How the Restaurant Industry Can Begin Planning for the Future
3 Min Read By Kurt S. Kiess, CPA
COVID-19 has had a devasting effect on the restaurant industry. Even before COVID-19, owning a restaurant was a challenging proposition, with long hours, low margins, staffing woes and seemingly endless dealings with the health department and landlords, to name a few issues.
For restaurateurs, this is the time to plan your future
In March, social distancing due to the COVID-19 pandemic came into effect and restaurants en masse were forced to close in order to stop the spread of the virus. Lacking cash reserves and the resources to access money (traditional bank loans), most restaurants were forced to lay off their employees. Professionals advised restaurant clients not to seek traditional bank loans to cover wages and to save their money instead for the reopening of their businesses.
Today, some relief is in sight, as the CARES Act has passed, and now professionals are working with clients to plan for the future. What resources are available to restaurants now? How will restaurants reopen and what will it look like when they do?
For starters, we are modeling a smaller restaurant with less front and back of the house staff. Expectation of low turnout should be planned for post COVID-19, and the occupancy for restaurants will likely be reduced. If, prior to the pandemic, your restaurant had a seating capacity of 120 seats, that may be reduced by 20 percent or more.
Next, we can start to determine what cash will be needed to relaunch your restaurant. Some likely expenses to be considered for initial cash reserves:
20 percent of the prior year’s monthly sales for purchases of goods
75 percent of the prior year’s monthly payroll cost
Two months of rent and utilities
We are using last year’s monthly sales to address some of the seasonality of the industry. So, if you expect to reopen in June, then use the June 2019 numbers to determine the cash reserves needed to reopen in June 2020.
The difficult question is how to obtain the money necessary to reopen. One possible source is the new SBA Payroll Protection Program (PPP), a small lifeline for restaurants who had to let employees go during the onset of the crisis. This program, which every restaurant owner should apply for, will help retain employees and cover some of the overhead while your restaurant is closed, though much more will likely be needed. Knowing that you will not need all of your staff when you reopen, perhaps you rehire only 50 percent or less of your staff during the eight-week measurement period for loan forgiveness. By doing this, the funds received not used for payroll would be converted to a loan.
A second option is to contact your landlord and negotiate a reduced rent. Keep in mind that landlords are also going to continue to incur ongoing costs during this time. Perhaps a 50 percent rent reduction (or some mutually agreeable amount) can be reached. Achieving a reduction in payroll through use of the PPP loan and a reduction in rent can significantly increase the likelihood of your restaurant having funds to reopen.
Long-term financing will probably be needed in the industry. Everyone wants to go back to their favorite restaurants for their favorite meals. Globally, restaurateurs should increase pricing in order to improve margins.
For restaurateurs, this is the time to plan your future. Work with your advisor to come up with a projection that can help guide you through this crisis. Share these projections with your landlord and work out a plan. Use the projection to anticipate your supplier needs once you do reopen—perhaps a smaller menu selection can reduce the amount of product to be purchased. Anticipate that you may need smaller wait staffs and work on plans to provide the service needed under these new conditions. It is your passion that led you to this industry and that will enable you to move forward when this crisis is finally behind us.