What I Learned From Owning a Restaurant Part 2
Part 2 - Don't Rely on Credit or Miracles to Pay the Bills
Part Two: Don’t Rely on Credit to Pay The Bills
Credit is a slippery slope. Used responsibly, it can be a valuable tool for managing the day to day expenses of running a restaurant. Credit can be in the form of a card, an extension by vendors (such as paying a week after the food delivery arrives) or a loan of some sort. In the restaurant industry, pre-recession, there were many companies promising loans based on a percent of future sales.
After we had used all of our personal credit to pay the bills and stretched our credit with vendors, we turned to one of these companies. The interest rate was far higher than a traditional bank or small business loan. It was a quick fix for a bigger problem that we refused to acknowledge. We were losing more money than we were making, and we couldn’t borrow our way out that. Along with falling behind on bills, we fell behind on our taxes, which just compounded the problems we already had. Instead of borrowing and paying things late, we should have cut payroll more, worked more hours ourselves (easier said than done –at the time we had four small children at home). We should not have relied on the idea of recouping money through a busy weekend, a busy summer, a busy holiday season. Though we had busy seasons, it was never enough to cover the losses in between. We should have reached out to our lenders to consolidate payments at a lower interest or sought advice from a professional financial adviser.
Instead we kept our heads in the sand and hoped that some kind of restaurant miracle would happen and we would find ourselves back in the black.
Know When to Close
Like any dysfunctional relationship, it can be hard to know when to stick it out and when to walk away. Our last restaurant should have closed about two years before it actually did.
It would have saved us a lot of heartache and money. If you’ve done everything you can to make a profit, but are continually in the red, it may be time to close up shop. This is why I tell people to think long and hard about financing in the beginning. If you do have to close, you want it to be able to walk away without losing your house to a second mortgage or owing hundreds of thousands of dollars on restaurant equipment that lost its value the minute it left the showroom. Closing isn’t an easy decision, but it is far more favorable than being shuttered by the bank.
If you're feeling bad about closing, keep in mind you are in good company - Gordon Ramsay and Bobby Flay are just a few celebrity chef's who've closed restaurants that weren't performing well. Paula Deen closed the restaurant she co-owned with her brother, Uncle Bubba's Seafood &Oyster House and Emeril Lagasse has closed multiple locations over the years. What separates the average restaurant owner from these celebrities is of course, money. Emeril and Paula didn't have to apply for unemployment after closing up. Bobby and Gordon didn't worry (I don't think anyways) about how to pay off that second mortgage on their house when their restaurants closed.
If you are smart about opening (prudent financing, responsible spending, etc...) closing a restaurant doesn't have to be catastrophic. And it will leave you in a good position to try opening a restaurant again, if you'd like.
Read Part 3 - Be a Good Boss.