How to Open a Restaurant in 2020: Step-by-Step Guide
December 02, 2019
Opening a restaurant in 2020 will, without a doubt, be one of the most thrilling and scariest experiences you’ll ever go through in your life. The great news is that you’re not alone. With the right resources and skills, your journey will be worthwhile and successful.
Successful restaurateurs know it’s all about finding the right balance between having a rock solid plan in place before execution, and allowing yourself enough flexibility to modify or pivot the plan as you go along.
Whether you’re at the very beginning of researching how to write a restaurant business plan or just about to launch, this article will provide you with the basics of how to open a restaurant in 2020.
What you’ll learn:
Phase 1: Planning your restaurant
The idea of opening a restaurant is really exciting. But reality soon hits once you start considering how much money is needed to open a restaurant. Restaurant startup costs typically run between $275,000 – $425,000 to launch. Here are those costs broken down by expense:
a. Start-Ups Costs
A big challenge you’ll face when opening a restaurant is addressing the hidden fees and expenses that pop up.
To start you off, here are a few general start-up cost ratios to be aware of:
- Major Expenses: 75% of your projected sales
- Smaller Expenses: 15% of your projected sales
- Profit Margin: 4%—10% of your projected sales
Here’s a breakdown of the major expenses you’ll likely encounter as you prepare to open your restaurant:
- Rent & Utilities: 5%—10% of your projected sales
- Food & Beverage: 25%—40% of your projected sales
- Staff Salaries: 30% of your projected sales with management salaries accounting for ~10% of this ratio
Here’s a breakdown of smaller expenses you‘ll encounter as you prepare to open your restaurant:
- Business Registration: $100–$1,200
- Consultants: Varies by region/expertise
- Licenses & Permits: Varies by region
- Insurance: Varies by provider and insurance type
- Construction & Renovations: $279,807 average; $300–500 per square foot for kitchen, $150–300 per square foot for dining room
- Equipment, Smallwares & Furniture: $100,000 to $300,000
- Technology: $1,100 – $7,000 + POS subscription of $70 to $400 per month
- Marketing & Promotions: Varies by venue
It’s important to monitor and manage the restaurant accounting basics for your business to properly manage your business.
b. Sales Forecast
One of the most important steps you need to address when figuring out how to open a restaurant in 2020 is to calculate your forecasted sales. Healthy and sustainable sales are the foundation to keeping your restaurant alive.
Here’s what you need to know:
- Forecasting requires a bit of math and a few informed assumptions about your business, such as the average amount of food sales per customer.
- Don’t try to be completely accurate. It’s unrealistic because there are so many variables you can’t predict.
- You’ll always need to fine tune your forecast, especially in the beginning as you begin to better understand the market demand.
The best way to prepare a financial forecast is to do the following:
- Get help from financial experts who have a background in the restaurant business.
- Be realistic and try to stay on the conservative side when making informed assumptions about your business.
- Do you research to understand the basic math required to properly forecast your sales.
- Review your financial forecast on a regular basis.
Every city has its own mix of requirements when it comes to licenses, permits and insurance. How many you need of each is affected by numerous factors, including your restaurant’s location, square footage, and staff numbers.
Businesses such as restaurants will often have to put down deposits for each type of insurance. Be sure to check with your lawyer and city requirements as soon as possible to ensure you obtain all required documents.
a. Licenses & Permits
As with any other type of service-oriented business, restaurateurs are subject to a number of licenses and permits. Many of these requirements come with nominal fees. If you are planning to renovate, have outdoor seating, or serve alcohol, each will require a license or permit.
Acquiring certain licenses and permits can take a long time, so it’s best to start the application process as soon as possible. The licenses and permits needed to open a restaurant will depend on many variables. Check with your local city office to see if they offer tools that will help guide you in opening a restaurant. Restaurateurs can sometimes need upwards of 30 licenses and permits.
Common types of licenses and permits are related to:
- Starting or managing a business
- Construction, development, and zoning
- Serving, selling, exporting, and importing – such as a food service license and liquor licenses
- Using roads, sidewalks, and public facilities
- Electrical, plumbing, and heating
- Dangerous goods and waste
- Business and professional services
Make sure you address your restaurant’s insurance needs. You also need to make sure you know how to protect yourself and your restaurant from lawsuits and claims.
To help you decide what kinds of insurance your restaurant needs, below are the most critical types that should be considered:
- General liability insurance
- Property insurance
- Liquor liability insurance
- Workers’ compensation
- Business interruption insurance
- Food contamination insurance
Phase 2: Building your restaurant
Here are the typical costs associated with construction and renovations when opening a restaurant:
- Kitchen: $300-500 per square foot
- Dining Room: $150-300 per square foot
Renovation budgets will differ depending on the kind of space you’re starting off with and the finished product you’re going for.
For example, converting a space that was originally designed for another purpose to a restaurant floor plan layout will require significantly more investment than working with a space that has already been designed for a restaurant. Don’t forget about the basics too – from restaurant lighting to flooring, it adds up!
a. Kitchen Equipment, Smallwares, & Furniture
Kitchen equipment, smallwares, and furniture costs typically range between $100,000–$300,000.
Large pieces of equipment such as refrigerators, ovens, freezers, and fryers can cost about $100,000.
Smallwares include tableware, glassware, utensils, and smaller restaurant equipment. Costs usually add up to about $80,000.
A typical furniture budget ranges between $5,000–$40,000. The final cost will depend on the size of your restaurant, the concept, and number of seats.
a. Best Practices
Restaurant management can easily be complicated and time-consuming, but it doesn’t have to be that way. When figuring out how to run a restaurant successfully, having a solid inventory management system in place will help you iron out the process quicker.
Proper inventory management requires setting up a series of processes that enable interactions between all your major activities, including ordering, receiving deliveries, stocking, counting, and inventory data analysis.
Developing a comprehensive inventory management system is a lot easier when you break down the numerous process into mini-processes that you can record, enforce, and adapt as needed.
Here’s how to break down your inventory management into more manageable mini-processes:
- Document and develop procedures for tracking and recording the number of items
- Create specifications for ordering and purchasing inventory
- Establish procedures for receiving deliveries (e.g. Who should receive deliveries and where should the stock be placed?)
- Develop policies and procedures for reconciling inventory discrepancies
- Maintain a regular schedule for analyzing inventory data
The purpose of performing all these mini-processes is to understand how much stock you have in your restaurant at all times. If you have access to this information, you’ll be able to avoid the following problems:
- Running out of inventory mid-service
- Excessive food waste
- Excessive inventory
- Relying on outdated and inaccurate financial reports
b. Inventory Software
For a lot of restaurateurs, the investment in inventory software is worth the amount of time that gets freed up. With so many other areas of the business that need your attention, every spare minute counts.
Look for inventory management software that will aggregate data and give you an at-a-glance look at historical trends in ordering, discrepancies, and costs.
Phase 3: Restaurant enablment
The most impactful technology that a restaurant can have is an efficient POS system. POS systems now function more like an operating system for your entire restaurant. They can help manage your staff and inventory, integrate with self-serve kiosks, build customer loyalty, and provide valuable data that enables you to make better business decisions.
The right type of restaurant POS system for your business will depend on your venue, payment processing requirements, and how you plan on using its capabilities.
No matter what your priorities, it’s important to consider all the options available for POS systems before making a final decision.
a. Traditional POS Hardware
Traditional POS systems, also known as “legacy” POS systems, have been used in the restaurant industry since the 1980s. A traditional POS system usually includes a network of stationary terminals with touchscreens connected to an internal, back office server. Payment processing is conducted at the terminal.
Common functions include:
- Inventory management
- Managing reservations
- Handling delivery and takeout orders
- Splitting bills between customers
- Limited sales reporting and data forecasting
- An upfront license fee is required
- They require monthly maintenance
- A technician needs to install the system at your restaurant
- You can only access your data at your location (no offsite access)
b. Mobile Cloud POS
Advancements in tablet technology have enabled the development of mobile POS systems. The once stationary POS terminal can now literally be placed it in the palm of the server’s hand with an iPad.
Three great qualities of a mobile POS are as follows:
1. New Offerings of Payment Processing
Restaurants are now required to accept chip-and-pin (EMV) credit and debit cards, so customers expect businesses to accommodate e-wallet apps.
The easiest way to comply with ever-evolving data security requirements is to use a mobile POS system that integrates with handheld credit and debit card machines. These can be brought directly to the customer’s table for transaction.
2. Cloud Installation & Easy Access to Data
Mobile POS systems don’t require on-site installation because they are cloud-based. Hardware can easily be set up in the restaurant and software can be connected to the cloud. Restaurateurs are able to access their sales reporting and financial forecasts from anywhere in the world and on any device.
3. Software Integrations
Mobile POS software can be integrated with other software. This means that your primary POS software can be connected to other management software that you use for activities like labor management, customer loyalty, etc.
a. Staff Salaries
When considering the ideal labor ratio for your restaurant, best practice is to target 25%–35% of gross sales.
Just like with your food and beverage costs, your labor ratio will depend on your restaurant concept. A full service sit-down restaurant will have a higher labor ratio of 30%–35%, whereas a quick service restaurant would spend between 25%–30% of gross sales on payroll. Management salaries usually account for 10% of your labor ratio.
When figuring out how to staff your restaurant, fair scheduling and wages will be big differentiators in attracting top quality talent.
In the U.S., many states have passed “fair scheduling” acts. These require managers to give their staff at least two weeks’ notice when assigning shifts, and provide additional payment if scheduled to work last minute.
You’ll also need to comply with your state’s specified minimum wage. If your state’s minimum wage is higher than the U.S. federal wage, you’ll need to comply with your state’s minimum wage regulations.
RELATED: The must-ask restaurant interview questions to ask candidates.
Phase 4: Opening your restaurant
a. Financial Reporting
Below are the most important financial reports that you should pay attention to when evaluating the ongoing health of your business.
1. Food & Beverage Sales Report
Your food and beverage sales reports should be standard reports that you generate on a daily, weekly, and monthly basis. Sales reports are required in order to generate any other type of financial report. They come standard with any cloud-based POS system.
These reports tell you critical day-to-day information, such as:
- Daily, monthly, weekly sales activity
- Sales by menu item
- Sales by employee
2. Prime Cost Report
Prime costs are the total cost of sales plus all payroll-related costs (including management and staff wages, and payroll taxes and benefits). Prime costs roll up into your profit and loss statement.
To calculate your prime costs, you need to generate the following reports from your POS system:
- Weekly labor cost report
- Weekly cost of goods sold report
- Weekly sales report
With these numbers, you can then calculate your prime costs:
Cost of goods sold (gross sales) + Total labor cost (include taxes, benefits and insurance) = Prime cost
Calculate the percentage of your prime costs against total sales. Your prime cost ratio should be less than 60%. If the ratio is greater than 60%, you’re spending too much on inventory and labor. Be sure to review this report on a weekly basis.
3. Profit & Loss Statement
A profit and loss statement (also known as statement of earnings, statement of operations, or an income statement) reviews the total revenue and expenses of your restaurant during a given time period.
This report gives you an idea of your restaurant’s financial health. A profit (i.e. positive number) indicates that your restaurant is doing well financially. A loss (i.e. negative number) means that it’s time to reassess your business strategy and decide which areas need to be tightened up to save on costs or increase revenue.
If you don’t have a bookkeeper, new restaurateurs generally conduct this report on a monthly basis. However, you may find it helpful to generate weekly reports at the very beginning so that you have a more real-time snapshot of the overall health of your business.
4. Inventory Reports
Your inventory report will help you accomplish three major goals:
- Calculating the total cost of your current inventory
- Determining the latest unit cost of each item
- Tracking the number of goods in your restaurant
Inventory reports should be created on a weekly basis at the very minimum. If you’re ordering inventory on a weekly basis, the easiest way is to conduct inventory on the same schedule.
5. Cash Flow Statement
Cash flow is the amount of cash you have on hand to pay bills. As a new restaurateur, it will be necessary to always be aware of your cash flow. The recommended frequency for generating a cash flow statement is on a weekly basis.
There are two main components of cash flow: inflows and outflows.
Cash inflows: The combination of cash from customers, financing sources, and assets sold.
Cash outflows: The combination of cash spent on operating costs, payments to financing sources, and asset purchases.
Total cash flow: Cash inflows minus your cash outflows within a specified time period.
a. How to Write a Marketing Plan for Your Restaurant
Using a combination of digital and traditional marketing tactics is the best approach to promoting your restaurant and maintaining continual business growth.
Similar to writing a business plan before starting your restaurant, best practice is to write a restaurant marketing plan before investing in marketing initiatives. The good news is that you would have already done most of the heavy lifting when you wrote your business plan. You’ll just need to fill in a few more details.
Here are the main steps to crafting a marketing plan for your restaurant:
Step 1: Review your brand’s vision, restaurant mission statement, and position statements. These will already be in your business plan so make sure you stay consistent when building your restaurant website and overall marketing strategy.
Step 2: Revisit who you identified as your target audience(s) in your business plan. Pay attention to the demographics, psychographics, and behaviors of these customer segments. Your marketing campaigns need to address at least one of these audiences.
Step 3: Perform a SWOT (strengths, weaknesses, opportunities, threats) analysis on your competitors.
For each competitor, consider the following:
- Strengths: What is your competitor doing well that you could learn from?
- Weaknesses: What could your competitor be doing better and why aren’t they doing it already?
- Opportunities: How can you exploit your competitors’ weaknesses and do better than them?
- Threats: Do your competitors offer something unique that you can’t?
Step 4: Outline what differentiates you within the market by repeating the SWOT process on your own restaurant.
Step 5: Develop an elevator pitch that can be used in your promotional activities. An elevator pitch is how you would describe your restaurant to a stranger in less than 60 seconds.
Step 6: Define and prioritize your marketing objectives. Each objective needs to serve at least one of your overall business objectives. Common objectives include increasing brand awareness, maximizing customer acquisition, and increasing customer retention.
Step 7: Decide what mix of digital and traditional marketing strategies is the best for your business and budget. Be specific about how you’re going to measure performance.
TIP: Brainstorm a unique grand opening idea to help your new restaurant generate buzz in the community.
Free Restaurant Business Plan Template
Opening a successful restaurant will take much planning. A business plan will help you manage all business planning and launch in one place.
You’re now ready to plan your restaurant
Now that you understand the fundamentals of how to open a restaurant, turning your dream into reality is within sight. The foundation to success is already laid down as long as you have documented plans, processes, and reporting in place.
If you ever feel overwhelmed, remember that you’re never alone as you go through this journey. There are plenty of resources and tools available to you, and communities of restaurateurs willing to share their experiences and knowledge.
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