Why you must have a business plan: the cause and cost of failure

A common misconception about restaurants is that they can overcome the worst of economic times and even survive poor management. The two main causes of failure are undercapitalization and lack of knowledge about the business.

Simply put, undercapitalization means just not having enough to go around. It usually results from not having a financial plan that allowed for sufficient contingencies when entering the business. Many entrepreneurs use all of their funds to construct their restaurant and cover their living expenses during the pre-opening period. They significantly underestimate the costs of delay and contingencies and then do not have enough money left to meet their bills. Having insufficient knowledge about business usually becomes evident the further you move through the process. Some businesses can survive even without the benefit of really knowing what they are doing, why it's working nor how to maintain the business. Without reservation, this is the exception! You may have worked for another successful restaurant and felt they had the whole process wrong and that you could do it better. They, of course, have been in business for the past 15 years. Let me challenge your perspective with the following fact; 80 percent of all new businesses fail within the first five years of opening and restaurants are no exception.

So why do you need a business plan? To prove out your theory! Careful planning is a key ingredient for the success of a new business – without it, a restaurant can only expect to react to crises rather than avoiding them or managing them effectively. My favorite phrase is, "You have to know where you're going before you know if you've arrived." Consider that your plan anticipated that it would be 120 days from identification of your site to complete your renovation, hire and train your staff and complete the pre-opening advertising. You already know the menu segment that you are going to develop and you've already got your eye on a particular location. The negotiations for the lease are well on their way. You feel real confident that everything can be completed within 180 days from today. You quit your job to focus on the project and have set aside sufficient cash reserves. Things rock along and every day there seems to be some other issue, you deal with it and move on but find yourself at the end of the 180 days and you don't have any employees, you don't even have any equipment installed. You work though this and it takes another 65 days, you get open and the customers don't flock to your door, your savings exhausted, your note was due 15 days ago and you know the banker will work with you because you've kept him informed about the delays, but you also need additional working capital. Let me inform you of something – prepare for Armageddon. As they say, "Stick a fork in it, it's done!" It's too late, there is probably nothing you can do but salvage what you can, hope that you don't file bankruptcy, and oh yes, find a job!

Although the most common use of a business plan is to persuade potential investors or lenders to finance your project, its primary value should be to assure you, the entrepreneur, that the enterprise is both feasible and potentially rewarding. A well- written business plan will convey to its readers the assurance that you can think clearly and have the ability to run a restaurant successfully.

The emotional ups and downs inherent in a start-up are often frequent and severe. You'll find periods of elation and excitement are often followed by panic, like when your cook decides to start his own restaurant right down the street. This is especially important for those of you that find yourself caught-up in corporate downsizing. The excitement of self-employment is daunting. Unfortunately, this is probably the first mistake in a long list that you will make. The business characteristics that made you successful in your previous life may well be the most important hurdle that you have to overcome. You won't have the infrastructure to support you, you won't have co-workers to bring you solutions, the skill sets of your staff will be significantly different and their perspectives on life and what's due them, shall we say is "interesting." In a small business, you have to manage all aspects of the business from marketing, financial, human resources, accounting, vendor relationships, and all around handyman.

Having a plan that was thoroughly thought out is vital when you get in the heat of battle and are being challenged from all fronts. The business plan will give you bearing, support and guide you through decisions that you must make on a daily to every-other-minute basis once the restaurant opens.

Your business plan needs to present your thoughts, your objectives, and the benefits. As noted above, it needs to convey to others that you know where you're going! There are some specific categories that should be in any business plan, but the menu segment and the complexity of the operations have a significant bearing on the need for some of the details. The following outline covers the major sections of a business plan.

  • Business model description
  1. Product offering
  2. Competition
  3. Customer demographics
  4. Restaurant industry trends
  5. The unique concept
  • The Company's Mission Statement
  • Other resources
  • Why you?      (Management team)
  • Why here?      (City/timing/physical location)
  • Objectives and financial expectations
  • Pricing and profitability
  • Market analysis
  • Marketing strategy
  • Financial Projections (detailed further later)
  • Supporting documents

Upon reviewing the above outline you still question, "Why is a business plan necessary?" You, of course, already know about food preparation or you frequent similar restaurant concepts to the one you plan to open or you've worked in a similar restaurant concept and know all the wrong things about operations. A thoroughly thought out business plan brings everything together, it enables you to succinctly share your plan with others and to maintain perspective when everything seems to be going wrong. A business plan is an operating tool.

The importance of planning cannot be overemphasized. Any comprehensive business plan will aide in identifying weaknesses in your approach, your financing, your location, your product offering from price points to menu offering. It is essential that your business plan be believable – be prepared to defend the statements you make. It is perfectly acceptable to present information in its best light, but inaccurate or incomplete information will be construed as deceptive or unreliable by investors and lenders and will very likely deter them from participating.

With a background in accounting, you have to hear the sales plug. Accurate financial information is critical to the success of any business, especially in the restaurant segment. Seek the advice of someone knowledgeable in the restaurant business. The friend next door or the CPA that is a member of the country club is probably not the right solution, but is always a better solution than someone that limits their business to bookkeeping. Don't be cost foolish here. Saving on accounting is like economizing on water if your house were on fire. If you can't afford a good accountant, then you can't afford to be in business. Trade out food for services if you have to, but get the best advice available.

With so little margin for error, why not be prepared to react to the hurdles and seize the opportunities as they present themselves. A business plan functions as the rudder does on a boat. If you want to go right you can, if you want to go straight you can. You know what action you must take to change directions. And if you need more support, when questioned about the value of the following dimensions, lenders that we know gave the following responses.

• Owner's previous experience:  45 percent

• Loan to equity ratio:  30 percent

• Well developed business plan:  40 percent

So from our informal survey, the Well Developed Business Plan is almost as important as Experience. (Our survey totals more than 100 percent due to the various responses.)