F&B Business start-ups biggest headache

Undercapitalized, lack of cash, no cash flow -- is the number one business killer in F&B.

If you are thinking about opening a new restaurant or bar, you need to understand three words- under capitalized, cash and cash flow.  Under capitalization represents the most common fatal mistake restaurant and bar owners make. Underestimating your startup costs and over estimating revenue will result in an early and unplanned exit from your business— also known as bankruptcy.

Even if you’ve dreamed up The Next Big Thing, an idea is no guarantee against lack of cash. And a great business plan won't pay the bills at the end of the month. 

Here are five quick solutions to avoid the cashflow challenge:

1. Pick an industry you are familiar with.

Too many new F&B business investors think F&B is easy and seek to open thie rown restaurant. There is a big difference between thinking your can cook better than a restaurants chef, or mix cocktails better than a barman and running your own bar or restaurant. You may be the greatest process engineer HP has ever seen, but just because your colleagues love the chilli ribs you bring along to share does not make you a restaurateur. Think about your strengths and play to them. There's more to F&B than cooking or mixing drinks, can you fix a stuck garbage disposal or a dishwasher during the friday night rush? If the answer is maybe, see #2:

2. If you just have to open a restaurant or bar, get a partner that knows the business.

Lack of experience in the restaurant or bar industry will sink you. Inevitably, new players will make some basic errors. You'll end up overpaying for things, or paying for things you don’t need. Whether that experienced partner is working for you or just a part owner, it makes smart business sense to find someone with insider knowledge that can help you through at least the planning and budgeting stage. And the first advice your partner will give you is have enough cash in hand.

3. Serve your Customers.

Nothing is more important in the service industry than keeping your customers happy, especially in the first few months of opening your new operation. With the ubiquity of online restaurant reviews, facebook, twitter, or any other social media, if you don’t make a great first impression in a very crowded F&B environment, all the cash in the world can’t help you. Angry or dissatisfied customers don’t come back—delighted customers may do, and they often tell their friends and all your great customer service will contribute to a more positive cash flow during the early, critical months of operation

4. Get great suppliers. 

This solution is useless (and sometime disastrous) without #2—an industry insider can save you thousands of dollars in start-up costs. Do you know the difference between a shiny, brand-new Wolf range and the blackened, grimy one in the farthest corner of the used section of the showroom? You need to.

Especially if you want to run a successful restaurant. In today’s economy, there is a huge amount of barely-used restaurant equipment. And walking down my street in Singapore i've counted three restaurants close their doors in the last two months, and all the equipment is ready for disposal.

A knowledgeable partner is going to know who is selling useable kitchen equipment cheaply. The right experienced chef can tell you exactly what kind of stove you need for your business plan—he or she may tell you that the beat-up old Wolf from the defunct vegetarian restaurant in Joo Chiat will last you for the next five years or they may want all nice shiny new equipment. The right partner will know someone who can go and disassemble it, bring it to your place and assemble it for the right price. All these points, however, are utterly useless without this final point:

5. Have a considered business plan. Opening with just a menu, an idea, and some staff, forget it? Without some considerable thought set down on paper, and you'll be the one selling sued equipment within three months.

The business plan is the business—a well thought out business plan is something a bank absolutely needs if they are considering giving you a loan. How much you need will be clearly outlined in your business plan. A strong business plan will account for the unexpected—usually in a line item called ‘cash reserves.’ In order cover unexpected and unforeseen problems, it is critical that during the initial planning phase money is budgeted for working capital.

How much is entirely up to you and is a matter of your personal risk tolerance. Successful restaurants when in the launch phase sought to maintain minimum cash reserve balance of at least $10-15,000 quarterly. This is “oh crap" money, set aside for any problem that comes up. Some of the more common problems encountered during the startup process include construction delays. What if you have to push back your restaurant’s opening by two weeks? Will you be able to pay your staff for those extra two weeks without any revenue? In practical terms be conservative: forecast sales slightly lower than expect and forecast slightly higher the amount of working capital in your budget. 

Please don't let me put you off becoming a great F&B entrepeneur, new blood is what we need- but we need it in the industry and not all over your bank managers office floor. Enter the business with your eyes open and prepared to succeed.