It’s a chore operators dread, but anyone who’s ever under-ordered for the weekend rush or over-scheduled during a slow period knows the pain of projections gone wrong.
An annual forecast is essential for operators that are serious about the business side of the restaurant business. Projections aren’t fortune-telling; they envision the future you hope for (and perhaps the one you fear) and create a map to get there.
The easiest way to think about forecasting is as a future-focused profit and loss statement. Real revenue and cost data are involved, but instead of obsessing over past performance, you use them to plan future efforts.
As an exercise, annual restaurant forecasting forces operators to take a long-term view that often gets lost amid the daily grind of ordering, writing schedules, and managing cash flow.
Well-built projections provide a way to gauge the health of your restaurant throughout the fiscal year. Pausing periodically to compare projections with reality will help determine know whether business is on track or whether corrective action is in order.
A thorough forecast is a game plan for the year ahead.
Let’s say you run a chicken wing concept and wing prices drop by more than 20%. Where do you put the extra capital you’d budgeted for food costs to get the biggest bang for your buck? And, if a trade war pushes tuna prices dangerously high for your sushi restaurant, how do you keep things rolling?
Having a solid annual forecast in place puts you in a proactive position, enabling you to compound profits, cut losses, or stay on course.
How to Create an Annual Forecast For Your Restaurant
As with all things forward-looking, forecasting can seem like a guessing game. For projections to go beyond bland predictions like “outlook not so good” or “cloudy with a chance of profit,” you’ll need to crunch some numbers.
Here’s how to get started.
Step 1: Gather Data
Being a digital packrat can be a good thing.
If you’ve kept copies of the past years’ P&L reports, you’re halfway there. If not, it’s time to dig them up.
For established operations, working from two or three years’ worth of data is recommended, as a longer look-back will help to establish seasonal variation and decrease the impact of outliers. Newly opened restaurants with no historical information may want to assume consistent spend and calculate a baseline for their sales forecasts.
Step 2: Think Categorically
Though it takes more time to put together, it's worth it to break out spend and revenue by category rather than tallying up two massive totals. We suggest using a high-level version of your chart of accounts that separates areas like bar and kitchen or purchases like alcohol and food.
They key is to strive for maximum insight and minimum hassle. Create too many categories and updating the reports is just a headache; create too few and you won’t have a good sense of why your business behaves the way it does.
If the calendar is critical to your operation, normalizing time periods may provide better insight. While monthly reporting is convenient, most restaurants see higher sales on the weekend; this can make comparing periods tricky, as some months have five weekends and others four. Breaking the year into 13 periods of four weeks each can help, but be wary of roving holidays like Mother’s Day and Thanksgiving.
Now it’s time to add something on the top to account for growth. Regardless of whether you’re hoping for a modest 1-2% year over year (YoY) increase or you’ve got more aggressive targets in mind, the key is to remain realistic.
Instead of pulling goals out of thin air, begin by calculating actual year-over-year change for each period.
Let’s say you’ve got two years of revenue data: In January of the first year (Year 1) you made $100,000, while in January of the second year (Year 2), revenue was $120,000.
Here’s how to find the YoY percentage change:
YoY Percentage Change = [(Year 2 - Year 1) ÷ Year 1] x 100
Repeat the process to find YoY change for both revenue and expenses for each period. Bear in mind that a positive result indicates an increase, while a negative number indicates a decrease.
Once you’ve done the math, consider the results: does seasonal traffic account for any dips? Are high-growth months accompanied (or preceded) by a spike in spend? Understanding the why behind the numbers is just as important as the data itself.
Step 4: Plan for Growth
With YoY change tackled, you’re ready to create informed targets for future growth. Use historical data to decide whether to continue a slow and steady climb in income to outpace inflation or whether to take a more aggressive route when it comes to increasing revenue.
When planning for growth, think carefully about your earning potential. If seasonal tourist traffic drives sales, slow months won’t realize the same rate of return as busier periods.
Here's an example: let’s assume average January revenue is $100,000, while the average June take is $300,000. Traffic is up, so you’re comfortable estimating an additional 2% profit for next January, but you’re planning to invest in more marketing that should result in 5% more profits over the summer.
To calculate projected revenue, use the following formula:
Projected Revenue = (Average Revenue x Percentage Increase) + Average Revenue
Projected Revenue = ($100,000 x 2%) + $100,000
Projected Revenue = $2,000 + $100,000
Projected Revenue = $102,000
Doing the same with your June estimates would put projected revenue at $315,000.
Don’t forget: it costs money to make money. If you want to increase revenue by even 1%, expenditures will rise. More customers requires more staff, more ingredients, and more money for marketing.
Historical information is a good starting point for estimating how expenses scale in relation to revenue. You should also give some thought to whether investing additional funds could lead to even higher returns and plan accordingly
If you’ve made it this far, you have an annual forecast for both revenue and expenses! You’re done, right? Not exactly.
Before sharing the final report with your managers, here are some things to remember:
1. Account for External Factors
There are plenty of external factors you can’t anticipate, such as a natural disaster that causes a price hike for a key ingredient. But if, for example, minimum wage is about to increase and your labor costs with it, factoring that in will make your efforts even more accurate.
2. Don’t Spitball
We can’t emphasize this enough: Your forecast will only be as good as the assumptions and data underlying them. Steps 1-4 above are crucial to forecast with any accuracy.
3. Create Two Versions
Go back to Step 4: Plan for Growth and reassess the percentage increase. Was it more on the conservative side or the aggressive side? Whichever way you leaned, re-run the math in the other direction.
Preparing two sets of projections—one that plays it safe and one that pushes the envelope—allows you to be more nimble should the unexpected arise. Whether revenue is through the roof or a broken walk-in is threatening to break the bank, you’ll have a ready-made plan in place for how to respond.
4. Follow Up
The point of projections is to measure performance against the plan. Periodically returning to (or even updating!) the report will help determine whether you’re hitting the targets you set and whether costs are eating into revenue.
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