to pay money in, for example, then this is yet another reason for banking elsewhere. And the bank which has lent you the money will respect your good business sense.

WORKING IN A PARTNERSHIP

Are you going into business alone or with a partner? Or will you be forming a company with investors or lenders? The latter is the route taken by most small restaurants. Try to achieve majority control with partners or investors as minor shareholders. But you have to convince them that you are capable of running such a business.

Keep the people who matter in the know. Your partners – should you have any – must be completely up to date with any transactions you may have made on behalf of the business. Communication is all when dealing with partners, and those who fund your restaurant, if you wish to stay in business.

Choose your partners or investors with great care and thought. Discuss your plans in great detail. Are they on the same wavelength as you? Do they have the same aspirations and goals? What strengths do they possess? Be aware of the investor who wishes to run the business because he or she knows better. This can only lead to tears and a messy falling-out. Look for investors and/or partners who respect your strengths and weaknesses and vice versa. Clearly define the areas of responsibility at the onset. These may shift as the business progresses but do discuss these changes in full when they arise.

When entering into a partnership, 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

Let’s look at the capital costs before the search for funding begins and work out figures for each cost. Remember, if your figures are too conservative, it is difficult to return to the same source for more funding. There will be guesswork involved as not all figures can be established correctly, hence a contingency fund is needed.

The property

The lists below for capital expenditure for a restaurant/bar can be made specific and appropriate to your business:

• rent deposit, on-going rent or cost to buy;
• renovations including labour and materials;
• building costs and labour;
• plumbing, electrical labour and materials;
• décor including any artefacts;
• toilet upgrade;
• accountant’s and bookkeeper’s fees;
• bar construction and furbishing;
• chairs, tables, service area costs;
• floor covering, window blinds/curtains;
• lighting;
• heating, air conditioning, kitchen extractor fan;
• fire extinguishers.

Kitchen and restaurant equipment

You may need:

• kitchen equipment large and small including rental equipment costs;
• glass, cutlery, crockery;
• coffee espresso machine – lease or buy;
• cleaning costs including vacuum cleaners, window cleaners;
• rubbish removal costs;
• linen, napkins, glass cloths, kitchen uniforms, waiting staff uniforms;
• laundry costs;
• music system, speakers, recorded music and performing rights costs;
• cash register;
• opening stocks: food, alcohol, cleaning materials;
• opening party costs.

Ancillary costs

These will include:

• telephones;
• gas and electricity;
• office equipment;
• printing for menus, cards, publicity handouts, bill heads;
• advertising;
• promotion;
• graphics;
• menu research including travel;
• exterior lighting and menu boards.

Accountancy and other costs including legal fees

Budget for:

• accountant’s and bookkeeper’s fees;
• legal fees;
• rates;
• insurance;
• permits: fire, health, business licence;
• licence fees;
• staff costs – waiting, kitchen, cleaning, office;
• breakages;
• operating capital;
• contingency fund.

NEXT STEPS IN FINDING FUNDING

With your capital cost figures under your belt, and armed with a business plan and your initial trading proposal worked out, it’s time to persuade others to fund your venture.

Whether the capital is via the bank or a private investor, the lender is looking for the survival of the business in order to recoup the loan and the agreed interest.

The lender needs to be satisfied that the business has the right people at the helm, its location is sound and that good research into the projected customer base has been undertaken.

Bookkeeping and accountancy

It is essential to initiate good bookkeeping practices from the beginning of the business so that investors, accountants and the Inland Revenue can see at a glance the cash flow, expenses, and profit and loss margins.

Place all transactions on computer as this will give the restaurateur immediate information on the operation: the sales, its mix, stock turnover, sales per table and waiter (very useful for checking facts if needed), food and drink cost percentages.

Computers also offer a cost-effective way of reducing paperwork but bookkeeping (nowadays usually put on a software package) is still essential, so do add the cost of employing a bookkeeper/accountant into the capital costs.

Choose an accountant who has experience and a liking for the restaurant trade. Do a cashflow forecast together.

Bookkeeping and accountancy requirements

Record cash and bank records, weekly sales of all aspects of the business (food and alcohol sales for example) and weekly payments (suppliers, wages, rent etc).

Record the weekly income and expenditure on printouts or summary sheets so that management can see at a glance where the money is going out and coming in.

The accountant will also require information regarding VAT, tips, credit card and cash sales, wages, purchases, operating costs (rent, rates, utilities, telephone, laundry for example), drawings for investors and owners and capital costs (maintenance, repairs, improvements).

This analysis of breaking down the business into the sum of its parts can be of immense help to see where the business is going, its strengths and weaknesses, its seasonal swings. It can also be helpful in combating fraud and theft. See tips, page 54.

At the end of the financial year (March 31), two summaries need to be prepared: the trading profit and loss accounts showing the gross profit, and the net profit and the balance sheet showing the company’s financial position. The latter shows the assets owned and the debts owed. The difference between the two is the capital value of the business, representing the capital invested by the owner/investors and the retained profits.

VAT

Value Added Tax (VAT) is a tax charged on most business transactions made in the UK or the Isle of Man. Some see the restaurateur and other business men and women as perhaps unpaid government tax collectors.

VAT is also charged on goods and some services imported from places outside the European Union, and on goods and some services coming into the UK from the other EU countries.

All goods and services that are VAT rated are called ‘taxable supplies’. You must charge VAT on your taxable supplies from the date you first need to be registered. The value of these supplies is called your ‘taxable turnover’.

There are currently three rates of VAT:

• 17.5% – standard-rated supplies on most goods and services
• 5% – reduced-rate supplies on fuel and power used in the home and by charities
• 0% – zero-rated supplies which are non-chargeable. Examples are most food, books, newspapers and children’s clothing.

Registering for VAT

You must register for VAT if you are in business and your taxable turnover, not just your profit, goes over a certain limit.

The current VAT registration threshold is £58,000 (October 2004) but you can opt to register for VAT if your taxable turnover (the amount going through the business, not just the profit) is less than this, if what you do counts as a business for VAT purposes.

If your taxable turnover is below the limit you can apply for voluntary registration if you can prove what you do is a business for VAT purposes.

The benefits of registration under the limit include increased credibility for your business but, once you are registered, you will have to account for output tax on all your taxable supplies which are not zero rated. But also, you can take credit for any input tax on those taxable supplies.

You will also have to send in VAT returns regularly and keep proper records and accounts so that VAT officers can examine them if necessary.

VAT accounting

For small businesses, there are a number of simplified arrangements to make VAT accounting easier:

• Cash accounting: if your taxable turnover is under £600,000 a year you can arrange to account to Customs for VAT on the basis of cash received and paid rather than the invoice date or time of supply.
• Annual accounting: if your turnover is under £660,00 a year you can join the annual accounting scheme and send in just one return a year, rather than the quarterly returns which most businesses do.
• Bad debt relief: if you supply goods or services to a customer but you are not paid, you may be able to claim relief from VAT on the debts.
• Flat rate scheme: you may be eligible if your turnover is under £150,000. It helps save on administration due to not accounting internally for VAT on each individual ‘in and out’. Payment is over a set percentage of the total turnover.

PAYROLL

Records must be kept of all staff, whether full or part-time. Avoid the temptation to pay unrecorded cash for labour as penalties for income fraud are severe. The following are necessary to keep records:

• name and address of employee;
• their tax code number and National Insurance number;
• tips earned: restaurateurs are responsible for all income earned, tips included;
• tax inspectors can estimate tip earnings if no service charge is included.

INSURANCE

Insurance is a very simple concept. Your annual payment will provide cover for your business which needs insurance for building, contents and liability, the latter for any litigation (dispute, lawsuit brought against the business, for example).

Even if you are able to cover the costs of replacement or repair or any loss that may occur, such as a shelf giving way with a hundred plates tumbling to the floor, it would be irresponsible not to be insured against any problems regarding guests’ legal actions.

Your biggest risk may be from the customers themselves, however delightful, with items being broken or simply taken. This does apply too to staff. There is also the possibility of customers or staff falling in your restaurant, and the building itself needing monitoring for safety.

Insurance details to look out for

The duty of disclosure is vitally important when confirming and agreeing to the conditions of the policy. The insurer must know what you wish to cover as the type of policy required must be an accurate reflection of your business. Be clear and specific and ask for written confirmation in all areas of your cover. Ask your local authority about insurance requirements.

Do spend time and effort talking to the right insurers – ie those dealing in restaurant/hotel businesses – and getting several quotes. Or get in touch with an insurance broker. Ask those who are in the restaurant business who they might recommend to receive quotes from. Ask questions. And factor the cost of insurance into your overall costings.

Public liability

Public liability covers injury and property damage caused by your personal negligence and/or business negligence.

Product liability

Product liability relates to any products you provide but specifically to food you serve, either bought-in or cooked on the premises. Should a customer find a nail in a roll (yes, it happened to me), you are liable.

Manager liability

Manager liability covers you for staff looking after customers in the absence of the owner. Customers, when in sueing mood, will not only sue you and your business but also the staff representing you at the time.

Getting the right cover

Your policy must include fire, storm, tempest (however ancient this terminology is), burglary, malicious damage, glass and other covers.

Additional cover which you may wish to consider is business interruption which replaces lost income in the event of a claim where your business is interrupted. Generally figures are based on your yearly income. This could be because of physical damage to your property and replaces lost income when you are unable to function as a restaurant.

Do ask for cover which guarantees you payment on a weekly basis for cash flow purposes and not payment once the claim is known some months after the event.

Obviously be aware that if your business is your sole income, bills need to be paid regardless of an interruption to your restaurant. Payments should be made until normal business can proceed and you have regained the income you would normally expect. These are based on last year’s figures for the time of year and not necessarily during your busiest period. Even when the work to repair or replace is complete, it should pay on a descending scale until your business returns to normal.

Your building and contents insurance should reflect all contents and all buildings independent of one another. Insurance is based on replacing and repairing, not on the market value or saleable value, so ask a builder or valuer to provide you with an estimate. Then add a percentage on to this figure for removal of debris, architect’s fees (if applicable) and any other costs.

A workers’ compensation policy should be discussed with your insurer. If you have a personal accident and sickness/income policy it is advisable to continue with this.

To combat this some large restaurants are installing CCTV cameras over tills. Do install automated till systems. Stocktake regularly. Having a foolproof system against fraud is not possible so be vigilant.

CREDIT CARDS

In today’s market, payment by card is the preferred method of payment. In 2003, the number of credit cards in the UK payment markets was the highest ever recorded and more than half of all adults regularly made debit card purchases.

Accepting credit cards brings the following benefits to your business:

• More customers through your door if they see their card is accepted.
• No cash restrictions can mean that customers spend more.
• An increased turnover and profit.
• Your banking becomes automated, making procedures simpler and faster.

Our increasingly cashless society demands the use of credit and debit cards in most restaurants, although some quick turnaround restaurants only work on cash as card costs are too high to merit the expense.

Negotiate charges with the card companies and renegotiate those charges a year after trading. They may see a good, profitable company in the making and wish to partake of your success long-term.

LEGAL TIPS

Don’t put your personal assets at risk

If you are starting a business with one or more people, you can choose partnership, limited liability partnership or limited company status. In a partnership all partners are jointly liable for debts. If you come up against a legal problem you will be risking your personal assets.

Put it in writing

Do put all your business deals and agreements in writing. If you have a verbal agreement get confirmation in writing. A verbal one is often difficult to put into effect if problems arise. A written record will also prevent people from trying to change their minds or giving you a different story at a later stage.

It pays to get advice early on

Get legal advice early on as it will pay in the long run. Problems can arise in the long-term if this is neglected. Ask for an estimate of the cost if you seek a lawyer’s advice. If forming a company, shop around for a solicitor’s package deal.

Get someone to recommend a solicitor

Solicitors specialise in many areas of the law and there are many different types of law so this can be a daunting step. Recommendations from other companies are a good start. Do ask solicitors for testimonials and references and follow these up.

Keep up to date with changes in the law

Employment law is constantly changing so keep up to date. Every employer must provide a statement of employment clearly laying down certain details. It can be in your interests to include policies that are not needed by law to safeguard you.

BUSINESS ADVICE ORGANISATIONS

Business Debtline

Of course, the hope is that good finance and accountancy practices have been adhered to from the beginning in putting your business together. But there may be worrying times when some good, practical advice from experts would help enormously. The psychological boost of just talking to someone who deals with financial problems is quite energising.

Contact Business Debtline (0800 197 6026), a national telephone service that offers free, confidential and independent advice to small businesses on tackling cashflow problems by:

• preparing a budget for your business;
• prioritising all your debts;
• dealing with court proceedings;
• understanding bankruptcy;
• avoiding repossession of your home and business;
• dealing with tax matters;
• negotiating with creditors and bailiffs and dealing with most other debt and cashflow issues that you and your business may face.

Federation of Small Businesses

The Federation of Small Businesses is the leading organisation for small businesses in the UK and campaigns on their behalf to improve the financial and economic environment in which they operate. Alongside this influential lobbying, FSB members also enjoy a unique protection and benefits package providing instant access to legal and professional advice and support.

For further details visit their website: www.fsb.org.uk

Other organisations

There are two other useful contacts as well as government agencies and organisations that can help you make the right business decisions.

The Small Business Service (SBS) is an organisation which operates a number of schemes and initiatives that are designed to help small businesses in a variety of ways. They encourage businesses to be more innovative and to exploit new technologies, help get finance more readily, and can provide ways for businesses to measure and improve efficiency. Their website is www.business.link.gov.uk

The SBS also oversees the work of the network of local Business Link offices that operate throughout England. Similar services are Business Gateway for Lowland Scotland, Business Information Source in Highland Scotland, Business Connect in Wales and the Local Economic Development Unit for Northern Ireland.

The Business Links provide independent and impartial advice, information and a range of services to help small firms and those starting up new businesses. Call Business Link on (0845) 600 9006.

The British Chamber of Commerce (BCC) is the national face of the UK’s network of accredited Chambers of Commerce, and campaigns to reduce burdens on business and create a more favourable business environment. For further help contact the BCC’s website: www.britishchambers.org.uk