Many people dream of starting a restaurant—but when they don’t turn a profit fast, the dream can turn into a nightmare. While the restaurant business can be very enjoyable and lucrative, it takes time to establish a presence in your marketplace, build clientele, and cover the costs incurred in starting up your business.
It can take anywhere between a few months and a few years for a new restaurant to become profitable, and some restaurants never do. As mentioned in a recent Forbes article, about 17% of restaurants close in the first year. However, if you start with a great concept and menu, and follow through with careful planning and exceptional execution, it is possible to become profitable quickly—especially if you have adequate capital to cover expenses during the early days.
Below are 10 factors that can make or break a restaurant’s profitability. Read on to learn how each one can impact how quickly your restaurant can become profitable.
1. Choosing the Right Location
Location has a major impact on a restaurant’s success, so it’s important to weigh the costs and benefits of each location you’re considering for your restaurant. Obviously, a high-traffic, pedestrian-friendly location in a high-income area has the potential to bring more customers to your doors. This can increase your profitability, but it will also increase your rent. In contrast, a less popular location can be rented at a lower cost, but may result in fewer guests. Factors like the side of the road a restaurant is on, available parking, and nearby restaurants and businesses can also make a difference. Choosing the right location can help your restaurant reach profitability faster, so research several options before making this critical decision.
2. Developing Your Menu and Brand
Delicious food and a warm, welcoming atmosphere will create a buzz, attract customers to your restaurant, and keep them coming back. Develop your restaurant brand and create your menu thoughtfully. You’ll need to determine what your unique point of difference is, who your target audience will be, and what they want. Every little aspect of your brand, from the type of food you serve, to the type of environment your provide, to the price point of each menu item, can make a big difference in how successful your restaurant will be.
3. Understanding Your Market
As you’re developing your brand, be sure you do the research to understand your target market, and ensure you’re pursuing a niche that will be profitable. Learn about the demographics, income levels and spending habits of the neighborhood where your restaurant will be located, so you can structure your pricing and framework to meet your customers’ needs.
4. Managing Startup and Monthly Expenses
There are many startup costs associated with opening a new restaurant, from furnishing it with tables and chairs, to purchasing or leasing equipment, to hiring and training staff, to investing in advertising. Beyond startup costs, there are also fixed costs that you will have to pay each month, like rent, utilities, insurance, payroll benefits, food and disposable items. Estimate the costs for building and maintaining your restaurant, and check with other restaurant owners and operators to ensure your estimates are reasonable. Then, look for opportunities to reduce costs, if it is possible to do so without sacrificing quality. A clear understanding of costs along with careful management can go a long way toward improving profitability.
5. Setting the Right Prices
The restaurant industry is known for its small profit margins. According to the Restaurant Resource Group, profit margins average around 2 to 6 percent. This is because, while the gross profits (price - cost of goods sold) are high in the restaurant business, the net profits (profits after expenses) are low. When determining the cost of every plate of food sold, you should consider the cost to prepare the food, serve the food, and keep the restaurant open and operational. Pricing your menu items to cover these expenses, while still keeping costs reasonable for customers, can be tricky—but those restaurants that do it well will reach profitability much faster. Once you’ve decided how you’ll price your menu items, you can estimate what your monthly income might be based on the number of guests you expect to enter your restaurant each month, and the average ticket price per guest. If your monthly income is not significantly higher than your monthly expenses, you may need to raise your menu prices.
6. Preparing for a Successful Launch
If you invest in advertising for your restaurant’s launch, such as print ads, neighborhood flyers, social media promotions and signage, and your branding is on point, you’re almost guaranteed to attract good traffic within the first few months of your restaurant’s opening. Take advantage of the once-in-a-lifetime opportunity of opening a new restaurant, and make sure you have everything you need for a successful launch. After all, first impressions are critical in the restaurant industry, where referrals and recommendations mean everything.
7. Paying Attention to Service
Every business says it provides excellent customer service—but in the service industry, our business is service. Make sure your employees are well trained in providing superior customer service, and set a good example yourself, welcoming customers and greeting employees warmly. Look for ways to surprise and delight your guests with unexpectedly great service, and pay attention to Yelp and Facebook reviews. If you do your best to provide great service, and respond quickly to any negative reviews with attempts at resolution, customers will be encouraged to visit your restaurant again and again.
8. Delivering Quality and Consistency
As with service, your food must also be consistently excellent. Many customers will drop a restaurant after just one bad experience, so create and enforce quality control measures to ensure consistently exceptional quality.
9. Learning from mistakes and expenses
The early months of your restaurant’s opening can be a great time to learn as much as you can about your business, so that you can optimize operations to achieve even better results in the months that follow. At times, you may find you are over-staffed, which wastes resources, or under-staffed, which impacts service. You may run out of food, and have to temporarily remove menu items, or have a surplus, and suffer losses due to spoilage. Don’t get discouraged. Instead, use these opportunities to respond quickly, adjusting staffing and supply levels, and determining benchmarks for the future. In time, you’ll have a much better understanding of what is needed to keep your restaurant running smoothly—resulting in fewer losses, happier customers, and greater profitability.
10. Funding your restaurant
The most dangerous time for most restaurants is the first year of operations, when you have the greatest expenses, and the greatest unpredictability. To increase your chances of success, ensure you have an adequate cushion to cover your restaurant’s launch, ongoing operating costs, and unexpected expenses that may come up along the way. As a rule of thumb, if you’re opening a new restaurant, you should have enough funds to cover immediate costs, one food and beverage re-order, payroll for two cycles, and rent for six months.
Need funding to open a new restaurant location—or keep your doors open?
Fundomate is a great funding resource for restaurant owners. In just a few minutes, you can use our online lending platform to compare rates from top lenders across the U.S., and secure financing fast. Find out how we can help your restaurant cover expenses today, so you can achieve greater profitability tomorrow.