How Much Capital Do I Need?February 12, 2013 | By: Angela Bell
Reason #1 for failure of a restaurant is undercapitalization. That can mean anything from not having enough funds to complete the start up phase required to open, to insufficient reserve to provide funds for operating costs until profitable. As a culinary instructor in a prestigious Charleston college, I was always taken back when my culinary students answered the question, how are you going to fund your restaurant, with the response, “my parents are going to help me”. What? How much is the rent? How much will the utilities be? How many employees will you have and what will they be paid? How many covers, how many seats, how many service hours, how much is the business owner’s insurance, how much are licenses and inspections, how much for signage, advertising, equipment and furnishings?
Having just gone through the start up phase recently myself in my newest venture, an eat smart cafeteria-style restaurant in Central, SC, there are always unexpected expenses beyond ones control. How was I to know the floor installation would cause a two week delay while the glue dried or that the roof would leak right into the middle of the service area? But, the first step in any business MUST BE a proposed budget based on real estimates for all services and products, for the type of service, location and service hours.
The only thing one MUST do is have a thorough, well researched budget in place to which is added a contingency and reserve. When it comes to contractors for flooring, sheetrock, plumbing, and other trades, it is wise to add a contingency of 10% for mistakes and unforeseen circumstances such as mold or a leaky roof. To that, one must add a reserve of anywhere from several months of operating expenses to a year depending on the type of restaurant. For mine, a 24 seat, take out or eat in, open for limited dinner service, a two or three month reserve is sufficient—that is, enough to cover all expenses including payroll for that period of time. But, for a 100 seat bar and grill, it may need to be as much as a year. Undercapitalized means you will run out of cash, and in the restaurant industry, cash is king!
Buon Appetito e Buona Salute, Chef Angela Bell
Beyond the Bull (an “eat smart” kitchen)
233 W. Main St., Central, SC 29630
This story is part of our Small Business Corner, a peek into the life and trials of small business owners.