Hotel Professionals

How to avoid restaurant bankruptcies

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New restaurants fail at alarmingly high rates (80 percent) during the first two years of their existence. Most of the se bankruptcies can be attributed to poor management. Successful restaurants not only require a good chef, but also exemplary service, appropriate décor and ambience, suitable beverage selection and general intelligent decision making. In short a fine chef with many years of cooking experience may not be a successful restaurateur.

Bankruptcies can be prevented if entrepreneurs are honest with themselves and recognize their shortcomings, admit to errors in judgment, seek expert, unbiased advise before it is too late and make sure the restaurant is adequately capitalized.

Restaurants deliver a bundle of tangibles and intangibles. Food and beverage are tangibles, but everything else is intangible. Service, food and beverages must be produced on demand and consistently; décor and ambience must be appropriate for the purpose and choice of offerings sufficient to satisfy demand.

Location in an important success factor and all restaurateurs must pay attention to choose the right one. Properly researched feasibility studies can guide an entrepreneur to select the most appropriate location, but location is only one of the factors, albeit very important, aspect for success. Studies show that 63 percent of all business failures are caused by financial incompetence, 17 percent lack of management skills, 10 and other factors.

Before opening a restaurant the entrepreneur must know enough about marketing, internal controls, accounting, taxation, labour law, relations with banks, purveyors, government agencies, quality standards, training techniques, and human resources management.

It is important to have a well thought out business plan but even more important is a document explaining how you envision achieving your objectives – your business plan.

Banks consider restaurants “high risk” and charge a premium for loans, if you can convince them that your project is worthy of consideration.

Always work closely with your bank manager and confide in him/her to receive valuable financial advice.

Unbiased third parties are objective and look at business operations with clear minds. Flexibility in restaurant marketing is very important and can save a failing venture. The restaurant concept chosen requires a quick turn to another – modern more appealing mode of operation, changing menu, pricing or even service style.

Annual forecasting is as important, as analyzing monthly statements for a successful restaurant. The restaurant business is highly volatile, and operators must be prepared for the unexpected to cut expenses when required. Who would have expected the sudden effects of SARS in Toronto, the aftermath of 9/11 just to name a few recent disasters that forced many restaurateurs to close their doors for good.

Be prepared to help your employees to get extra education (skill and theory), explain that quality in anything is a moving target and one must neve4r be satisfied with the status quo. Follow up both guest complaints and employee concerns.

Successful restaurants are well planned, have an excellent business plan, well-conceived marketing plan, adequate financing, meticulously chosen and well trained, dedicated employees, continuous market monitoring rigorous internal controls and uncanny management skills.

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2 Comments

  1. Nice Article! The restaurant business is highly volatile and one should be prepare for the unexpected and cut expenses in anticipation. Developing a strong, service-oriented, friendly, and efficient labour force and increasing productivity based on incentive programs can be rewarding.

  2. Wow I didn’t know you can get charged a premium on your loan if you are high risk. It makes sense though, because restaurants come and go every day.

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