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THE ART AND SCIENCE OF AVOIDING BANKRUPTCY IN THE RESTAURANT INDUSTRY

 

In North America, restaurant failure rates are much higher than in Europe simply because most are undercapitalised and in many instances owners or managers fail to understand all aspects of the business. Statistics show that 80%* of all new restaurants do not survive past their second anniversary.
* This number is not correct, although it is frequently used in the food industry and the media. According to a study by Ohio State University, 26% of new restaurants will fail within the first year. Nineteen percent will fail within the second year and 14% will go belly up by their third year. --- Chef James

     During unexpected economic crisis, the failure rate increases even more. Last year’s SARS and BSE-infected cattle have demonstrated vividly the catastrophic repercussions of such occurrences. Studies show that most bankruptcies are the result of poor or lack of management skills, including human resources, training, supervision, marketing, finance and internal controls.

     The Golden Horseshoe is home to more than 6000 restaurants, and by conventional ratios, the population cannot support so many restaurants.

     An excellent chef with many years of experience may fail as restaurateur, whereas an entrepreneur with a flair for marketing , public relations, pleasant personality and training skills can prosper.

     Management is the art and science of accomplishing tasks through others. Restaurant management requires the mastery of many skills and attention to detail. Generalists in this industry do better than specialists.

     Restaurant bankruptcies can be prevented if only owners/managers are honest with themselves and recognize their shortcomings, and admit problems in the early stages.

     The first step in turning around an imminent failure is pinpointing the reason(s) for poor performance. Once this is established, several steps can be taken including hiring a consultant or consultants to help solve problems. Running a business, particularly restaurants, is complex and all consuming undertaking and requires an appropriate formal and practical educational background and total commitment.

     For the budding restaurateur the best advice is to determine tacking skills and systematically acquire knowledge by whatever means available (Continuing education courses, distant education).

     Trade literature and specialized courses or seminars help understand the intricacies and changes in the market place but do not guarantee success. That comes through personality, diligence, and a burning desire to succeed.

     Recent studies show that 63 percent of business failure are the result of financial incompetence,, 16 percent lack of managerial ability, and only 10 percent skill. The rest is attributed to other factors.

     In developed countries a restaurateur must conduct a feasibility study to determine whether opening a restaurant in the envisioned location is viable. Then, and only then, arrange financing, plan marketing strategies and complete a business plan.

     Timely and accurate managerial information is of prime importance. Making decisions on gut feeling and hearsay can be extremely costly. Managers must analyse all the information and take into consideration other relevant factors before making a decision.

 

     Successful restaurateurs know enough about marketing, internal controls, accounting, repairs and maintenance, purchasing, public relations, taxation, laws, relations with bank managers, purveyors, government agencies, training techniques and quality (food, beverage, service, décor)

     Most free standing restaurants start with a heavy debt load; either loan or mortgage. Bankers are risk averse and consider the trade risky, thus charge higher than normal interest rates as compensation.

     Financially restaurateurs are quick in determining how well their operation is performing and communicate with their bank managers. Looming economic downturns usually allude optimistic restaurateur with predictably catastrophic results. They are too involved with daily routine intricacies and neglect to evaluate the “big picture” to draw contingency plans.

     Banks waste no time to call in their loans, whereas the mandate of the Federal Business Development Bank (FBDB) and Ontario Development Corporation (ODC) is to help entrepreneurs.

     Restaurateurs first ensure sufficient cash after the opening. The right employees must be sought, hired, trained, and adequately compensated to ensure the delivery of product.

     If sufficient capital is unavailable, leasing equipment, rather than outright purchasing will reduce capital requirements.

The following points help avoid bankruptcies:,
• Acquire sufficient capital. At least 50 percent of the capital should be put up by the entrepreneur. Anticipate 20 percent cost overrun. Sufficient cash should be available to meet payroll for the first four – six months.
• Several professionals (accountants, tax specialists, marketing types should be consulted prior to starting any restaurant project.
• Lead by example
• Communicate clearly both verbally and in writing
• Forecast at least two years ahead and revise  your forecast on an ongoing basis.
• Make decisions after analysing your monthly statement
• The restaurant business is highly volatile. Prepare for the unexpected and cut expenses in anticipation.
• Have a business plan and revise when necessary/
• Develop a strong, service-oriented, friendly, and efficient labour force. Productivity based on incentive programs are rewarding.
• Always be well informed of external and internal developments, employee dissatisfaction, changes in various taxes, competition, changing patterns in eating habits, new products, and regard perfection as a “moving target”.
• Provide continuous training
• Follow up both guest and employee complaints.

     Successful business development strategies require good planning, adequate financing, an excellent business plan, willing employees, dedication, continuous monitoring of the market, and rigorous internal controls.

Article contributed by Hrayr Berberoglu, a Professor Emeritus of Hospitality and Tourism Management specializing in Food and Beverage. Books by H. Berberoglu

 

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