While the saying “A dollar saved is a dollar earned” is commonly accepted, in the restaurant industry, its meaning extends far beyond that. Read on for more insights.
You’ve probably heard the phrase, “A dollar saved is a dollar earned.” This saying, though well-known, has proven to be misleading in my experience running a food truck and restaurant.
I first contemplated this idea nearly a decade ago while working at a tech startup (bear with me as I connect it back to food service). I distinctly remember the CEO dismissing my excitement about cutting costs in cloud computing. “We won’t save our way to profitability,” he stated firmly, prioritizing revenue growth, which made sense for that particular business and sector.
Now, as the CEO of both a tech startup and a bagel shop, I’ve learned the importance of balancing spending and prudent saving.
In the food service arena, failure often creeps in unnoticed. It’s rarely the result of one big blunder; instead, it usually stems from a collection of small financial miscalculations.
The leading cause of downfall is ineffective cash management.
Understanding the real cost of expenses
Many entrepreneurs make the mistake of simply checking their bank balance, noting it, maybe transferring some funds, and calling it a day. However, the figures in your account aren’t as straightforward as they appear.
A dollar saved isn’t merely a dollar earned—it’s actually $2.50 earned. Here’s why:
Consider my bagel shop, where our prime cost is 60%, resulting in a contribution margin of 40%. This means that for every dollar in sales, 40 cents are allocated towards our overhead—rent, utilities, loans, and my profit as the owner. To cover $10,000 in monthly overhead, we need to generate $25,000 in sales. That’s a significant volume of $5 coffees!
But here’s the crucial point: when I avoid a non-essential $300 expense, I’m not just saving that amount—it’s like earning $750 ($300 / 0.40). That could equate to a whole day’s sales, especially in the early days of a business.
So, when evaluating a $300 expense, consider whether it can generate value equal to $750 in sales.
Diving into the numbers
Knowing the true cost of spending is vital for the success of your food truck or restaurant. This knowledge goes beyond simply tracking available cash or determining how much money you need; it involves dissecting every expense and questioning, “Do we truly need to spend this amount?”
For instance, if you’re tempted to invest $500 in custom-branded coffee cups or take-out containers, contemplate the sales needed to offset that expenditure. With a contribution margin of 40%, you’d need to make $1,250 in sales just to break even on that purchase. Is that realistic for your business?
In an industry with a high failure rate, these seemingly trivial decisions can significantly impact your business. Every dollar saved should be assessed based on its effect on your broader financial health. Are you cutting costs that could stimulate future revenue? Are you spending on essentials that directly foster growth?
Strategic spending for growth
Reviewing expenses isn’t merely about cost-cutting; it’s about making informed investments. When determining whether an expense is essential, consider the following criteria:
- Alignment with business objectives: Does this expenditure directly impact your restaurant’s growth or efficiency?
- Customer influence: Will this investment enhance customer experience or draw in more patrons?
- Long-term advantages: Does this spending provide lasting benefits, or is it merely a temporary solution?
For example, investing in a quality restaurant point-of-sale system might seem costly initially, but it can streamline operations, minimize errors, and enhance customer service, ultimately leading to increased revenue.
Maximizing Return on Investment (ROI)
Start by assessing your current expenses using the criteria mentioned above. Reduce unnecessary expenditures and focus on beneficial investments. Then, apply the same principles to make more educated decisions moving forward.
When you do decide to spend, ensure it has purpose. Concentrate on areas that promise the greatest return on investment. Generally, we observe the highest ROI in these three sectors:
- Marketing: Targeted campaigns developed by industry professionals can attract a higher volume of customers and create loyalty that keeps them returning.
- Staff training: Well-trained employees can enhance customer satisfaction, increase your average check size, and maintain smooth operations. Furthermore, well-trained staff usually have lower turnover rates.
- Technology: Selecting the right technology can help you operate a more efficient and profitable business. It’s typically best to collaborate with only one or two vendors for your restaurant’s operational and business services.
Shift your mindset for success, not just savings
Embracing the idea that a dollar saved translates to $2.50 earned can revolutionize your approach to managing a food truck. This isn’t just a minor shift in perspective; it’s a complete change in strategy that will lead your business toward profitability. Ultimately, the goal is not merely to survive but to thrive in the food service industry. You’ve got this!
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