Michael Tran is Partner & CEO of the Peli Peli Restaurant Group in Houston, TX. Peli Peli is the only South African fusion restaurant in Texas and the 2010 Click2Houston winner for Best Romantic Restaurant in Houston. In addition to its awards for atmosphere (2009 Houston Press – Reader’s Choice) and ambience (Best Romantic Bar and Music Venue – Citysearch 2009), Peli Peli is one of only a handful of restaurants in Houston that have been rated at least 4-stars on every online food and drink website.
The restaurant industry has been known to be one of the “toughest” businesses around. It is an all-consuming business that goes by the mantra of “you are only as good as your last meal served”. With small profit margins, high startup costs, and crazy competition, financial discipline has often been neglected by restaurant entrepreneurs.
As an 8-year-old startup, Peli Peli has gone through its startup phase to the growth phase, and is now moving toward a public offering. We are challenged every day to keep our financial discipline in a world of uncertainty.
Nine years ago, the 2009 market crash was one of the worst. Peli Peli had a very rough start as a result, but came out successfully in the end through pure entrepreneurial grit and determination. We did not have systems in place, no budget, no forecasting — we just survived day in and day out.
One of the biggest challenges for any business is growth versus survival. This season, we are executing an exponential growth plan that we have designed ourselves. With the current oil crisis in Houston, there are some significant challenges with growth and cash flow.
And when time, resources, and funds are limited, survival is king. Cash is king. Most entrepreneurs do not fully understand cash flow and how tightly their business is tied to it. When it comes to restaurants, food is important — but cash IS FOREVER KING. We’ve earned this knowledge in the trenches, and we are still in the infant stage as a company.
I believe profit margins are a measuring stick of the value you create in a marketplace. There are things you can control and things you are not in full control of. Fine dining, fast casual, and fast food are all different aspects of the same thing. People want to experience different things at different times based on their needs. As restaurateurs, our job is to mold our financial model and our offering to the world based upon what our guests’ values. It’s what makes the restaurant industry so flashy and fun!
That said, there are some really big financial challenges restaurant owners face today. Having to figure out when to put limited resources towards growth systems is number one. But even before that stage, high startup costs and limited backup reserves or safety nets can be crippling. You must spread liabilities across investors, bankers, vendors, and your own funds. Don’t make the mistake of putting everything on only one financial source. You have to have multiple safety net reserves and make sure they are available at any time. Run drills to see if you can have access to capital in a shrinking market. It’s critical to manage your cash projections, especially during the growth phase.
In order for a restaurant owner to improve financially, you have to get your profit and loss stabilized, and know all your percentage of costs, expenses, sales, and everything in between. Get professional advice from an experienced CPA with restaurant experience. Maintain weekly cash flow projections to see how close your cash projections come to actual income. Design a great EBIDTA number and stick to your budget. Do it weekly.
Specifically, in the first year, do emergency cash crunch drills in good times. Set up safety nets with lines of credit, savings, and other funding sources such as credit card advances (used only if you have no other options), and/or investors. Run worse case scenarios. Sales will take time to build. The loyalty of your guests takes time to build and it’s slower to develop than you expect.
In your first year, LIVE and DIE by your P&L. Know every number on your profit and loss balance sheet. Understand your cash flow statement. And I repeat: always put safety nets in place. Learn to tweak your P&L, too. Ask yourself, “Are these expenses needed for this month?” If not, hold off on it. If it can wait, save up and put it in your reserves or safety net funds. But pay yourself fairly. You are the last line of defense. You have to be financially able to withstand a cash crunch.
I think most owners spend too much on vendors. Cut back by 25 percent. It’s an exercise that has to be done twice a year. Don’t pay for “advice.” NO ONE knows your business like you do. Advice from “pros” (especially if they are only for a check) is a great way to burn money fast.
One piece of advice I have for new restaurant owners is to be careful not to fire employees too quickly. It costs money to replace them and most employees take close to six months to make a return on your investment in them. Build a great training program. Treat people well. They will stay to help you achieve your goals if you do.
Most restaurant owners don’t spend enough money on employee benefits and perks, not to mention other important items like branding, marketing strategy, and customer loyalty programs. And if a customer does not like something, replace it ASAP, no questions asked. Go above and beyond.
But there are a lot of things restaurant owners can’t anticipate that ends up biting them later on, as well. Emergency break/fix costs are often a major unexpected expense. Stuff happens all the time … especially in the restaurant industry! Key employees can leave, so it’s critical to have redundant systems in place. Have key employees train other employees, just in case.
And then there’s always the risk of a market downturn. No one plans for it, but the signs are all over the place. Look at your P&L, talk to your customers, and talk to vendors. Understand the playing field, so you can pick the right financing option if necessary.
When we sought financing for our restaurants, why did we decide merchant cash advance was the right option for us? It is quick, easy, and you retain most of control as an entrepreneur. It is like a shot of adrenaline to your system if you are in trouble. Go in there understanding all the ramifications. Talk to other restaurateurs who have used it as a strategic move.
But there are new technology trends we consider worth the financial investment for our restaurants.
A lifetime customer value has to be placed on EVERYONE who walks through your door. Don’t see it as a one-time transaction. Developing loyalty in a social media platform is the best use of your funds. Design so much value in your restaurant’s experience that there is NO other choice but for them to come back. Then use technology and social media to amplify.
There are also technologies built for instant gratification: online ordering, app ordering, Uber delivery. People want it now. Figure out how to give it to them. Invest in it.
And ultimately, customization technology is key. Do you know me? Do you care? What do you have for me specifically? Use technologies that expose the human desires to be known, seen, and appreciated. It goes beyond loyalty program. It is trust.
Along those lines, chef-driven trends exist because people do not like to be a part of the “machine” of mass produced food that has no soul. A chef is a person putting his soul into something we appreciate. We appreciate artistry, passion, and the love of serving others. I personally think that a chef gives back the spirit of food. Food is not just filling your tummy so you can live to die. Food now represents love, life itself, and the adventure of experiencing one of the only things that every human can have in common. We eat with our loved ones. We share lives over food. GREAT food with soul is a part of that.
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