If you’re planning on starting a new restaurant, you need to make sure you can afford it. While many new restaurant owners have a passion for food and hospitality, few realize the heavy financial burden that a restaurant carries.
According to a post by RestaurantBusinessOnline.com “The restaurant business stands today as an economic engine generating annual sales of $825 billion from more than 1 million establishments, which collectively employ 15.1 million people. All signs suggest it’s ready for the next 100 years.” Those are some big picture numbers and statistics, but that doesn’t necessarily mean you should run out and open a restaurant, especially without knowing the startup costs.
So, how much does it cost to open a restaurant? Before we answer that question, it’s essential to understand what startup elements will cost you money. While there’s no doubt that opening a new business will cost you a considerable amount of time, there are considerable upfront financial costs before you can even open your doors.
Below, let’s take a look at some big-ticket startup expenses you can expect when you first begin planning your restaurant.
1. Location, Location, Location
If you’re running a traditional brick-and-mortar restaurant, your establishment’s location can make or break your business. New restaurant owners typically require large amounts of foot traffic — if you don’t have a previously established reputation, it can be hard to attract customers to an inconvenient location.
Two of the major contributors to property costs are location and restaurant size. Unfortunately, the busiest real estate is often the most expensive. The bigger and better, the more you will need to pay. It’s always a good idea to conduct market research in the area you want to open your restaurant — compare different leases on a per square foot basis.
Also, considering that most restaurant owners rent their properties, you need to consider the terms of your lease before you make any financial commitments. While you might not have to pay the whole lease upfront, you’ll be responsible for paying the lease regardless of the success of your restaurant. That’s why it’s sometimes a bad idea to sign a multi-year lease when opening a new restaurant concept.
Not only will you need to pay rent, but you might also need to consider the cost of insurance or licensing. An expensive restaurant might look good, but it’s useless if you don’t have the proper licenses from your local authorities.
While the price will vary significantly based on your city, neighborhood, restaurant size, and more, you can expect to pay over $100,000 per year for a 1,200 square feet restaurant. Keep in mind that you will also need to pay a substantial deposit.
2. Property Upgrades and Renovations
Unfortunately, most properties won’t come fitted to your requirements. While there are pre-built restaurant properties available, your menu will dictate the type of kitchen that you need. Even if you find a suitable restaurant property, there’s a good chance that you will need to make some renovations or adjustments.
The kitchen will typically be the most expensive component to renovate, but you should also put considerable effort into updating and branding the eating areas of your restaurant. A venue’s appearance can often be a significant factor in its success.
If you manage to find a restaurant-specific property, you might be able to get away with spending less than $15,000 on renovations and customizations. On the other hand, if you need to renovate a large restaurant to your exact specifications, the cost can rise well above $100,000.
Either way, if you do need to spend money on renovations, make sure to use this as bargaining power when you’re negotiating the terms of your lease. You might also be able to arrange to delay rent until your restaurant begins serving customers — this can be an excellent way to prevent cash flow issues during renovations.
If you want to get your restaurant off to a running start, investing in a marketing strategy is always a good idea. As most of your customers will likely be living or working close to your restaurant, it’s essential to target nearby consumers with a mix of digital and traditional advertisements.
Some restaurants spend tens of thousands of dollars per year on marketing and a professionally designed website. Fortunately, you can purchase some substantial promotion with just a few thousand dollars. Running different competitions and giveaways can be an excellent way to seek brand recognition without spending on paid advertisements.
If you’re trying to keep costs low, you can run your own marketing strategy. But it can sometimes be a good idea to hire a marketing firm to take care of the initial processes — if you don’t have experience attracting customers, it’s a good idea to hire someone who does!
Labor costs will vary depending on your requirements and restaurant size. Staff can be paid anywhere from minimum wage to over $50,000 per year. If you want an experienced chef to take control of your restaurant, you might have to pay even more.
To determine the cost of your labor, you should draw up a list of the number of team members you need to run your restaurant at certain times of the day. For example, you will need more staff at lunch and dinner than in the late afternoon.
5. Slush Fund
While rent, renovations, marketing, and labor will be your initial costs, it’s also essential to consider unexpected costs. It’s always best to prepare for the worst — if you run into appliance problems or you need to shut your restaurant for a few days, it can cost serious money.
Many restaurant owners make the mistake of using all their cash to open a restaurant. It’s best to maintain a slush fund that you can use to pay emergency staff, repair appliances, hire new chefs, or pay any other unexpected expenditure.
Also, if you run into problems with sales when you first open your restaurant, you need to be able to cover your staff costs and bills. Keeping between $40,000 and $50,000 in a slush fund is the best way to mitigate this risk. Let’s continue below and take a look at some common new restaurant spending mistakes.
6 Common Spending Mistakes by New Restaurant Owners
If you’re new to the restaurant industry, it’s easy to make mistakes. Learning from other people’s errors is often the best way to avoid experiencing similar issues.
1. Buying Expensive Equipment
While it can seem like a good idea to purchase expensive kitchen equipment when you first start your new restaurant, this can be a big mistake. Sourcing affordable equipment or finding second-hand appliances is a great way to save money. When other restaurants close down or change hands, it’s easy to pick up cut-price supplies.
If you choose to finance new equipment, the interest payments might create cash flow problems if your restaurant takes a while to get off the ground. No matter what, it’s always important to be frugal when you’re purchasing any large-ticket items for your restaurant. You can always shop restaurant stores online to find to find the best price.
Aside from purchasing affordable equipment, it’s also critical to consider the energy efficiency of the appliances that you’re buying. If you ignore energy consumption, it could cost you thousands of dollars per month. Sometimes investing in slightly pricier appliances can help you cut your energy bills.
2. Misinformed Restaurant Technology Purchases
If you’re in the restaurant business, it’s essential to understand the importance of technology. While you might not associate hospitality with technological advancements, there are plenty of opportunities to waste your money on unnecessary tech.
Your restaurant’s point of sale (POS) system is one of its most critical components. While a range of modern POS systems offers cutting-edge features to business owners, it’s essential to choose the right one. Compare the market before you make a purchasing decision, and make sure that your POS system doesn’t require expensive hardware.
3. Ineffective Marketing
While marketing has the potential to increase your revenue by thousands of dollars per month, it doesn’t always work. If you target the wrong customers, or you don’t use the right marketing channels, you might not see any returns on your money.
Fortunately, digital marketing makes this a lot easier. By using search engines and social media to target customers, you’ll be guaranteed that your ads are exposed to relevant people. Blunt advertising methods, such as radio and television, often waste your message on a much broader range of consumers.
If you do decide to choose a marketing agency to take over your advertising efforts, it’s best to select an agency that has experience with unique restaurant promotion ideas. Ask the agency for past clients, references, and additional evidence that they can achieve results. In some cases, it’s best to negotiate payment terms that are directly linked to marketing performance.
4. Overpriced Food Sourcing
Once your restaurant is operating, it’s essential to consider the costs of your food. If you’re making large purchases, it’s a good idea to try and negotiate with your suppliers. You should also compare your current suppliers against other competitors in the same niche.
While it’s easy to get caught in the routine of sourcing from the same suppliers, it’s essential to be getting the best deals if you want to stay competitive.
5. Poor Food Management
In addition to sourcing food at affordable prices, it’s also essential to manage your current stock. Many restaurants end up shutting down because they’re unable to manage their food supply properly. If you purchase too much food, it might spoil before you can sell it. On the other hand, if you don’t buy enough, it can leave customers very unhappy.
Fortunately, many leading POS systems now offer inventory tracking and inventory analysis. Using a tracking system and analyzing your order volume and inventory can help you make the right food purchasing decisions.
6. Can Consultant Help You Cut Costs?
If you’re finding it hard to assess costs and viability, it might be a good idea to speak to a restaurant consultant. There are various former chefs and restaurant owners that now help new restaurant owners navigate the complexities associated with starting a new establishment.
If you hire a consultant that has years of experience owning or managing a restaurant, you’ll be uniquely positioned to benefit from their knowledge on day one. While there will still be learning curves, a consultant can help speed up the process of becoming a competent owner and manager. Good consultants can often help you build menus, assess costs, design your interior, source appliances, understand food management, and more.
If you do decide to hire a consultant, ask them for proof of their previous consulting work and successes. With so many restaurant consultants now operating in the industry, it’s essential to find one with a reputable track record.
In addition to helping you assess costs, a consultant can also search for properties, source food, and acquire staff. While the costs of a consultant might seem unappealing, using an expert during your setup process can save you a considerable amount of money in the long run.
At the end of the day, the costs associated with opening a restaurant can vary significantly depending on a range of factors. Rent, labor, renovations, licenses, and a host of other restaurant-related expenses all contribute to the overall price of setting up a new restaurant. While some small restaurant owners have gotten off the floor for less than $100,000 in total, some high-end restaurants can cost millions to open.
Either way, it’s always essential to have a viable business plan. The key to successfully opening a restaurant is careful planning and thorough ‘cost-benefit’ comparisons. Assessing potential costs before you jump headfirst is the best way to avoid being hung out to dry!
Cathy Smiley is a POS specialist, former restaurant professional, and content contributor for www.posusa.com. Cathy currently works as an ISO for one of the largest POS companies. Since 2011, she has personally been involved with hundreds of point-of-sale installations. Her articles have been featured or mentioned in many of the top industry websites. She likes writing on the subject of POS systems and enjoys helping merchants find the best solutions to help grow their business.
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