Know your finances
Financial preparedness is one of the key performance indicators signalling the time is right for expansion – and it certainly shone through in our survey. Nearly all executives (94%) said their cost estimates – including labour, inventory and facilities – for their newest locations were accurate.
However, financial challenges remain a primary concern, with 78% of executives citing facility costs as a common hurdle, followed by securing sufficient funding (76%) and managing spending priorities (74%). And with nearly four in 10 executives reporting that a better understanding of their profit margins would help their organisation master the art of scalability in the future, now seems like a good time for a quick refresher.
1. To determine if your business is ready for expansion, start by tracking your prime costs – in other words, everything required to run your restaurant:
Total labour costs: Includes employee wages, benefits and payroll taxes.
Cost of goods sold (COGS): The total cost of ingredients for your menu items.
Operating expenses: Rent, utilities and direct operating costs, such as paper towels, menu printing and laundry.
Vendor expenses: Technology and financial services – we’re talking about payments made to third-party businesses for reservation and delivery systems.
2. Next, calculate your bottom-line profit. This is your company’s net income, or what your business makes after all expenses are deducted from your revenue.
3. Finally, understand your gross profit margins or the ratio of profit to revenue. Divide your gross profit by total revenue for the year and multiply by 100 to determine if your business is financially healthy. If the result is negative, you’re spending more than you’re earning.
“A good rule of thumb is to try to keep your prime costs under 65%. While this is ideal, it will likely vary depending on whether you’re running a quick-service or a full-service restaurant. Some best-in-class restaurants, for example, are closer to 50%.”
According to RestaurantManagement.co.uk, the gross profit margin – the percentage of revenue remaining after deducting (COGS) – for quick-service restaurants in the UK can range from 20-40%.
Technology can simplify financial tracking. A modern restaurant POS system – such as Square for Restaurants – provides real-time reporting on gross sales, refunds and net sales. Leaders can access these insights anytime, whether behind the register, on a desktop or via the mobile app.
By inputting revenue and expenses, restaurant owners can assess profitability, pinpoint high costs and determine revenue and profit per order. Armed with this data, making informed expansion decisions becomes more straightforward.
After looking at your finances, there’s plenty more to think about before opening a new location – like your timeline. In the next section, we’ll walk through what’s involved in the process, step-by-step.
