Financial Forecasting for Restaurants: A Beginner’s Guide

Introduction to Financial Forecasting

Okay, let’s talk about something super important for any restaurant – whether it’s a small cozy cafe or a big bustling diner. It’s called financial forecasting. Don’t worry, it’s not as complicated as it sounds! Think of it like predicting the future, but with numbers.

Financial forecasting basically means looking at your past sales, expenses, and other financial data to guess (in a smart way!) how much money your restaurant will make or spend in the future. This isn’t about being a fortune teller, it’s about being a smart business owner. It helps you make good decisions about things like how much food to order, how many staff to hire, and even whether or not to open another location.

Why is Forecasting Important?

Imagine you’re planning a big party. You wouldn’t just buy random amounts of food and drinks, right? You’d probably try to guess how many guests are coming and what they’ll want to eat and drink. Financial forecasting is like that for your restaurant. Here’s why it’s super important:

• Budgeting: It helps you figure out how much money you’ll have available, so you can plan your spending wisely.
• Planning: It helps you get organized. You can plan for busy seasons or slow periods.
• Decision Making: Need to hire a new chef? Forecasting can help you decide if you can afford it.
• Avoiding Surprises: No one likes financial shocks. Forecasting helps you see potential problems before they happen.
• Growth: Knowing your financial future can help you plan for expansion or improvements.

Understanding the Basics of Restaurant Finance

Before we dive into the forecasting part, let’s make sure we’re on the same page about some basic restaurant finance terms:

Key Financial Terms You Need to Know

• Revenue (or Sales): This is the total amount of money your restaurant makes from selling food and drinks. It’s everything coming in.
• Cost of Goods Sold (COGS): This is the cost of the ingredients you use to make the food and drinks you sell. Basically, the raw materials.
• Gross Profit: This is the money you have left over after paying for your ingredients (Revenue – COGS = Gross Profit).
• Operating Expenses: These are all the other costs of running your restaurant, like rent, utilities, staff salaries, and marketing costs.
• Net Profit (or Profit): This is the money you have left over after paying all your expenses (Gross Profit – Operating Expenses = Net Profit). This is the real profit of the business.
• Break-Even Point: This is the point where your restaurant isn’t losing money, but isn’t making a profit either. Your revenue is equal to your expenses.

Gathering Your Historical Data

To forecast accurately, you need to look at your past. That’s where historical data comes in. It’s like the history book of your restaurant. Here’s what you need to collect:

• Sales Data: How much did you sell each day, week, or month? Which dishes sold best? When were your busy and slow times?
• Cost Data: How much did you spend on ingredients, rent, salaries, and other things?
• Customer Data: How many customers did you serve? When do they usually come?
• Inventory Data: How much food did you have at the start of each period? How much did you buy? How much did you throw away?

Keeping good records of all this data is super important! Use a spreadsheet (like Google Sheets or Excel) or specialized restaurant software to organize it.

Steps to Create a Financial Forecast for Your Restaurant

Okay, time to get practical! Let’s break down how to create a financial forecast for your restaurant, step by step.

Step 1: Forecasting Sales Revenue

Sales are the lifeblood of your restaurant, so this is where we’ll start. There are a few ways to approach this:

Using Historical Data

• Look at Past Trends: Analyze past sales to see patterns. Do you sell more on weekends? Do sales increase during certain holidays or events?
• Calculate Averages: Find your average daily, weekly, or monthly sales.
• Factor in Seasonality: Account for busy or slow seasons. Summer sales might be higher than winter sales, for example.
• Identify Growth Trends: Are your sales increasing month by month or year by year?
• Use Trend Analysis: You can use a technique that looks at past sales to estimate future sales.

Considering External Factors

• Local Events: A big festival in town? A concert nearby? These can boost your sales.
• Competitor Activities: New restaurant opening nearby? They could draw some customers away.
• Economic Conditions: When the economy is doing well, people tend to eat out more.
• Weather: Bad weather might reduce the number of customers visiting your restaurant.
• Marketing Campaigns: Are you planning a big promotion? This can increase sales.

Example

Let’s say your restaurant’s weekly average sales have been $5,000. However, you know that next month is a holiday and you are planning to run a special promotion. So you forecast $7,000 in sales for that week.

Step 2: Forecasting Cost of Goods Sold (COGS)

Once you have your sales forecast, you’ll need to forecast your costs of ingredients, the COGS.

Understanding Your COGS

• Food Costs: Calculate the cost of every ingredient you use for each menu item.
• Beverage Costs: Calculate the cost of drinks you serve.
• Waste: Remember to factor in food spoilage or waste when calculating your costs.

Forecasting COGS

• Percentage of Sales: Usually, your COGS is a percentage of your total sales. Look at your historical data to see what this percentage has been.
• Adjust for Price Changes: If ingredient costs have increased or decreased, adjust your COGS forecast accordingly.
• Menu Changes: If you change your menu, you’ll need to recalculate your ingredient costs.
• New suppliers: If you start using a new supplier it might change your ingredient cost.
• Portion Control: If you control how much food you are giving in each plate, your food costs can change

Example

If your historical COGS percentage is 30%, and you forecast $7,000 in sales, your forecasted COGS would be 30% of $7,000, which is $2,100.

Step 3: Forecasting Operating Expenses

These are all the other costs of running your restaurant.

Types of Operating Expenses

• Fixed Expenses: These costs stay the same each month, like rent, loan payments, and insurance.
• Variable Expenses: These costs can change month by month, like utilities, staff salaries, marketing, and cleaning supplies.

Forecasting Operating Expenses

• Fixed Expenses: Usually, you can assume fixed costs will stay the same unless you’re planning to move locations or make changes to loan agreements.
• Variable Expenses: Look at past trends. How much do you usually spend on electricity each month? Does your staffing cost fluctuate during weekends?
• New Expenses: Consider any new expenses you might have in the future, such as an investment in a new oven or a marketing campaign.

Example

Your rent might be $3,000 per month, your staff salaries $2,000, utility bills $1,000, and other operating costs $500. So your total fixed operating expenses for the month will be $6,500.

Step 4: Calculating Profit and Break-Even Point

Now that you’ve forecasted your sales, COGS, and operating expenses, you can calculate your profit.

Calculating Gross Profit

Your gross profit will be your sales revenue minus your cost of goods sold. For the previous example, your gross profit will be $7,000 (sales revenue) – $2,100 (COGS) = $4,900.

Calculating Net Profit

Your net profit will be your gross profit minus operating expenses. For the previous example, your net profit will be $4,900 (gross profit) – $6,500 (operating expenses) = -$1,600 (net loss). This means that in the given example, the business is losing $1,600.

Calculating the Break-Even Point

To calculate break-even point, you need to divide the fixed costs by the gross profit margin. For example, if fixed cost is $6,000 and your gross profit margin is 70%, your break-even point will be $6,000/0.7 = $8,571. Which means your business needs to make sales of at least $8,571 to breakeven.

Tools and Techniques for Forecasting

Forecasting doesn’t have to be done with a pen and paper. There are many tools and techniques that can make this process easier.

Spreadsheets

Spreadsheets like Google Sheets or Microsoft Excel are great for basic forecasting. You can create tables, do calculations, and visualize your data.

Restaurant Management Software

There are software programs designed specifically for restaurants that can help you with forecasting. These programs often have features like:

• Sales Tracking: Automatically tracks your sales.
• Inventory Management: Helps you keep track of your ingredients.
• Reporting: Creates reports that help you analyze your data.

Simple Forecasting Techniques

• Moving Averages: Taking the average of your sales over a certain period.
• Trend Analysis: Using past trends to estimate future sales.
• Scenario Analysis: Predicting different outcomes by varying input variables.

Making Use of Your Forecast

Creating a forecast is only half the battle. You need to use it to guide your business decisions.

Adjusting Your Budget

Your forecast can help you decide where to spend money.

• Optimizing Spending: You might find you’re spending too much on one area and can cut back.
• Planning for Investments: If your forecast shows you’ll have extra cash, you can plan to invest in new equipment or a marketing campaign.

Setting Targets

Your forecast can help you set realistic goals for your restaurant.

• Sales Goals: Setting specific sales targets for each month.
• Profit Goals: Setting profit targets.
• Staffing Goals: Making sure you have the right number of staff on hand.

Tracking Actual Performance

It’s important to track your actual results and compare them to your forecast.

• Making Adjustments: If your sales are lower than forecast, you need to find out why and make changes.
• Improving Your Forecasting: Each time you create a forecast, you will get better at predicting the future.

Common Mistakes to Avoid

Forecasting is not always perfect. It’s important to know some of the common mistakes people make:

• Ignoring Historical Data: Not looking at past trends.
• Over-Optimism: Being too hopeful about the future.
• Underestimating Costs: Not factoring in all the expenses.
• Not Updating Forecasts: Ignoring any change in business or industry and making constant updates in your forecast is important.
• Not Checking Performance: Not checking the actual numbers against the forecasts and adjusting them.

Example of a Financial Forecast

Let’s bring this all together with an example, assuming your restaurant’s name is “Cozy Corner Cafe.”

Scenario: Cozy Corner Cafe is planning its financials for next month.

Historical Data:

• Average weekly sales: $4,500
• COGS as a percentage of sales: 35%
• Monthly rent: $2,500
• Monthly staff salaries: $1,800
• Monthly utilities: $800
• Other monthly operating costs: $500

External Factors:

• There’s a local festival happening next month, so you expect a 15% sales increase.

Financial Forecast for Next Month:

• Sales Revenue: $4,500 (average weekly sales) 4 (weeks) 1.15 (15% increase) = $20,700
• Cost of Goods Sold (COGS): $20,700 * 0.35 (35% of sales) = $7,245
• Gross Profit: $20,700 – $7,245 = $13,455
• Operating Expenses: $2,500 (rent) + $1,800 (salaries) + $800 (utilities) + $500 (other costs) = $5,600
• Net Profit: $13,455 – $5,600 = $7,855

Break-Even Point Calculation:

• Fixed Cost: $2,500(rent) + $1,800(salaries) + $500(other costs) = $4,800
• Gross Profit Margin: ($13,455/$20,700) * 100 = 65%
• Break-Even Point = $4,800/0.65 = $7,384
• This means that Cozy Corner Cafe needs to make a minimum sale of $7,384 to breakeven

Analysis:

Based on this forecast, Cozy Corner Cafe is expected to make a net profit of $7,855 next month. This is a healthy profit, but there are some caveats too. If the restaurant does not get the 15% expected increase then there is a high chance that it will be difficult for the restaurant to make a profit. This also does not take into account unexpected expenses like kitchen appliance repair. If the café does not have a buffer amount set aside for unexpected emergencies, the profit could easily turn into a loss. It’s important to note that this is a simple example and that in the real world, your forecasts will likely be more detailed.

The Importance of Regularly Reviewing and Updating Your Forecasts

Financial forecasting is not a one-and-done task. It’s an ongoing process that requires regular review and updates.

Why Review Your Forecasts?

• Market Changes: The restaurant industry is always changing. What’s popular today might not be popular tomorrow.
• Economic Shifts: The economy changes and you must consider that in your forecast.
• New Opportunities: New opportunities may come up and you might have to update your forecast.
• Performance Tracking: Reviewing your forecasts against actual results helps you see if you’re on the right track.
• Problem Identification: If your actual results are very different from your forecast, it means you need to identify and fix the problem.

How Often to Review Your Forecasts

• Monthly: Review your forecast every month to see if you are meeting your goals.
• Quarterly: Conduct a more in-depth analysis of your financial performance every three months.
• Annually: Reassess and develop a new annual plan every year.

Best Practices for Reviewing Forecasts

• Track Actual Performance: Keep a close eye on your sales, expenses, and profits.
• Compare to Forecasts: Regularly compare your actual numbers with the numbers in your forecast.
• Identify Variances: Find the difference between your actual results and your forecasts.
• Analyze Variances: Figure out why the variances happened. Was it due to a one-time event?
• Adjust Forecasts: Make changes to your forecast as needed, based on your analysis.

Learn Business: Your Partner in Restaurant Success

At Learn Business, we are dedicated to providing guidance and resources to help entrepreneurs like you build successful businesses. We understand that starting and running a restaurant can be challenging. That’s why we have created a comprehensive platform that offers a variety of resources to support you at every step of the way. We have all the tools and resources required for your business needs.

How Learn Business Can Help Your Restaurant

• Business Planning Templates: Access free downloadable business plan templates to help you get started with your restaurant.
• Financial Planning Guides: Learn the ins and outs of financial management for restaurants with our easy-to-understand guides.
• Industry Insights: Stay up-to-date on the latest trends and news in the restaurant industry.
• Marketing Strategies: Learn how to effectively market your restaurant with our comprehensive marketing guides.
• Expert Advice: Get personalized support and advice from our experienced team of business experts.

Our Mission

Our mission at Learn Business is to empower entrepreneurs by providing them with the knowledge and tools they need to succeed. We believe that with the right guidance and resources, anyone can build a thriving business.

Join Our Community

Become a part of our community and learn with fellow business owners. You can ask questions, network with others and learn from other’s experiences. We provide support to our community of entrepreneurs.
Visit us today at https://learn-business.org to discover how we can help you on your journey to restaurant success.

Conclusion: Forecasting for Financial Stability

Financial forecasting for your restaurant is not just about predicting numbers. It’s about understanding your business and making smart decisions. By taking the time to create accurate forecasts, you’ll be better positioned to manage your finances, plan for growth, and create a successful business. Yes, it might look challenging at first but with time and practice, forecasting will become a crucial part of your business operations. It’s not a one-time activity but a practice that you do continuously to make your business financially stable. Remember to keep learning and adapting your forecasts based on your own unique experience. Remember we at Learn Business, are here to help you along the way, so reach out to us with any queries.