My mother-in-law got it into her head to open a restaurant (part II) – Finance Lessons for Young Mothers-in-law: the Business Plan

“See, with your 50k, you’re barely buying a license.” I get back on the issue.

“That would be your investment. When we talk about investment, we talk about ROI – return on investment.

The investment is represented by everything that has a utility over a period longer than the 12 months of the fiscal year (license, premises, kitchen, furniture… all the things you buy that you will keep for a few years).

The return, on the other hand, is calculated year by year and is represented by the turnover in that period of time minus everything that was used to produce it. So every year, the 12 months (and only 12 months) of rent, personnel costs, expenses for food, electricity, heating, etc.. etc.. necessary to get to make “as much” covers.

The simplest example is the purchase of an apartment to rent it.
Imagine spending 180k€ for the property and 20k€ for renovation. 200k€ in all.
To rent it for 800€ per month, or 9 600€ of turnover, you will have 3 600€ of various expenses. You will then have 6000€ left, which, compared to the 200 000€ investment, represents a return of 3%.

How many covers do you plan to have ?”

“Well, I was thinking of a 20-something place where I’d do double service at noon and triple in the evening in July and August.”

“So 100 covers a day for the 62 days of the summer season.”

“The other months of the year I’d do one service at noon and one in the evening, opening five days a week.”

“So for the remaining 43 weeks, two hundred covers a week.

In total:

Covers / day Days Total
July/ August 100 62 = 6200
Rest of the year 40 43 weeks x 5dd = 215 = 8600
    = 14800

At full capacity you’d make 14,800 covers a year. But I advise you to make a cautious assumption, to fill the restaurant to only 80% of its potential (i.e. 11840 seats).

In Business Plans there are generally 3 hypotheses: an optimist one, that everything works out well, a pessimist, that bad luck never leaves us, and generally the one between the two is the one that is considered.

How much would you charge for each cover on average ?”

“I would have thought 30 euros a cover.”

“Sounds consistent to me. Again I would take 80%, rounding up to 25€ per cover.

The cost of raw materials let’s say it could represent half of the turnover, while the cost of personnel (you and your 2 children) 10k€ per month. In addition, you’ll need temporary workers in the summer, which we say will cost 20k€.

At this point you can calculate the result of one year of work

Turnover 296 000€
Cost of raw materials -148 000€
Salaries and wages -140 000€
Utilities (water, electricity, gas) -2 000€
Rent -18 000€
Result -12 000€

The return on investment is negative.

Thanks to this little “business plan”, you realize that your idea is more complicated to develop than you imagined.

Of course, you can always revisit those assumptions where you think there’s margin.

But don’t forget that you have a “prudentrisk profile (you’re someone who invests her savings at most in government bonds).

Unfortunately for you, the assumptions are already quite conservative. To improve the situation, instead, you should make more “aggressive” ones, such as imagine making 100% of possible covers instead of 80%, making margins of x3 or x4 on ingredients instead of x2, firing your child… in short, nothing that seems practicable to me”.

“So?”

“There are only 3 ways to earn more money in an enterprise:

  • Increase turnover: in your case the number of covers or the average price per place setting;
  • Reduce variable costs: buy cheaper ingredients, start growing vegetables and raising rabbits in the garden;
  • Reduce fixed costs: work with fewer people, pay them less, find an out-of-the-way place with cheaper rent, etc. etc.

To reduce fixed costs, it seems to me that you can’t do less than that. There are 3 of you, underpaid, doing more hours than the clock in a filthy hole.

You could think of reducing variable costs by cooking only raw materials from your garden. But I don’t see you start raising chickens and rabbits or growing artichokes.

To increase turnover, however, we should make more covers or a more expensive menu. So find a bigger place, hire more people, prepare more sought-after dishes to sell at a higher price. But all this would increase the fixed costs and then not respect your idea of a family business to supplement your pension.”

“So what do we do?”

“Let’s go back to your example and think about the increase in turnover which seems to me to be the only way forward. Let’s find a place a little bigger, but not too much. That it’s manageable by the manpower you’ve already selected.

Let’s say 30 covers, with the same assumptions about shifts and the price of the menu.

14208 covers are also a conservative guess of 80%.

The result is as follows

Turnover 355 200€
Cost of raw materials -177 600€
Salaries and wages -140 000€
Utilities (water, electricity, gas) -2 000€
Rent -18 000€
Result 17 600€

The breakeven point (what in Milan they call the breakeven point) will be reached when fixed costs (i.e. costs that do not vary with turnover) coincide with the margin on variable costs (which in our case are represented exclusively by raw materials).

Turnover 320 000€ Salaries and wages -140 000€
Cost of raw materials -160 000€ Utilities (water, light, gas) -2 000€
    Rent -18 000€
Margin on variabile costs 160 000€ Fixed Costs 160 000€

320 000€ at 25€ the cover corresponds to 12 800 covers per year.

Approximately 1 000 per month or 30 per day.

Is that what you expected? Is that reasonable?”

(to be continued)