Our Restaurant Client Was Doing $2 Million in Sales. Why Was He Taking Home So Little?
By ProfitWise - a Visa Business Plans company
One of our restaurant clients was generating approximately $2 million a year in sales.
From the outside, that sounded like a very successful restaurant. It was busy and sales had actually increased over time.
But during one of our monthly meetings, the owner asked us a question that had clearly been bothering him:
“If we’re doing this much in sales, why am I taking home so little?”
Because we handle the restaurant’s specialized bookkeeping, we didn’t have to guess. We had the financial history in front of us and could walk through what had been happening month by month.
The restaurant was bringing in more money.
The problem was how much it was costing the business to generate that money.
We Started With Where the Money Was Going
When restaurant owners hear that sales are up, it’s natural to expect profit to follow.
In this case, sales had grown, but several of the restaurant’s major expenses had been growing with them, and some were increasing faster.
The restaurant was spending more on payroll, and food costs had gone up too. Insurance, utilities, credit-card fees, delivery commissions and everyday supplies were all taking a bigger bite out of the revenue.
No single expense explained the entire difference.
Once we put everything together and compared the numbers with prior periods, however, the owner could see why an increase in sales hadn’t translated into the increase in take-home income he expected.
That is one reason our monthly meetings are such an important part of the bookkeeping relationship.
We don’t expect restaurant owners to look at a multi-page financial statement and immediately understand what changed. We go through it with them in plain English and focus on the numbers that actually matter to their business.
A Small Percentage Can Be a Lot of Money
Restaurants operate on numbers where relatively small changes can have a significant impact.
On $2 million in annual sales, a two-percentage-point increase in a major expense category represents $40,000.
If food costs move up, labor consumes a larger percentage of sales, and several other expenses increase at the same time, a meaningful portion of the restaurant’s additional revenue can disappear before it ever reaches the owner.
Seeing that in dollars often changes the conversation.
Instead of saying, “Costs seem high,” we can show the owner where they increased, by how much, and what that increase meant over the year.
Then we can decide what deserves a closer look.
Cutting Expenses Isn’t Automatically the Answer
Finding higher costs doesn’t mean we immediately start looking for things to cut.
If payroll increased, for example, we want to understand why. The restaurant may need the additional staff to handle higher sales volume. Cutting employees simply to improve the labor percentage could hurt service and ultimately hurt revenue.
The same applies to food costs. If an ingredient has become more expensive, removing it or buying a lower-quality substitute isn’t necessarily the best solution.
We want to understand what is driving the number before deciding what to do about it.
For this client, that meant looking more closely at how labor aligned with sales patterns, what was happening with food costs, and whether every revenue source was contributing as much as the owner assumed.
Not All Restaurant Revenue Is Equally Profitable
This became particularly important when we looked at delivery.
Delivery was contributing meaningful revenue to the restaurant, but those sales also came with commissions, packaging, and other costs that dine-in orders didn’t have in the same way.
That didn’t mean delivery was bad for the business.
It meant we needed to understand what the restaurant was actually keeping from those sales.
The same type of analysis can be applied to menu items, promotions and other parts of the business. A restaurant can sell a lot of something without necessarily making much money from it.
Once the bookkeeping gives us reliable numbers, our Fractional CFO work can go deeper into those questions and help the owner determine which changes could have a meaningful effect on profitability.
$2 Million in Sales Wasn’t the Number We Needed to Fix
There was nothing inherently wrong with the restaurant’s revenue. In fact, growing sales was a positive sign.
What the owner needed was a better understanding of what happened to those sales after they came through the door.
Because we were already handling the books, we could show him how the restaurant’s costs had changed over time and explain what those changes meant in dollars. From there, we could focus our attention on the areas where an adjustment could realistically improve the bottom line without compromising the operation that was generating the revenue in the first place.
For this restaurant owner, $2 million in annual sales sounded impressive, but that wasn’t what he was ultimately trying to build.
He wanted a restaurant that rewarded him financially for the work, investment and risk involved in owning it.
Understanding where the money was going was the first step toward figuring out how to keep more of it.
