Chapter 5 – Financial Planning

Chapter Warm-Up

Prechapter Reading Materials

• “Planning Your Pop-Up Business Expenses” (Baras 2015)
• Food and Beverage Cost Control (Dopson and Hayes 2019, 14–18)

Prechapter Exercise

• Watch the video below and provide the best response to the questions.

CHAPTER OUTLINE

• Aligning budgets with processes
• Foodservice flowchart
• Budgets and the pop-up
• Forecasting sales
• Planning for profit

Aligning budgets with processes

Important to developing the pop-up restaurant is the alignment of budgets with processes. This means that planning for the pop-up involves having a thorough understanding of food and beverage operations pre-, during, and postproduction. Examples of operational considerations are identifying local and reputable vendors who will be able to provide high-quality food items, finding available storage facilities, and having adequate personnel for FOH service and BOH production on the event day. A useful way to plan for financing the pop-up is by viewing positional requirements via a food-service flowchart.

Food-service flowcharts

Figure 1 shows a simple foodservice flowchart. In this simplified model, cash inputs are used to purchase raw materials and acquire labor needed for the event. These inputs are transformed into production elements capable of producing finished goods and services for consumers. In exchange for these services, consumers will provide a reward for enjoying the finished good (i.e., a dining experience), usually in the form of cash or cash equivalents. These receipts generate revenue adequate to reproduce supplies or add to cash reserves. Using this basic chart, the popupreneur is able to engage in financial planning or budgeting for the pop-up event.

Budgets and the pop-up

The basic elements of a pop-up budget, or projected income statement, include:

• ​Revenue – The amount of dollars an operation takes in.​
• Expenses – The costs of the items required to operate the business.​
• Profit – The Reward for Service​. The amount of dollars that remain after all expenses ​
  have been paid.​

Using the profit formula, popupreneurs are able to prepare estimates of their budgeted revenue and expense for their event (table 5.1). The preparation of the budgeted revenue and expense statement is among the first steps in planning financially for the restaurant.

Table 5.1 – Sample Budgeted Revenue and Expense Statement

Key considerations in assembling your pop-up restaurant budget include the following:

• Time/duration of pop-up
• Trends
• Outgoing costs (expenses)

Be as detailed as possible when working out your budget. This helps mitigate being hit with hidden costs that could potentially wipe out profits. Revenue makes up the top line of the statement and, in the case of a pop-up restaurant, may include dinner sales, beverage sales, and sale of branded paraphernalia. Other forms of (noncash) revenues include donations, sponsorship, and small business grants.

Expenses inform the pricing of your menu items and may include venue rental, menu item ingredients (food and beverage), labor, food safety training, utilities, insurance, marketing and print costs, cleaning materials, and kitchen and dining equipment.

Forecasting sales

Forecasting or projecting sales allows the popupreneur to assess the scenarios needed to support revenue generation projected for the pop-up restaurant. Sales forecasting is dependent on two key variables: average check and the number of guests expected. When combined, these variables produce a sales forecast that helps determine financial limits related to ensuring profitability and optimal spending. A sample sales forecast is shown in table 5.2.

Table 5.2 – Sample sales forecast

A popular approach to forecasting sales comes by way of using historical data. However, the nature of pop-up restaurants may not allow for historical data to be readily available. In such a case, popupreneurs must look to other data to guide sales forecasting.

When forecasting sales, another consideration may be seat turnover, or the number of times a seat turns over in an hour. This number roughly indicates the volume of sales and is also an index of efficiency for the entire operation. For example, let’s say that a restaurant has a forty-seat capacity. The owners project that they will be able to serve one hundred guests or cover a two- to three-hour lunch period. With only forty seats, this means that the seat turnover rate would need to be 2.5 (i.e., 100 / 40). To achieve this target, production and service teams would need to possess adequate resources to serve between two and three guests per hour.

Forecasting the number of guests requires a similar approach, using the formulae below.

Planning for profit

Alongside the sales forecast, popupreneurs must understand their restaurant’s break-even point, if they are to generate a minimum level of profitability.

In the sample break-even analysis shown in Figure 1.3, given a variable cost of $4.50, average check of $39.00, and fixed costs of $750.00, the break-even number of guests is between 20 and 25 guests, specifically 24 guests ($750/[$39 – $7.5] = 23.8 = ~24).

table 5.3 – Sample break-even analysis

KEY TERMS

• Break-even analysis
• Budget
• Expenses
• Financial planning
• Foodservice flowcharts
• Profits
• Revenue
• Seat turnover

REVIEW Questions

1. What is the difference between a budget and an income statement?

2. What is the difference between revenue and profit?

3. What is the relationship between a food-service flowchart and a budget? Should one be prepared before the other when undertaking financial planning for a pop-up restaurant?

4. What is meant by the term break-even analysis? Why is it important when undertaking financial planning for a pop-up restaurant?

5. What is the break-even number of guests for a restaurant with variable costs of $7.75 per person, a selling price of $20.00, and fixed costs of $9,625.00 per month?

6. What is meant by the term seat turnover? What is the seat turnover for a restaurant that seats 60 and served 175 guests last Friday night?

Review Activities

1. Read “Pop-Up Restaurants in New Orleans Move beyond One-Day Wonders” (Clark 2012). From your reading of the article, identify factors that influence the following:

• The SWOT analysis for a pop-up restaurant
• Revenue
• Food and beverage expense
• Labor expense

2. How does the Clark (2012) reading inform the budget and design of your own pop-up restaurant concept? (Hint: the duration of your pop-up will likely impact the design of one or multiple stagings.)

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