Article

How to Overcome Common Startup Challenges in the First Six Months of Operation

Having been involved in dozens of restaurant openings I can confidently state this as fact: Things rarely go exactly as planned.

Regardless of the reasons, issues such as construction delays, staffing troubles, kitchen efficiency, or unpredictable guest counts will most certainly affect your best-laid plans.

The scramble to overcome these issues during the infancy period of your startup eats up valuable resources in both time and money, oftentimes creating operational and financial hurdles too great to scale.

Restaurant business generalists will tell you that you always need more money than expected, but when it comes to answering the question why, you're more apt to get a response that is exclusive to a particular operator's unique experience. However, by listening to enough voices of experience, one gets a sense that many operators face the same challenges over and over again.

Not surprisingly, unexpected challenges usually lead to financial shortages, which is the common denominator for most failed restaurants. But ultimately, undercapitalization is not the primary cause for most restaurant failures; rather, poor planning and execution are the chief culprits.

In this article, we'll attempt to identify some of the common experiences that restaurant startups face during the opening stages. I won't spend a lot of time addressing the question, "How much money does it take to open a restaurant?" Instead, we'll focus on identifying the obstacles faced by startup restaurants during the months immediately before and after opening. And we'll explore how these obstacles can work to disrupt your business plan and deteriorate your restaurant's level of execution.

Halftime Adjustments

Much like the Sunday afternoon game plan prepared by NFL coaches, your business plan outlines your strategy to win the game, or in the case of restaurants, turn a profit. However, as most armchair quarterbacks will tell you, many games are won or lost based on the adjustments that teams make at halftime. When things aren't going exactly according to the game plan, coaches are usually able to tweak the game plan because they prepared their team all week for various obstacles they might encounter on the field.

Restaurants need to be prepared to alter their game plan as well. Naturally, from a financial perspective this means that you need sufficient working capital and contingency funds available. You may need to call upon these cash reserves to pursue your game plan.

Opening Cost Overruns

Many operators, startup or otherwise, experience an early disruption to their game plan, even before they've made their first sale. As with most plans, a restaurant's business plan is built around a timetable. Preopening salaries, hiring and training, or commencement of monthly rent are costs that must be absorbed by the startup capital budget.

. .New restaurants also get bombarded by every coupon merchandiser, directory, magazine, newspaper, and a litany of other marketing opportunities. You need to create your own marketing plan, or enlist a marketing consultant before deciding on the various vehicles by which you'll market your restaurant..

Construction delays, hiring difficulties, or other setbacks can cause these expenses to swell above their original budget. When this happens, the stage is set for operators to commit two of the biggest mistakes in the opening process.

The first mistake is funding these cost overruns by reducing the amount of working and contingency capital intended to help you through the first six months. As we'll discover later in the article, these funds are intended to ensure that you have sufficient cash flow during the typically unprofitable first few months. If you rob your future operating funds before you even get open then you are setting your restaurant up for failure.

The next mistake many operators make when confronted with time delays is to try and cram the remainder of their opening agenda into a shortened timetable so that they can begin a cash flow to help offset the budget overruns.

"This is a regrettable situation," says Chris Tripoli, founder of A'La Carte Foodservice Consulting Group in Houston. "Now the operator is saying to themselves, 'Not only am I broke, but now I'm poorly prepared to serve my guests.' In their rush to create cash flow they bypass the necessary training, food testing, and operating procedures development," Tripoli says. "Instead of being the engineer that is guiding the train, they're now the caboose chasing it."

It's true, rushing your opening timetable to create cash flow almost always has a reverse effect by creating a negative cash flow as a result of being ill-prepared for opening.

So, how do operators avoid finding themselves in this situation? The answer is simple, though not easy: Find an alternate source of funds for the cost overruns. Do whatever it takes to make up the shortfall such as going to the bank for more money, hitting the partners up or consider equipment leasing alternatives.

Whatever you do, don't raid your operating reserves. Hopefully, by the time you open your restaurant you'll still have enough working capital to see you through the many challenges still to come.

For organizational purposes, we'll categorize these challenges into four distinct areas:

• Customer
• Staff
• Operations
• Marketing

Many of the issues you'll deal with will overlap several areas as they tend to create a domino effect that can ripple through your entire system.

Customer Challenges

Most assuredly, several of your challenges will be customer-related. Once you open your doors, you are no longer working based on expectations; rather, you are dealing with reality. You may find that the profile of the customer you get differs from the one which you planned for. After all, your financial projections were most likely based on certain demographics and spending patterns of your perceived customer base. Deviations to that plan will most certainly alter the financial projections.

Consider also your customer's perception of your restaurant concept. Are you delivering on their expectations? Does your food and service complement the menu and décor? What do they like or dislike about your restaurant? Typically, the answers to these questions will come in the form of either compliment or complaint.

Let's take a look at some of the customer-related issues you'll face:

Customer complaints. Inevitably, every restaurant, new or established, will get complaining customers. Many diners are somewhat forgiving of their first visit to a new restaurant. They understand that the staff is new and that service timing may not be up to their liking. Others, though, are more demanding. No one likes to be disappointed, but the more demanding guest is more likely to voice his or her displeasure. You must be prepared by having a system in place to deal with complaining guests. (For more information, see "How to Turn Complaining Customers Into Loyal Guests.")

I've often heard that for every complaining guest there may be 10 more who don't say anything, so it's extremely important you listen to the complaint and then take a course of action that will prevent similar complaints in the future.

Sales mix. Whether you're full-service or limited-service, the menu you introduce to your market has a significant effect on your financial projections. Presentation, appeal and pricing perception will steer your guests toward menu items that fit their tastes as well as their wallet. You may find that your check averages are not what you expected, possibly creating a gross profit margin that is less than ideal. Be prepared to re-engineer your entire menu if necessary.

Customer service issues. If you're a table-service restaurant, then you'll want to be sure to have policies in place to handle customer requests. Startup restaurants tend to overlook the need to set policies for basic service requests, and then are left scrambling as they try to make decisions for handling them on a case-by-case basis.

You can reduce the chaos by establishing policy ahead of time to handle the following:

• Large-party seating
• Separate check requests
• Tab transfers from the bar
• Menu substitutions or special orders
• Wait list management and reservations
• Splitting dishes
• Drink refills

Guest counts. Maybe guest counts are not what you expected. How have they affected your financial projections? Hopefully your business plan included a contingency to offset slower than anticipated sales.

Typically (though not always), a restaurant goes through a honeymoon period for the first two or three months (even longer in some cases). They then experience a dip in sales as the novelty wears off within the marketplace; however, if you've done a good job of creating a great product that meets a demand or need in your market, and with a bit of luck, you'll have achieved close to break-even status within the first six months. Operational improvements and "getting the bugs worked out" during this six-month infancy period should help promote steady sales growth over the next few months.

Staffing Challenges

In addition to customer-related challenges, there will be staff-related challenges as well. You can minimize staffing issues by emphasizing the selection and training process before you open your doors. Even so, once you open you'll find it necessary to add to or modify your training, scheduling and hiring practices. Here are some of the issues you can expect to encounter:

Higher labor costs. Hitting an ideal labor cost during the first few weeks of operation just isn't going to happen. Even the chain restaurants armed with proven systems and procedures experience heavier than normal labor costs during the opening phase of new units. Excess labor costs can be as much as 20 percent to 25 percent higher than normal during this period. Let's say your labor projections for a certain sales volume is 35 percent; it's not uncommon to see 42 percent or higher during the opening phase. That percentage should drop as staff becomes more proficient and accustomed to their job duties.

Employee timekeeping problems. One of the causes for high labor cost in the beginning stages can be attributed to inefficient timekeeping controls. A recent survey conducted among RestaurantOwner.com members revealed that nearly 70 percent of respondents track employee time and attendance on their POS system. Even so, it's important to take care of corrections on a daily basis so you can avoid the "payday blitz" of employees claiming incorrect hours. Establishing a policy that catches time corrections daily not only keeps employees honest, it serves to avoid unnecessary overtime and keeps you out of trouble with the Department of Labor.

Staff turnover. For most startups there is a "weeding out" period. Unfortunately, this sometimes means that you lose good staff ("A" or "B" employees) as well as the less desirable ("C" employees). Your staff will begin forming opinions about ownership, management, and each other almost the instant they are hired. If you're successful in creating a work environment that is professional and a place that "A" employees want to be then getting rid of the "C" employees will be a positive move. However, if the workplace is chaotic, less disciplined or lacking structure then all you may be left with are "C" employees.

Burnout. Restaurant openings usually mean long hours and sleepless nights, especially for owners and managers. It's OK to push hard for the first week or so but you can't burn the candle at both ends for too long, otherwise you risk serious performance and morale levels. Your goal should be to get into a normal schedule routine within the first few weeks.

Scheduling issues. Staffing turnovers tend to accentuate the need for solid scheduling policies. Unprepared operators are left to deal with problems such as schedule change requests, substitutions and no-shows. Having policies clearly defined and in place when you open can head off these issues.

Employee theft. Unfortunately, dishonest workers relish new restaurant openings because it allows them to take advantage of the oftentimes chaotic environment where mistakes abound. They know that management attention is heavily focused on making the guest happy and therefore may not be paying such close attention to employee actions. This is particularly true for positions such as cashiers or bartenders who are responsible for ringing sales. Void requests, overrings or other sales adjustments are often explained under the guise of being a mistake. The dishonest employee is emboldened because busy managers don't take the time to question.

Likewise, inventory control during the opening phase of a restaurant is usually not very tight. Opportunistic employees may find it easy to walk out the back door with a few steaks. For this reason it is imperative that basic controls such as key item tracking be in place when you open -- not something that you wait to do when things "settle down."

Operational Challenges

If you're like most new startups, you've more than likely spent long hours planning "how" you are going to run your restaurant. You even had a few mock parties before opening to give the staff a chance to practice taking orders, entering them into the POS system and then cooking them. During that time you may have uncovered some operational flaws and made the necessary adjustments -- but the parties were just for practice.

. .No matter how great your marketing plan is, even if it brings in hundreds of new guests each week, if you have a bad product (e.g., inconsistency) all you will have accomplished is to more quickly let people know about it. So, before you schedule grand openings, drop big bucks on advertising, or spend a gazillion dollars on billboard advertising, make sure you are ready to serve your new guests in a manner that will make them repeat customers who will spread positive word-of-mouth endorsements ..

Once you open your doors, practice is over. Now you're open seven days a week for lunch and dinner, leaving little time to work on your operational systems. Herein lies the biggest challenge for startup operators: How do you find the time to work on your systems while also giving proper attention to guest service, every shift?

Start by setting time aside for weekly meetings (more often if needed) with your managers. A good general manager realizes the importance of weekly meetings to stay on track with projections, identifying problems, and for correcting them. This is particularly important during the infancy period of a new startup. Allowing operational problems to linger will certainly increase the challenges you have with customers and staff.

The number of operational challenges you experience will be directly related to how well you prepared and planned for your opening. Not surprisingly, design flaws tend to be the No. 1 cause of operational problems. Owner Ed Peacock, of Charo's Peruvian Cuisine restaurant in Southern California, has this to say: "I can't understand why anyone spending anywhere from $300,000 to $1 million or more wouldn't spend the extra 15 grand or so to hire professional designers." He goes on to say that he is amazed by the stories he's heard of brand-new kitchens that have circuits popping or kitchen line bottlenecks.

But the operational challenges that most operators face are not limited to design flaws. Operational systems entail such things as setting policy and procedure, cash control and reporting, inventory control, ordering, cleaning and safety, product preparation, and the list goes on.

To help you minimize your list of operational challenges, consider the following list of common problems faced by new operators:

Timely financial reporting. Lack of timely financial reporting has sunk thousands of restaurant ventures. Operators who don't know where their restaurant stands financially are ill-equipped to recognize and deal with cost control issues.

Minimum recommended financial reporting includes:

• Detailed profit-and-loss statement at least monthly.
• Weekly prime cost status (prime cost is the combined total of food, beverage and labor costs). (See "Why Prime Cost is the Most Important Number [That Should Be] on Your P&L")
• Daily cash reconciliation: the process of balancing cash and credit card receipts against reported sales
• Knowing your break-even sales requirement

Kitchen timing problems. Whether they are the result of design flaws or unbalanced menu demand, kitchen timing problems affect customer service and employee morale. If you have timing problems you need to address them promptly. You should have targeted preparation times for each menu group, including appetizers, salads, main courses and desserts. And don't forget about the bar. Drinks need to be served in a timely manner as well.

POS programming deficiencies. No matter how much you prepare, you're going to discover that your POS program will require some changes. Certain items may not ring properly, or you need to add modifiers, or some of the pricing is wrong. You can head off the bigger problems by having your staff ring up hypothetical orders during the training period and mock parties. Discovering problems before you open will reduce your headaches. Also, be sure to select a good POS vendor that plans on being on standby on opening day.

Breakage and loss. New restaurants tend to have higher than normal incidents of breakage and loss when it comes to supplies such as plate and glassware, silverware and linens. This is due to carelessness and the failure of management to have systems in place to control the loss. Running out of product. It's difficult to estimate product usage until you have been open long enough to see what's selling. Having an effective order guide that lists all the ingredients you use helps to keep enough products on hand without having all your money tied up in excess inventory. Your order guide should list the desired par levels you need to maintain. By constantly monitoring product usage during the first few weeks you should be able to get a handle on your inventory levels.

Cleaning and safety problems. The constant traffic of staff and customers will reveal safety issues such as wet or slick floors, unsafe floor transitions that might cause one to trip, or blind corners and doorways that could cause a collision. You'll need to address all safety concerns promptly. Day-to-day activity also reveals shortcomings in your cleaning and maintenance procedures.

Marketing Challenges

As stated earlier, it's not uncommon for startups to go through an initial honeymoon period in which sales are up, and then take a downturn for a few months. Once the downturn hits, building your sales will depend on your performance in two key areas. The first area, as explained to this point, depends on the level of consistency you deliver in food quality and service. In other words, the quicker you resolve customer, staffing, and operational problems then the quicker you are able to deliver a consistent product.

The second key for building sales revolves around your marketing efforts. You must have a clearly defined marketing plan in place to compete in today's restaurant market. There are simply too many choices for your customers when it comes to making dining decisions. You need to have a plan that sets you apart from your competition.

Allow me to explain why I placed consistency ahead of marketing. No matter how great your marketing plan is, even if it brings in hundreds of new guests each week, if you have a bad product (e.g., inconsistency) all you will have accomplished is to more quickly let people know about it. So, before you schedule grand openings, drop big bucks on advertising, or spend a gazillion dollars on billboard advertising, make sure you are ready to serve your new guests in a manner that will make them repeat customers who will spread positive word-of-mouth endorsements.

While this article isn't intended as a column on developing your marketing plan, it's imperative that we point out some of the marketing-related challenges and mistakes facing startup restaurateurs.

Charity bombardment. New restaurants are a prime target for local fund-raising groups. Not that there's anything wrong with supporting some of them, but it's just impossible to donate to everyone who has an inclination to call on you. Your marketing plan should include a strategy for dealing with the many requests you'll get. Some operators have been successful by requiring a certain amount of advance notice as a matter of policy and budget; this way you're not telling them no, just no for now.

Advertiser bombardment. New restaurants also get bombarded by every coupon merchandiser, directory, magazine, newspaper, and a litany of other marketing opportunities. All of them will claim great distribution or returns, or "you must act now because it's going to print," or "there's limited space available." Don't fall for it. You need to create your own marketing plan, or enlist a marketing consultant before deciding on the various vehicles by which you'll market your restaurant.

Customer feedback. As stated earlier, there are bound to be guests who will complain and some will have compliments as well. It's never too early to solicit guest feedback, but many operators wait until after the honeymoon period to begin surveying guests for their opinion. Operators use a variety of methods to do so; including comment cards or a place on their Web site for guests to give their opinion. Always try to get names and addresses, as this allows you to invite disgruntled guests back in for a second try.

It's also never too early to begin building your customer database. Directly marketing to your existing guests is the most effective way to build repeat customers, and should be part of your overall marketing plan.

Bad News, Good News

The bad news is that everything we've mentioned to this point is only a partial list of the challenges you'll face as a startup restaurant. The good news is that you can begin preparing now as to how you intend to deal with these challenges. Let's face it, you're going to make mistakes; how you deal with them will determine your level of success.

In closing, here are a few pointers to keep in mind when contemplating your first six months of restaurant ownership:

• Don't put too much emphasis on growth such as franchising, or the next location; get this one right and create it as if it will be your only restaurant.
• Budget for higher costs and fewer sales for the first three to six months.
• Create an environment where people want to work and customers want to dine.
• Hire good management who have a following or who can naturally attract good talent.
• Be in constant communication with guests and staff.
• Take care of issues promptly; don't let them fester or multiply.
• Create a mastermind team that meets weekly or every two weeks; stay true to your concept or change it if it has flaws.
• Be sure you have timely financial reporting.
• Don't get caught up in the setup of too detailed of information such as real-time inventory tied to daily price changes, recipes and POS sales. Instead, track 10-15 key items.
• Train, train, and train your staff.