Stephanie O’Rourk is an accountant who crunches numbers for some of the most successful chef-restaurateurs and food entrepreneurs in the country; she’s a partner in the Hospitality Practice division at the professional services firm CohnReznick. I heard her talk about how to run a business on a panel conversation at Haven’s Kitchen in New York City, declared her the Suze Orman of food, and told her to write a book. Until she takes my advice, I’ve convinced her to share some of hers.
Eater: Once an entrepreneur decides on their big idea, what’s the first thing they need to understand about how to fund it?
Stephanie O’Rourk: Don’t get caught short. One of the biggest mistakes I typically see is that first-time operators of restaurant or hospitality retail businesses underestimate the financial capital that is required to both open the business as well as maintain operations for the first year. More often than not, fledgling operators do not provide for an adequate cushion to cover pre-opening expenses or first-year working capital needs. I always encourage my clients to develop both a generous capital budget (the money allotted to secure or maintain fixed resources, like property-related assets: equipment, land, building space) and a conservative cash-flow model (how much cash you’ll need, and how you’ll spend it to cover operating costs over time) for the first year of operations prior to starting a project. A proper budget will ultimately establish the financial capital amount required to successfully launch and maintain a new business. It is always better to beat those budgets than not meet them. Reimbursing yourself and your investors earlier than projected is much easier to swallow than having to ask for additional funds or acquiring debt that may be difficult to service.
Truly understand your upfront costs. First-time operators specifically focus on the hard costs, such as build-out expenses, rent deposits, furniture, fixtures, and equipment and inventory. A failure to pay attention to and fine-tune pre-opening costs, construction contingencies, and initial working capital (think of it as what you’ve got in your cash register — it’s the money you spend to keep up everyday transactions; you determine it by subtracting your current assets from your current liabilities) needs can lead to unnecessary financial strain on the business.
Understand what drives the costs in the business. Whether you’re selling frozen dessert or running a full-service restaurant, fast-casual concept, or bakery, you are dealing with a retail operation, and are all subject to the same overall metrics. Revenue, which generates cash flow, is king, and no matter how well you think you can cut and manage costs and margin percentages, that’s what pays the rent, keeps the lights on, and reimburses your investors.
An understanding that your daily cover and ticket count, average check, product mix, and ratio of delivery to in-store revenue are what drives the majority of your P&L (profits & loss) costs is critical. Oversee purchases and inventory in accordance with what and how much you’re actually selling, and manage labor hours and dollars to accommodate various revenue streams.
What can you tell first-time entrepreneurs about weathering surprise — and often costly — outcomes?
Plan for negative outliers. Expect the unexpected. Not everything will be in your control. You have no power over the snowstorm that occurs at the end of April, a similar concept that debuts the same week as yours just around the corner, or the water-main break that happens right in front of your store the day of your grand opening. From a strictly financial perspective, you should be prepared for your opening not to hit it out of the park (or at least assume as much), or, if it does, for the honeymoon period not to last as long as you anticipated. If negative outliers don’t come to fruition and all goes your way, then you are ultimately in a better financial position than you ever imagined.
Okay, so an entrepreneur has their launch capital ready. What should they think about when it’s go time?
Know when to launch and do it on time. The seasonality of your business is going to determine the most optimal window for you to open your concept. Let’s say you’re expected to open your New York restaurant in November. A negative outlier comes to fruition, causing you to delay your launch until January. Your financial model has just dramatically changed. The fourth quarter in the majority of cities can be a prime time to launch most types of concepts. The upcoming holiday season spurs activity with tourism, shopping, consistent dining with friends, and both social and corporate parties. And then comes January, and everybody goes into hibernation, spending all their discretionary funds on detoxes, juice cleanses, and gym memberships.
Alternatively, July somewhere in New England, where it’s peak vacation season, or the Hamptons, where everyone descends to see and be seen, may not be an ideal time to introduce your business to the world, for the opposite reason: You may not be prepared for the immediate, constant rush. In this scenario, launching at the beginning or middle of May instead might allow you to do a soft opening and work out the unavoidable kinks… come Memorial Day, the unofficial start of summer, when you have real customers, you can put your best foot forward.
Beyond hard cash and costs, what are the areas of business people don’t prioritize as much as they should?
Intellectual capital is just as important as financial capital. You don’t know what you don’t know, but you do know what you know, and you understand there are a lot of missing pieces to account for. Figure out who those experienced people are who can advise you on how to optimize your skills and knowledge and fill in those deal-breaking information gaps. The experienced operator or trusted adviser who has been there and done that can be one of the most valuable assets in your organization.
Additionally, invest in the culture of your business. Culture is now, more than ever, an essential ingredient of success — it’s not merely a mission statement slapped up on the wall. The millennial generation that comprises much of your human capital (this “metric” refers to the collective value of the skills that your labor force brings to your business) wants to feel good about the company and people that they work for. The days of employers telling staff to jump and them automatically jumping are long gone.
A common mantra of successful operators is “happy employees make happy customers, which in turn makes happy profits.” Simply treating others as you would like to be treated, something we all learned in kindergarten, and showing appreciation for a job well done goes a long way. If you are a tad cynical and old-school and don’t buy into any of this, here’s a little secret: The numbers don’t lie. The national average of the cost incurred by employee turnover is approximately $1,500 for an hourly worker and $2,400 for a manager. That comprises training costs and the ancillary loss of revenue and productivity. That’s real dollars that are going out an operator’s door with every employee who leaves and goes across the street, because you need to know, in today’s world, they always can go across the street and obtain the same paycheck from a competitor.
Be clear on your strengths and weaknesses. The best-run restaurants and retail operations tend to be the result of a partnership between someone who is creative and talented in the kitchen and someone who is more business-oriented, who truly understands the numbers. Not everyone can do both successfully, and those who can’t shouldn’t try. Bring someone to the table with complementary and compensating assets. Whatever your deficit — maybe you suck at hiring or finances — either partner with or employ someone who thrives and excels in that regard.
Don’t under- or overestimate passion. While it takes passion to create and differentiate your business, if you don’t understand how to operate it effectively and efficiently and make it financially viable, no amount of passion will save you. I equate it with marriage. Love and passion are the foundation for creating and nurturing a marriage. After 25 years of being married myself, I can confidently say that while love and passion (and a considerable amount of laughter) are most certainly needed to endure, it is compromise, constant growth and evolution, along with smart and practical decision-making that get you through the ebbs and flows of a relationship. That’s no different from what’s required to sustain a successful business.
How does a business owner decide when to compensate themselves when a business is getting started?
Always pay yourself. Ownership needs to be compensated in one way, shape, or form. It is important to set a precedent as you grow your brand, to show your company as well as your current and future investors what you believe your value is to the organization. One of the top five questions I receive from new operators is: “Can I pay myself if my investors have not been paid back in full?” More often than not the answer is yes, and then the question is: “How much can I pay myself?” My response is always, “Well, if you weren’t there to wear that hat, how much would you pay someone else to wear it?” Your salary should be determined by what you do to serve the organization based on the current market.
When you pay yourself will depend on the economic arrangement you have with your investors: You may be required to pay their capital investment back first before you, as an operator, are able to share in the profits. You may have agreed to share in the profits from the get-go (and that can be quite the motivation if you are depending on that cash to pay your personal bills), or you may have arranged a combination of both models. No matter which avenue you chose, pay yourself! And if the business is strapped for cash at times and you short yourself to save or boost funds, then make sure you pay yourself back what is owed to you for the essential services you have provided.