Opening restaurants seem like a simple thing, but it’s much more complicated than you may think. There are several things to consider, which all need a big financial commitment. The startup capital, lease payment, staff salaries, inventory, etc., are among the things to consider before opening a restaurant.
When will you break even? This should be the first question to ask yourself if you’re planning to make a profit from your restaurant business. What you get from the calculation is what is referred to as the Return on Investment(ROI). ROI is the ratio between the investment cost and the net profit. It may take at least three years for a new restaurant to reach its break-even point, generally. This is around the time your net profits could be equal to the investment costs. Also, note that the first two years are usually not easy for most restaurants, but those who manage to thrive during this challenging period make good RIO monthly.
How Do You Calculate ROI for Your Restaurant?
Calculating restaurant ROI is pretty simple if you can point out your costs easily. The calculation only requires two things: your startup costs and the operational costs. Below are these costs illustrated in detail.
- Startup Costs
Though challenging because you don’t have any experience whatsoever, starting a restaurant from scratch is possible. And, you have to include the startup costs in your ROI calculations to come up with an accurate ROI for your restaurant. But, what exactly is the startup costs? This is your initial investment. It’s the money you set aside for the restaurant business before you could even launch it and welcome the public in. The costs include rent, licenses, equipment costs, and inventory. Note that calculating startup costs isn’t necessary if you’ve purchased an existing and already established restaurant since it automatically becomes the buying price.
- Costs of Operation
Calculating your operational costs should be next in line once you’ve known your startup costs. Operating costs are all the money you spend on restaurant staff and utilities monthly, including salaries, taxes, electricity bills, water bills, sanitation, entertainment, insurance, food, etc. To be safe, you have to set aside at least 250,000 dollars to cater to operation costs depending on the size of your restaurant and its location.
The Formula
Now that you have all the required numbers, calculating ROI becomes easy. You can calculate it by subtracting the initial value of investment(includes the startup and operational costs) from the net return. This becomes your restaurant’s final value of the investment. To get your restaurant’s ROI, you’re supposed to take the figure you got from the above subtraction, divide it with the cost of investment, then multiply by 100%.
(what you’ve gained from the investment-the cost of investment)=net return
Then take, (net return/cost of investment)x100=ROI
How to Interpret ROI Calculations
There are two things to keep in mind when you want to interpret the ROI calculations. First, it is easier to understand ROI when it is calculated in percentage form rather than in ratio form. And the last bit is that net return is generally on the numerator in this calculation because the results of your investment return could either be positive or negative.
When the net result is positive, it means that your returns are higher than the total costs, meaning that you’re making profits. But when you get a negative figure from this calculation, then your investment has produced a loss since total costs are higher than total returns.
A Good ROI for Your Restaurant
A good RIO should range between 15% to 30%, especially for small restaurants. This means that very few restaurants that are less than three years old would even make a profit. To speed up the ROI process, especially if you’ve started your restaurant from scratch, you may consider advertising campaigns. These campaigns may take up a lot of money initially, but they are worth it.
