Financial Benchmarks and Why You Should Poke Holes in a Business Idea

On this premium episode Casey sheds light on some financial metrics for restaurants in particular and talks about why she thinks it's so important to try and poke holes in someone's business idea.

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Transcript

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SPEAKER_00 0:09

Hey everyone and thanks for listening to the premium episode for this week and also being a supporter of the show. It's much appreciated and really goes a long way. So on today's episode, Casey talks more about certain financial benchmarks, particularly within the restaurant industry, to look for. And then also we talk more about revenue models, business models, and the importance of creating a plan and thinking through the model of how you're gonna break even, how you're gonna make money, how you're gonna sell and account for costs, things like that when it comes to an idea that you have for a business. And her role is to kind of discuss that with people and in a way try to talk them out of it if it's not a good idea. So I really enjoyed this part of the conversation with Casey. Can you dig into like let's stick with the restaurant industry because I think that's unique and I don't think I've really talked to anyone specific to that. What are some like benchmarks that do you give people, you know, entrepreneurs, business owners, say, hey, here's where you should be? Or are you coming in there and just saying, I'll just do the logistics for you, or like, hey, you should expect to make, you know, 20% margin if you, you know, at this number, uh, this level of revenue, or do you have like kind of best practices, benchmarks, things like that that you give your clients that they should be striving towards kind of as a consultant?

SPEAKER_01 1:49

Yeah, so I mean there are kind of industry standards when it comes to any industry, and they're they're fairly true across the board. And you know, we're in and out of over 250 businesses every single month, you know, from a financial viewpoint. So we have this front row seat. So I can actually say that with lots of conviction that across the board, they are pretty standard. And the restaurant industry, the standard really would be a 30% food cost, so that's food and beverage combined, and a 30% direct labor or payroll cost. So that's combined, that's 60% is called your prime costs. That's pretty standard. Everything else below that, you know, it's would be your supplies and your occupancy and all that, that would vary from restaurant to restaurant. But across the board, you would say 30 and 30 is usually standard, but I can start there. But everything always will come back to your business model. So, you know, as I the first actually, the very first line in my book is something like you know, the running joke we have in my office here is that whenever someone comes in to pitch me their new idea for a business, my first thought is how soon do you think I can talk them out of it? Because that's what I do. And in a way, what I do kind of feels like Shark Tank a little bit. There are people I'm known in the in this, especially in this neck of the woods, the South Shore, where someone has a business idea. Oh, go talk to Casey at Spark, like she'll help you with that. So, and I I don't I don't charge for that. And I'll have them come in and we go up in the conference room and I have them like present their business idea and I just poke holes in it. And I don't even mean that in a horrible way, but I feel like I'm saving them from a lot of debt and grief down the road. Because if their business model doesn't work, it doesn't even make any sense. And by business model, like for a restaurant, if you're gonna sell burritos, okay, well, what do you, you know, you need to know what you're gonna sell it for, meaning what are your customers willing to pay for that burrito? Okay, what are you gonna put in it? So that's the cost. What's it gonna cost you to put the meat and beans in that, right? And then, like, okay, so who do you need to make the burrito and what's that gonna cost you? All right, where's your burrito place gonna be? What's the rent? What's the lease look like? What are utilities? Like, get the past utility bills. Like, we need to dial in every single penny it takes to run your restaurant for a day, a week, a month. That's the business model. And then from there, okay, so then how many burritos does that mean? Okay, and this is what I end up doing. I'm like, okay, so based off of everything you told me, okay, you you talked to the landlord, this is what it's gonna be, and here's what you think. You know, you want to sell it for eight bucks. Okay, great. Okay, so you need to sell 9,862 burritos to break even. How does that sound? And they're like, what? And then I'll I'm just showing them the numbers. Well, this is the model you just told me, that's how many you have to sell in order to pay all the expenses. And they usually run out the door crying. No, they're not crying, they usually walk out the door because it's just like it's not possible. So it comes back to the business model. There are times where someone will come in and they have such a great model and such a great idea, and the value is so there that they could probably end up selling, you know, a hundred of something a month and they're gonna make money out of it and that's a home run. Like that's a home run. It's rare, but that's a home run right there. So those are the ones that I'll be like, yep, yep, let's go, get on board, let's do this together. It's just a rare thing because most of the time I'm just talking them out of it.

SPEAKER_00 4:50

Right, right. So are these like uh, you know, new kind of prospects that are just they just kind of want your opinion that they're just coming in to kind of get get some guidance, essentially.

SPEAKER_01 5:02

Yeah, it's it's pr that's pretty much exactly what it is. They'll um either, you know, they were told that they had a really great idea from a bunch of neighbors that, you know, tasted their cupcakes at a party or whatever, or like one, you know, one was this was a few years ago. This was someone who wanted to open up an inn in Hingham. And this is a very, you know, bougie town down here. And there is definitely not enough lodging um places to go. So, like, yeah, you're right, we need an inn. And then I looked at the space and what it would cost to renovate, and it was just we doing the numbers out. I'm like, okay, well, you're gonna have to charge $1,800 a night, and I who no one's gonna pay that kind of money to stay there. You're not even on the water, like what? Like, you know, so you just it's like just coming back to the numbers and the business model and what it means. If you think you can sell that for $1,800, $1,800 a night, 365 days a year, all right, like maybe, but you better you better have a stomach for that if you don't, because that's gonna be loss. Yeah.