Allocating Expenses

Business owners need to know a few basic terms for evaluating the health of their business: Revenue (how much money you earn), Cost of Sales (cost of the product you are selling) and Net Income (what’s left after you pay all your other operating expenses such as labor, occupancy and marketing).

Being shy of numbers is no excuse when you’re talking about the success of your business. Simply put, when your Net Income is positive, that means you’re doing okay but, in reality, it is much more complicated to extract useful information because there are often many revenue streams to consider.

Does your catering business add to your bottom line?  Is attending a weekly farmers’ market worth the added labor?  Does it make sense to open your restaurant for lunch?  All of these activities add to your (top-line) revenue, but do they increase the dollars left at the end of the day (bottom line)?

To answer these questions, you must evaluate all the expenses involved in each revenue stream.

Catering

For a restaurant that wants to add off-premise catering to its customer offerings, there are more expenses beyond the actual food and labor of executing the event.  These incremental expenses decrease profits.

• Corporate expenses – If your managers spend hours marketing and planning for catering events then they are not working on running your restaurant.  Do you need to hire more workers for the restaurant because your managers are otherwise occupied?
• Sales materials – Do you print menus and/or brochures? Who designs these materials?
• Advertising – If part of your advertising budget is used to promote your catering business then this needs to be accounted for.
• Have you purchased special equipment or supplies to support the catered events?

Attending a Farmers’ Market

Farmers choose between many different options to sell their produce – wholesale to restaurants or retail to customers at a farm-stand, farmers’ market and/or through CSA programs.  Each sales channel has its own associated costs, and perhaps different revenue as well (most restaurants get discounts based on retail prices).

• How much time do you spend selling your products through each sales channel? Remember that making phone calls, sending emails or directly interacting with customers at the market all need to be considered.
• How much fuel to you use to drive to each of the different markets?
• Do you need to purchase tables, tents and signage for the market?
• Selling to different markets also requires different packaging – wholesale cases versus retail boxes.

Opening for Lunch

Many restaurateurs justify opening for lunch because they already have to turn on the gas for the evening prep crew.  Beyond paying for food, kitchen and front-of-the house expenses, opening for lunch means an increase in other operating expenses:

• Do you need more uniforms and linens for the additional lunch staff?
• If you increase your staff, then the administrative time spent on payroll, recruiting and hiring is also increased.
• Yes, the lights are on for the prep staff, but additional utilities are used to fully open a restaurant.

This is not to say that these revenue streams do not add to overall profit of the business. But understanding how profitable they are can affect decisions to invest more or less energy into each line of business.

Do you know how profitable each business line is? For help answering these questions, please contact me. I can help you streamline your operations and increase your Net Income.