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The road to profitability

Math is a science, and operating a restaurant is an art. However, operating a profitable restaurant is a science, and it boils down to the math.

For restaurants within the Twin Cities area, the formula is this:

Revenue - Discounts - Labor - Cost of Goods - Operating Costs = House Profit

You can take the categories listed above for any restaurant within the Twin Cities, or the nation for that matter, and apply the appropriate numbers to each category, and come out with an apples-to-apples comparison of 2 or more restaurants.

For example, the numbers work out this way for a restaurant with $3M annually in Revenue:

Revenue - Discounts (3%) - Labor (31%) - COGS (28%) - Operating (18%) = House Profit (20%)

$3,000,000 - $90,000 - $930,000 - $840,000 - $540,000 = $600,000

These are tight parameters, and the largest of these categories - Labor and Cost of Goods - must be controlled to the smallest decimal, in order to maintain the holy grail that is House Profit.

Because, the House Profit is what pays the Rent, which falls after House Profit in our analysis.

Ideally, for a restaurant that has the square footage to attain $3M in annual Sales, Rent is less than 10% of Revenue, but in our current market many leases average $20-25k/month, which totals $300k annually, or half of the House Profit in our example.

For many restaurants, this Rent deal is a fixed amount - and if Sales fall below the $3M mark, that doesn't mean the Rent amount changes, it just becomes a higher cost percentage of those Sales. And the more Rent is, the less money there is left over for cost overages, debt service payments, and distributions to investors.

Therefore, negotiating the Rent deal prior to a restaurant opening for business becomes the single most important factor in determining the profitability of a restaurant, as well as determining whether it's a good investment for stakeholders. Profitability pretty much boils down to the Rent deal in most restaurants.

Comment if you agree or disagree with the math...

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