To ease the burden of rising energy costs, start by taking a look at your HVAC system. The unit not only maintains the current climate control in your restaurant, but it also controls exhaust from the kitchen. One way to maintain climate in the back and front of the house is to install two or more HVAC units. While costly in the beginning, you’re likely to see a more even internal temperature throughout.
Tips for saving energy (sourced from the Washington State University Cooperative Extension Energy Program and the Northwest Energy Efficiency Alliance) include:
• Use the thermostat factory settings. Leave the thermostat settings at 76 F for cooling and 68 F for heating. Each degree of heating or cooling can cost an additional four to five percent in energy costs.
• Use the thermostat’s night setback feature. Set the thermostat to bring your restaurant to temperature no earlier than needed.
• Opt for florescent lighting and save as much as 1/4 on your energy output. Plus, the bulbs expel less heat than traditional light bulbs, helping to keep your restaurant cooler.
Dollars & Sense
Why it’s important to understand your EBITDA
BY Robert Lillegard
But that’s a mistake, especially when it comes to financial planning. Spending a little time tracking your cash flow now can mean the difference between success and failure later. And while accounting can get extremely complicated, a simple formula called EBITDA can tell you much of what you need to know.
First things first. EBITDA stands for “Earnings Before Interest, Taxes, Depreciation, and Amortization.” It’s basically your gross revenue minus your food costs, payroll and other expenses, with the four expenses mentioned above added back in. EBITDA is a basic measure of cash flow that would be available to a debt service. According to Brian Murphy, vice president of business banking at the Duluth, Minnesota-based North Shore Bank of Commerce, it’s crucial if you’re interested in getting a loan.
“It’s critical,” Murphy says. “It’s one of the most important calculations that we do as bankers. What we’re trying to do is determine capacity to pay.”
So how can a restaurateur learn their EBITDA? Murphy says the answer is probably already in front of most of them.
“It’s right in the financial statements,” Murphy says. “That’s the first good piece of advice — keep good financial statements.”
Even if you don’t read your financial statements, it’s still good practice to keep them for the bank. Pete Radosevich, who owns Eskomo Pizza Pies in Esko, Minnesota, says that he couldn’t tell you his EBITDA offhand, but he’s able to get it when it counts. He tracks sales and expenses in QuickBooks, which automatically processes the numbers.
“When you write everything down in QuickBooks, once a month you can print out a balance sheet,” Radosevich says. “I don’t even look at the balance sheet. I just send it to the bank once every quarter or so.”
A positive EBITDA is good, and the higher the better. With a higher EBITDA, you’re able to borrow more money at lower interest rates because you’re less of a risk. Conversely, a negative EBITDA means you’re losing money month to month. While you may be able to supplement with savings or income from another business to stay afloat, your business model is unsustainable over the long term. Your minimum EBITDA depends on how much money you need to borrow.
“Say an operator has round payments of $1,000 of principal and interest — EBITDA needs to be greater than $12,000,” Murphy says. “If the EBITDA is less than $12,000, then there isn’t adequate cash to make those payments.”
While these numbers can help you plan for financing, Radosevich says they’re not important for most day-
to-day operations. He sets money aside in a separate account for expenses like maintenance, and he keeps track of more basic metrics in the short term.
“I know every month on the 15th I have a payment of about $8,000 and I need to plan,” Radosevich says. “If you know your sales last week were $20,000, you know you’re going to get a bill from Roma for $5,000. I don’t need to see every day that my building has depreciated another $42.”
When it comes to financial planning, the best advice is to play to your strengths. Radosevich says that there are two ways to run a pizza business. Some operators focus on staying profitable and in the black, and simply make sure their pizza is good enough to keep customers happy. Others, like Radosevich, focus on quality pizza, and do just enough math to stay afloat. This approach can work, as long as you find someone to help with the more complex aspects of financing.
“Most of the time, people who go into small business need to have a rudimentary (financial) understanding,”
Radosevich says. “But the concepts you’re talking about are usually far beyond people who all they want to do is make pizzas. They should find an accountant who can explain these things.”
Robert Lillegard is based in Minnesota.
Knowing Your EBITDA
Finding your EBITDA is actually a fairly simple process if you keep good records. For each quarter, start by finding your operating income (or net revenue before taxes). If interest payments have been subtracted, add those back in. Also, add in depreciation and amortization expenses. Do this for each quarter and add the figures together to find your EBITDA for the year. When you do, exclude one-time expenses and any income/extra expense from operations that you no longer do (for example, if you used to cater but now you don’t). That will give you a realistic idea of your current EBITDA.
So what can you do to change your number? Well, you COULD hit your oven with a sledgehammer to speed depreciation. But realistically, the only way to get a better EBITDA is to add income and cut expenses.
“It’s not always easy to do, but it’s that simple,” says Brian Murphy of North Shore Bank of Commerce. “It’s a good thing to educate your operators about.”
Examining your P&L
Report gives insight into health of business
BY NORA CALEY PHOTOS BY RICK DAUGHERTY
Pam Proto, founder of the six-location company, says she and the managers use the P&L, which summarizes sales and expenses, to see how the Colorado and Idaho restaurants are performing compared to the same period the previous year. “We take first quarter 2011 and we compare it to first quarter 2010, and we say, ‘We did less in sales, but why did we spend more on cheese?’ ” she says. “It’s very transparent. We all talk about it. Everyone has certain things they have to accomplish, and they are rewarded when they accomplish these things.”
The P&L is a financial statement your bookkeeper or accountant sends you, along with other reports such as daily sales figures or weekly snapshots. Some accounting experts refer to the P&L as the income statement, and many recommend examining it monthly. The important thing, they agree, is that as a restaurant owner you examine the P&L, understand what it says about the health of your business, and then do something with the information.
“It really tells a story of your business,” says Alex Coppersmith, chief financial officer of the San Francisco-based Bacchus Management Group, parent company for four Pizza Antica restaurants and several other restaurants. “It gives you a glimpse of not just what’s happening today, but what’s happening over a week, a month, a year.”
That glimpse tells you whether your business really is making any money. “So many people think, ‘If I have money in the bank, I am making money’,” says Barbara Ann Barschak, CPA and restaurant and hospitality partner at the accounting firm Katz Cassidy in Los Angeles. “The P&L will help them manage their business. It will tell them if they are pricing their menu properly, if their portions are right, if they are overstaffed.”
The P&L shows sales, and how much those sales cost your business. Sales encompass food and beverage, merchandise such as t-shirts and gift cards. Costs include food, labor and operating expenses. Each has its own subcategories. For example, Barschak says, labor
includes not only wages, but workers’ compensation insurance, uniforms, payroll processing, payroll taxes and, for some, health insurance. Operating expenses include everything from marketing and utilities to oven repair.
Make sure the P&L is timely. Barschak suggests getting the P&L around the tenth of the month, showing revenues and expenses for the previous month. Compare the figures to how your business did in past months. Also use other restaurants as a benchmark. You can get these industry standards from the National Restaurant Association, friends and peers in other restaurants, or an accountant who specializes in foodservice.
Most restaurants have food costs of about 30 percent of revenues, and for pizzerias that figure is lower. Labor should be no more than
33 percent, and rent should be seven to 10 percent, Barschak estimates. Credit card processing could take up two-and-a-half percent. Marketing might be two percent.
The more information you have on the P&L, the better. “It is very important that business owners are aware of how much money they are actually making, and not just hyper focused on sales figures,” says Kevin Suto, CEO of Zachary’s Chicago Pizza Inc., with three locations in California. “If your sales are consistent, yet your profit is down, the P&L will show you where you have incurred higher expenses.”
Proto says when food costs went up, she renegotiated with vendors. Managers came up with ways to save electricity and to schedule less staff during certain shifts. “The economy helped us be better at what we do. It really made us look at our costs,” she says.
Coppersmith agrees that collaboration is important. “Let the chef know the food costs were 23 percent and the industry norm is 20, and last year you had 19 to 20,” he says. “As an owner you don’t need to worry about it by yourself. Go to the dining room manager and say, ‘We are having issues with labor costs, do we have more waiters than last year?’”
Also speak with your accountant. Theodore D. Derma, CPA, audit manager for the accounting firm R. J. Augustine and Associates in Schaumburg, Illinois, says sometimes restaurant owners panic because one month went badly. An accountant can offer some perspective. “A client will say, ‘I am losing money this month. What’s going on?’ and we say, ‘You just spent 20 grand on a liquor license, it was similar to last year,’” he says. Sometimes he suggests small changes, such as using a scale to weigh cheese before it goes on the pizza.
Don’t look at the P&L as a list of things to cut. The P&L might also suggest you should raise prices,
develop new marketing tactics, or revamp your menu, says Suto. “These decisions are difficult ones,” he says. Or you might need to just stay put. “If sales and profits are strong or up, the P&L is telling you to keep doing what you are doing.”
What’s important is the bottom line, literally the last figure on the chart, the net profit. “If you are doing three percent after taxes,” says Derma, “you are doing a good job.”u
Nora Caley is a freelance writer based in Colorado and is a frequent contributor to Pizza Today.
Should you create your own profit and loss statement or hire a bookkeeper or accountant? Daniel V. Augustine, CPA, director of accounting for R. J. Augustine and Associates in Schaumburg, Illinois, says there is reasonably priced software available that enables business owners to draw up their own charts, including P&L, balance sheets, and cash flow statements.
“The software makes financial information available to owners almost on a daily basis,” he says.
However, he says, the pizzeria owner’s main task is to sell pizzas. “You don’t want to micro-manage the profit and loss detail on a daily basis.” A full or part-time bookkeeper can generate these reports, or you can hire an accounting firm that sends you the reports, and discusses them with you, on a regular basis.
If you do want to create the P&L yourself, you’ll have to pull the sales information from your point of sale system and the expenses information from your invoices, credit card statements, and bank statements. Software such as QuickBooks can help.
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