LFTL: Understanding Your Restaurant’s Sales Cycle

"History doesn't repeat itself, but it often rhymes" - Mark Twain

As we move into the hottest month of the year, it's a good moment for Lessons From the Line to take a look at the natural ebbs and flows of our industry - we're in a (mostly) blazing DC Summer and your revenue could be trending in the wrong direction. During the Summer doldrums it's easy to take a look at your sales numbers and get frustrated, but there is a natural cycle to our industry and we can make sure you’re well prepared.

While every restaurant is different, Harmony can reliably predict the ups and downs of your P&L - sales cycles can vary but generally can be forecasted reliably once baselines have been established. Your sales might be down now, but they'll come back in the Fall, and when they do, you should be shoring up for when they dip again in Winter so you can get through the lull and into Spring, when they'll be up again, rinse and repeat, ad infinitum, and so on and so on.

Despite the relative predictability, it's always good to take a moment to refresh yourself on what to expect through the year and take stock of any practices you can enact to maximize profits, wherever you are in the cycle. One variable to expect is the Inflation Reduction Act's impact on businesses, which we began to unpack in this month's Commonsense CPA and which we'll be taking a deeper dive into next month. In the meantime, read on to brush up on the nuances of this industry's ebbs and flows.

Matt Hetrick, CPA
President and founder of Harmony Group Inc.

Understanding Your Sales Cycle

Summer, a time of bounty for farmers, can be feast or famine for restauranteurs. As Summer draws to a close, it’s a perfect time to understand the importance of the sales cycle of your restaurant. It would be great if we could count on predictable revenue intervals but in the real world the distribution of sales varies widely. Most restaurants have months that are significantly busier than other months due to the weather, consumer behavior, offering and changing trade area density and these fluctuations must be carefully managed.

A typical urban East Coast restaurant sales cycle could go something like this:

Of course, a waterfront restaurant will have a very different sales cycle and make the vast majority of its revenue in the four warm weather months: May, June, July, August. Some restaurants have specific holidays that can dramatically impact the sales cycle – Irish pubs tend to do well in March with the St. Patrick’s Day sales bump. In a perfectly smooth sales cycle each month would account for 8.33% of yearly sales but in reality it’s not unheard of to see months account for 13% - 16% of yearly sales. Many restaurants generate the majority of their profits in three to five months a year.

When it comes to revenue generation, an operator with a good handle on the sales cycle will work to make sure they capture the most available revenue in each part of the sales cycle. For example, a waterfront restaurant may aggressively work to drive check average in the summer months and shift to a more value focused approach to attract customers in the offseason. A restaurant with a big private dining room will invest resources to make sure it’s booked with ample holiday parties in December.

It can also be beneficial to look at the calendar and your concept and see if you develop any “tentpole” events to become big revenue generators. St. Patrick's Day and Cinco De Mayo are well-established but a restaurant could try and promote a unique version of lesser known festivals and events that are celebrated around the world. The list of possible options is quite voluminous and publicizing an event takes resources, but it can be a great opportunity to showcase your restaurant’s unique culture and establish a strong revenue generating opportunity.

Most important to navigating your restaurant’s sale cycles is effective cost management. The first place to look is your expense structure and determine what percentage of your expenses are fixed costs and what percentage of your expenses are variable costs. Fixed expenses include things that aren’t reliant on sales volume or easily changed, for example: management salaries, fixed rent, utilities and loan payments. Variable expenses scale with sales volume or are easily manipulated such as costs of goods sold, hourly wages, most direct operating and G&A expenses.

The conventional wisdom is that variable costs are preferable to fixed costs because variable costs allow the operator to fine tune costs to the operating environment. In restaurants with uneven sales cycles, large fixed costs will create bigger swings in cash flow over the course of a year, stressing bank balances if not properly accounted for.

So what are some strategies for smoothing out your cash flow?

Labor is the most challenging cost center because while it is technically variable, it can be very difficult to adjust. Restaurants with extreme seasonality can need up to double the staff in the busier months and the optimal staffing of every restaurant inevitably changes throughout the year. At Harmony we recommend a maximum total labor load of ~40% of sales but that won’t be distributed consistently throughout the year. Slow months may see labor at 40%+ which is acceptable as long as labor is efficiently allocated below benchmarks in the higher revenue months.

Excess management costs and hourly staffing that doesn’t take into account the larger sales cycle will be detrimental to profitability but effective labor management can be a difficult process. It’s expensive and impractical for most restaurants to dramatically increase their staff in the busy months but untenable to keep excess labor in slower months. Managing this paradox requires robust systems, sensible menu engineering, roles for different employee skill levels, strong management teams whose roles evolve throughout the year and strategic use of hybrid employees who serve as key managers. Your Harmony team is available to review labor strategies that make the most sense for your particular sales cycle.

The other key is to be aware of the cash ebbs and flows when making significant outlays of cash by budgeting for future anticipated expenses. Common large outlays of cash include percentage rent payments made on a quarterly/yearly basis, balloon loan payments, capital investments, intercompany loans and investor distributions. Some businesses with extreme seasonality find it useful to have lines of credit but extreme care should be taken around adding debt and any loan should be at a reasonable interest rate because interest is an expense that reduces profits.

Finally, the imperative to distribute funds quickly to investors has to be balanced around anticipated cash needs. Maintaining an above market rate-of-return is critical to strong investor relations but once cash leaves your accounts it becomes very costly to replace in times of crisis. It’s prudent to maintain a cash reserve of a financial quarter’s total expenses and distribute any excess capital above your reserve but this reserve and the timing of distributions will vary according to fluctuations in profitability.

At Harmony we have regular reviews with our clients and work with them to focus on the short, medium and long-term. Managing the sales cycle is a large part of sound financial and strategic planning. Our experience allows us to help new clients plan for their sales cycle by implementing best management practices. Even our experienced clients benefit from regularly reviewing the revenue cycles against their cost management procedures.

Last Bites

Restaurant Revitalization Fund Redux (Sort Of)

The original $28.6B Restaurant Revitalization Fund was almost immediately exhausted, leaving 60% of applicants without funding. The SBA recently discovered $180M in unobligated funds that it may disburse to some of the 150,166 approved and unfunded applicants. The unallocated funds represent less than one percent of the outstanding funding requests and the RRF has been subject to contentious litigation, so it’s anyone’s guess how and when these funds will be allocated and disbursed. Also up for debate is whether this round of funding can change the feeling among some operators that the RRF created haves and have-nots in the industry.  What’s certain is that Harmony is closely tracking all developments related to the RRF and will keep you apprised.
 

Sous Vide Newsletter w/ Information, Expertise & a Dash of Humor

Menu engineering can be a mysterious art but the evolution of menu descriptors is a good snapshot of the current mood of the food world. Eater reports that the minimalist descriptions that dominated menus is a trend on the way out, positing that a new generation of savvier diners want more information about what comprises a dish – including the name of the chef who created the dish.
 

Climate Changing Menus

We’ve extensively covered the implications of the Inflation Reduction Act in our companion newsletter, Commonsense CPA, but restaurants have been doing their part to aid climate change efforts for years. This trend shows no sign of slowing down as celebs and major industry figures are opening restaurants focused on plant based menus that will strive to be healthier than the Standard American Diet and less carbon intensive. Since there are usually better margins on vegetable-forward dishes, testing a few to see if they sell on your menu is never a bad strategy.