copyright © 2014 by john wiley & sons, inc. all rights reserved. chapter 15 financing and...

Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved.

Chapter 15

Financing and Leasing

The Restaurant: From Concept to Operation, 7th edition

Courtesy of Sysco

1


Objectives

• After reading and studying this chapter, you should be able to:– Forecast restaurant sales– Prepare an income statement and a

financial budget– Identify requirements for obtaining a loan

in order to start a restaurant– Discuss the strengths and weaknesses of

the various types of loans available to restaurant operators

2


Objectives (cont’d.)– List questions and the types of changes a

lessee should consider before signing a lease– Discuss the strengths and weaknesses of the

various types of loans available to restaurant operators

– Describe the various forms of business ownership

– Recognize the legal aspects of doing business

– Discuss the various types of government regulations

3


Financing

• Where does the money come from?– Borrowing on property– Relatives, friends– Partnership– Groups of investors

4


Sufficient Capital

• Many try to start restaurants with only a few thousand dollars in capital– Such ventures usually fail

• Number-one factor of failure– Lack of management

• Second factor of failure– Lack of finance and working capital

• Standby amount of cash to open the restaurant and get through unprofitable months of operation

5


Sufficient Capital (cont’d.)

• Commercial banks – Common source of funds– Lending officers in the banks

• Paid employees, not owners – Also limiting their risks

• Performance is largely judged by good loans• Tend to be ultraconservative

– Want proof of income, debt, employment, and credit history

– Bank also wants collateral • Assets they can take should the loan not be repaid

6


Sufficient Capital (cont’d.)

• Types of loans– Term loan

• Repaid in installments– Usually over a period

longer than 1 year

– Intermediate loans• Made for up to 5 years

– Single-use real estate loans

• Typically run less than 20 years

7


Preparing for the Loan Application

• Restaurateur bought furniture and fixtures from an existing restaurant for $30,000– Money is paid to previous person leasing the

property• Work they had done to set up a restaurant

– Paid after a due diligence• Thorough check to assure everything works and

health department isn’t about to shut it down

– Larger restaurants will naturally cost more • Just a matter of finding a location and price that are

right for you

8


Preparing for the Loan Application (cont’d.)

• Important financial questions: – How much money

do you have?– How much money

will you need to get the restaurant up and running?

– How much money will it take to stay in business?

9


Budgeting

• Purpose: “do the numbers” – Forecast if the restaurant will be viable

• Sales – Must cover all costs – Must allow for reasonable profit

• Financial lenders – Require budget forecasts as a part of

the overall business plan

10


Budgeting (cont’d.)

• Basic categories to project sales and operational costs – Sales– Cost of sales– Gross profit– Budgeted costs– Labor costs– Operating costs– Fixed costs

11


Forecasting Sales

• At best, calculated guesswork– Many factors beyond control of the

restaurant• Examples: economic factors and weather

• Without a fairly accurate forecast of sales– Impossible to predict success or failure

• All expenses are dependent on sales for payment

• Sales volume components– Average guest check – Guest counts

12


Budget Forecast of Sales

13


Income Statement

• Provides information about financial performance over a given time period – Allows for analysis and comparison of

sales and costs– Shows income after expenses have been

deducted (net income or loss)

14


Projected Income Statement

15


Budgeting Costs

• Cost categories– Fixed costs

• Unaffected by changes in sales volume– Real estate taxes, depreciation, insurance

premiums

– Variable costs• Change proportionately according to sales

– Food and beverage costs

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Gross Profit

• Money left from sales – After subtracting cost of sales

• Must provide for all other operating costs– Plus leave enough for a satisfactory

profit• If insufficient the business must be redone

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Controllable Expenses

• Expenses that can be changed in the short term– Variable costs– Salaries and wages – Benefits– Direct operating expenses– Heat, light, and power– Administration– General repairs and maintenance

18


Uniform System of Accounts for Restaurants

• Benefits– Outlines uniform classifications and

presentations of operating results– Allows for easier comparisons to

foodservice industry statistics– Provides a turnkey accounting system– Is a time-tested system

19


Balance Sheet

• Used to determine a sole proprietor’s or company’s worth– Lists all assets and liabilities

• Must always balance:– Assets = Liabilities + Net Worth

• Snapshot of financial standing at a given moment in time– Usually at the end of a financial period

or fiscal year20


Operating Ratios

21


Pre-Opening Expenses

• Include:– Initial purchase of all equipment– Hiring and training of personnel– Preopening advertising

• Fixed costs:– Depreciation– Insurance– Property taxes– Debt service

22


Pre-Opening Expenses (cont’d.)

• Variable costs: – Change in direct proportion to the level

of sales• Examples: food, beverage, labor, heat, light,

power, telephone, and other supply costs

23


Cash Flow Budgeting

• Any business needs available cash– Managing cash is crucial during first few

months of operation– Positive cash flow is enhanced by

increasing sales or decreasing costs while maintaining sales

– Can be achieved by: Cash receipts journal, cash flow budget collecting ASAP

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Productivity Analysis and Cost Control

• Various measures of productivity have been developed– Meals produced per employee per day– Meals produced per employee per hour– Guests served per wait person per shift– Labor costs per meal based on sales

• Simplest employee productivity measure– Sales generated per employee per year

25


Seat Turnover

• Number of times a seat turns over in an hour– Some consider the most critical number

• Goal rates vary – Seven an hour to less than one an hour

• Depends on the type of establishment

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Securing a Loan

• Only people who are independently wealthy can ignore funding; everyone else will need to secure a loan

27


Compare Interest Rates

• One percent over a period of years is big money

• Avoid points if possible• Beware of bankers who demand

– Compensating balance– Interest discounted in advance

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Loan Sources

• Include:– Local banks– Local savings and loan associations– Friends, relatives, silent partners, and

syndicates– Limited partnerships– Small Business Administrations (SBA)– Small Business Investment Companies

(SBICs)29


Small Business Administration

• User-friendly • Excellent record of success in lending

money to restaurants• Principal parties:

– SBA– Small business borrower– Private lender: central role

30


Talking to SBA Loan Officer

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Small Business Administration (cont’d.)

• SBA loan requirements: – Right type of business– Clear idea of which loan program is best

for you– Knowing how to fill out the application

properly – Willingness to provide detailed financial

and market data required

32


SBICs

• Small Business Investment Companies – Licensed by the SBA– Independently owned and managed – Set up to provide debt and equity capital

to small businesses

• Minorities Enterprise SBICs– Specialize in loans to minority-owned firms– Amounts loaned range from $20,000 to $1

million or more

33


Soliciting an SBA Loan• Qualifications:

– Be of good character– Show ability to operate a business– Enough capital to operate on a sound

financial basis– Show proposed loan is of sound value or

secured as reasonably to assure repayment– Show past earnings and future prospects– Provide sufficient funds to withstand

possible losses34


Sequence for Securing an SBA Loan

• Items:– Current business balance sheet– Income statements– Current personal financial statement– List of collateral to be offered– Statement noting total amount of

financing and specific purpose of the loan– Tax returns for the most recent three

years

35


Stockpiling Credit

• To make the process smoother, provide:– Personal financial statement:

• Education and work history• Credit references• Copies of federal income tax statements• Financial statement listing assets, liabilities,

and life insurance

36


Stockpiling Credit (cont’d.)

– If in business:• Business history• Current balance sheet• Current profit-and-loss statement• Cash flow statement for last year• Copies of federal income tax returns• Life and casualty insurance in force• Lease• Liquor license• Health department permit

37


Other Sources of Money

• Include:– Landlord or landlord's bank– Local government– Selling and leasing back– Public– Selling bonds or convertible bonds– Farmer’s Home Administration– Economic Development Administration – Urban Development Action Grant program

38


Collateral

• Collateral is security for the lender– Personal property or other possessions

assigned as a pledge of debt repayment• If debt is not repaid, the lender becomes owner

of the collateral

• Collateral accepted by banks:– Real estate, stocks, bonds, and savings – Chattel mortgages– Life insurance and assignment of lease– Endorsers, co-makers, and guarantors

39


Keep the Loan Line Open

• One loan may lead to another– Development of a line of credit is a

valuable asset

40


Avoid Personal Liability

• Shrewd individual who guarantees a sizeable loan has very few personal assets that can be claimed in case of default

• Giving one’s assets to another may be hazardous

41


Leasing

• Restaurant buildings and equipment are more likely to be leased by the beginner– Less capital is required

• Signer is obligated to pay for the entire lease period– Lease should be good for both parties

• Landlord (lessor) and tenant (lessee)

– Beginners should try for a five year lease with an option to renew

42


Lease Costs

• Approximate five to eight percent of sales– Can go as high as 12%

• Lease costs – Calculated on a square-foot basis

• $2 to $50 per square foot per month

• Lease terminology and length– Consult a lawyer versed in real estate

terminology to avoid misunderstandings 43


Drawing up a Lease

• Ask questions before agreeing on a lease:– Why is building for rent?– Who was the last tenant?

44


Lease Terminology and Length

• Both parties should consult a lawyer versed in real estate terminology to avoid misunderstandings

• If the business does not survive you are still liable for the payment if you signed a personal guarantee.

45


Specifics of Most Restaurant Leases

• Include:– Term of lease– Power supply– Financial responsibility– Roof warranty– Maintenance agreement– Real estate taxes– Municipal approval– Leasing and insurance

46


Restaurant Insurance• Types:

– Property/building – General liability– Business income– Workers′ compensation and employers′

liability– Employee benefit liability – Liquor liability

47


Restaurant Insurance (cont’d)

– Equipment breakdown– Food contamination/spoilage– Crime– Auto/valet liability– Umbrella/excess liability – Fire– Several others

48


What is a Restaurant Worth?

• Potential Values:– Real estate value

• Usually determined by competitive values in the community

• Market value of real estate tends to follow the value set by similar properties in the area

– Value as a profit generator

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copyright © 2014 by john wiley & sons, inc. all rights reserved. chapter 15 financing and...

Documents

john wiley sons

restaurant operators

existing restaurant

types of loans term

sufficient capital

forecast restaurant

good loans

capital standby