I. Financial Forecast (1. Research and Evaluation)

During the research and evaluation phase, you should analyze both the external factors (outside your control) that will influence the restaurant’s business and the internal factors (within your control) that will determine the future performance of your restaurant.

External factors may include:

• Sales Generators: any other business or gathering of people that may generate sales for your restaurant. Common sales generators include office buildings, residential areas, and schools. Visit your local chamber of commerce and city planning commission to learn of any new developments, such as office buildings that may be in the planning stages
• Competition: another business in the same industry as your restaurant concept that offers similar menu items, restaurant environments, and customers. Any business that has the potential to take away revenue streams from your restaurant concept should be considered competitors. Refer to our [competition section] for additional information and guides
• Community Events: events organized or participated by individuals in nearby communities. These events can have a significant influence over the amount of customers your restaurant will potentially attract. These events can include local festivals, carnivals, concerts, sporting events, and church events
• Local Economic Conditions: the financial stability of the local government, suppliers, utility companies, and other local entities that have an impact on your restaurant's business. Some questions you should ask include:

• Are local economic conditions expected to get better or worse and how will they impact your restaurant? If economic conditions are expected to get worse, potential customers may be less willing to spend their money on more expensive items
• Will the local utility companies be increasing rates? Rate increases will affect your restaurants profitability by increasing your fixed costs
• What is the financial stability of my suppliers? Are any of them threatening to go out of business, thus forcing me to purchase from more expensive suppliers?
• Are any major increases in foods or other costs anticipated that may greatly affect my restaurant’s sales?

• Relevant Regulatory Criteria / Updates: these can include licensing or zoning changes as well any regulatory codes that must be met by your restaurant

Internal factors may include:

• Inventory Costs: reflects the cost of ingredients and inventory that comprise the menu items you sell to guests. Leverage the Menu Breakdown and Inventory Budget Tool in the Supply Chain / Inventory Workspace to help you determine how much these costs will be. This tool will allow you to break down your inventory costs across food, non-alcoholic beverages, and alcoholic beverages. As general guidance, the total inventory costs (including beverages) for the restaurant industry typically range from 25-38% of total sales, depending upon restaurant style and sales mix
• Labor Costs: generally the second-highest costs for restaurants after inventory costs, labor costs reflects the cost of your restaurant's employees. On average, full-service restaurants generally have labor costs between 30-35% of sales and 25-30% for limited-service restaurants
• Other Controllable Costs: any other expenses that fall directly under the control of management. Below is a list of a few examples. Note that management may only have partial control in some scenarios (e.g. contractual services)
• Marketing / Advertising Costs
• Equipment and Technology
• Maintenance and Repairs
• Professional Vendor Fees
• Real Estate Costs: reflects the costs associated with your restaurant's real estate. While costs are generally set after signing an agreement (e.g. lease agreement), you have control over the initial process of finding a property that fits your budget / price range. Check out our Real Estate Workspace for additional guidance and information

I. Financial Forecast (2. Generating Estimations)

Leverage your research and analysis to begin generating estimated numbers for your initial forecast. For further guidance, refer to the 7 steps below and the "BULB_Initial Forecasting Tool".

Note that all changes made to your financial forecast have to be fully considered. For instance, if you decrease your advertising / marketing budget, you should consider the decline in sales that may follow.

Step 1: Forecasting Sales & RevenueThe first step is projecting annual sales. You should use the analysis of the external and internal factors in Phase 1 to arrive at the appropriate sales figures. When forecasting sales, it is generally best to categorize the sales expected from weekends / holidays versus from normal business days since restaurants often have dramatically different sales between the two. In addition, identifying your sales mix after projecting total annual sales is also very helpful down the road.

Note that if your restaurant has other income outside of your restaurant's normal operations (e.g. financial investments, selling licenses), your revenue will be different than sales since revenue includes these additional streams of income unlike sales. Otherwise, revenue = sales.

Refer to the "Sales & Revenue" worksheet in the Financial Forecasting Tool for calculations and specific instructions.

Step 2: Forecasting Cost of Goods SoldCost of Goods Sold (COGS), also known as “cost of goods used” or simply “cost of usage,” is the cost to your restaurant of the food and beverage products your restaurant sells.

When starting a new restaurant, the inventory costs you researched during Phase 1 will ultimately drive how you estimate COGS since your restaurant will not have made any purchases or sales at that point. For your initial forecast, you can estimate COGS as a percentage of forecasted sales. However, make sure to also compare the resulting estimates in the forecast with the numbers you calculated in the "BULB_Menu Breakdown and Inventory Budget Tool".

For future reference, the standard formulas for COGS and COGS percent after obtaining a period of sales are also included below:

     Beginning Inventory + Purchases – Ending Inventory = COGS
     COGS / Sales = COGS % 

-Beginning inventory means the amount of product that you have in your kitchen and storage rooms at the beginning of a period, usually the beginning of the week. For instance, if Monday is the start of your business week, and you have $5,000 worth of food and beverages on your shelves, $5,000 is your beginning inventory.

-Purchases means the amount of inventory you purchase in food and beverage orders in that period of time. If an order of another $3,000 worth of inventory arrives on Friday, this would be considered the purchase.

-Ending inventory is the amount of food product you have left when the work week is over. Although you purchased product during the week, but you will have less inventory at the end of the week since you sold the food to your customers. For example, at the end of the work week, you have $4,000 worth of inventory remaining.

***Numerical Example: if your restaurant has $5,000 worth of inventory on hand on Monday, and then purchases another $3,000 of food and beverage product, you have a total of $8,000 worth of inventory at the beginning of the week. The following Monday morning, you arrive at the restaurant and count $4,000 worth of inventory. This gives you a usage cost, or COGS, of $4,000. This also means that you sold $4,000 worth of inventory.

Refer to the "Gross Profits & Prime Costs" and "Descriptions & Calculations" worksheet in the Financial Forecasting Tool for additional calculations and specific instructions.

Step 3: Forecasting Labor Costs
Based on your forecasted sales, your estimated staff levels may have to be changed and wages and salaries may have to be adjusted as well. Labor costs generally include the cost of management, back of the house employees (chefs, line cooks, kitchen helpers, etc.), front of the house employees (servers / waiters, cashiers, counter helpers, etc.), and any statutory benefits (payroll taxes, employer withholding dues, workers compensation benefits, etc.). 

Refer to the "Gross Profits & Prime Costs" worksheet in the Financial Forecasting Tool for calculations and specific instructions

Step 4: Forecasting Controllable ExpensesControllable expenses are costs that fall directly under the control of management. In addition to prime costs (COGS + Labor Costs) which should comprise the majority of controllable expenses, there are several other costs that fall under this category, including marketing / advertising costs, music and entertainment, and maintenance and repairs. Note that some of these costs are better forecasted as a percent of sales while others are better forecasted as a fixed dollar figure.

Refer to the "Controllables & Occupancy" worksheet in the Financial Forecasting Tool for calculations and specific instructions.

Step 5: Forecasting Occupancy CostsThe fifth step is to forecast occupancy costs which include items like rent, property taxes, and property related insurance.

Refer to the "Controllables & Occupancy" worksheet in the Financial Forecasting Tool for calculations and specific instructions.

Step 6: Forecasting Profits and Net IncomeThe sixth is to forecast profits and net income. Note that the word "profits" is a broad term and can be calculated as gross profits, controllable profits, operating profits, and net income.

To calculate net income, you will also need to estimate any interest expenses, depreciation expenses, and business income taxes in addition to the prior costs forecasted.

Refer to the "Profitability & Net Income" worksheet in the Financial Forecasting Tool for calculations and specific instructions.

Step 7: Compare Against Industry Benchmarks / Direct CompetitorsAfter you generating your initial forecast, you should always compare the numbers you have against industry benchmarks and your direct competitors if accurate financial information is available.

For reference, below are some industry benchmarks as provided by Jim Laube (founder of www.RestaurantOwner.com).

• Prime Costs
• Full-Service Restaurants: 65% or less of total sales
• Table-Service Restaurants: 60% or less of total sales
• Food Inventory Costs
• Generally 28-32% of total food sales
• Non=Alcoholic Beverage Inventory Costs
• Soft drinks (post-mix): 10% to 15% of soft drink sales
• Regular coffee: 15% to 20% of regular coffee sales
• Specialty coffee: 12% to 18% of specialty coffee sales
• Iced tea: 5% to 10% of iced tea sales
• Alcoholic Beverage Inventory Costs
• Liquor: 18% to 20% of liquor sales
• Bottled beer: 24% to 28% of bottled beer sales
• Draft beer: 15% to 18% of draft beer sales
• Wine: 35% to 45% of wine sales
• Total Labor Costs
• Full-service Restaurants: 30% to 35% of total sales
• Limited-service Restaurants: 25% to 30% of total sales
• Labor Costs (Management)
• Generally 10% or less of total sales 
• Statutory Benefits
• Generally 5-6% of total sales
• Generally 20-23% of gross payroll costs
• Occupancy Costs
• Rent / lease payments: 6% or less of total sales
• Total Occupancy Costs: 10% or less of total sales
• Sales Per Square Foot
• Break-even for Full-service Restaurants: $150-$250
• Break-even for Limited-service Restaurants: $200-$300