Anyone who’s ever under-ordered produce for the weekend rush or over-scheduled staff during a slow period knows the pain of predictions gone wrong. This is where annual forecasting can come in real handy.
An annual forecast is essential for operators who want to take control of their restaurant’s finances. Making projections isn’t fortune-telling; it’s envisioning the future you hope for and creating a map to get there, while being aware of the other ways it could go.
What is Sales Forecasting?
A thorough sales forecast is a game plan for the year ahead. The output of annual forecasting is basically 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 your future efforts.
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 your sales reality will help determine whether the business is on track or whether corrective action needs to happen.
Let’s say you run a chicken wing restaurant, and wing prices drop by more than 20%. Fantastic news, right? Checking in with your annual forecast can then help you figure out where to put the extra capital you’d budgeted for food costs to get the biggest bang for your buck? On the other side of the spectrum, if a trade war pushes tuna prices dangerously high for your sushi restaurant, you can figure out which areas of your business can stand to share a little cash with the rest of your food budget.
Having a solid annual forecast in place puts you in a proactive position, enabling you to compound profits, cut losses, and stay on course.
How to Create an Annual Sales Forecast for Your Restaurant
Forecasting can seem like a guessing game. For your projections to go beyond uninformed predictions like “outlook not so good” or “cloudy with a chance of profit,” you’ll need to crunch some numbers.
Here’s a step-by-step guide to creating a data-backed annual forecast.
Step 1: Gather Data
You likely already know the importance of holding onto copies of your business statements, whether for tax reasons or to inform your future plans.
If you’ve kept copies of 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. It’ll help to establish seasonal variation and decrease the impact of outliers. Newly opened restaurants with no historical information may want to assume consistent spending and calculate a baseline for their sales forecasts.
Step 2: Create Categories
Though it takes more time to put together, it's worth it to break out your spending and revenue by category rather than tallying up two massive totals. We suggest using a general version of your chart of accounts that separates by areas, like bar and kitchen, or by purchases, like alcohol and food.
The key is to strive for maximum insight and minimum hassle. With too many categories, updating the reports becomes a headache; with too few, you won’t have a good sense of why your business’s finances are behaving the way they are.
It’s also a good idea to choose a time frame to always use when looking through reports. While monthly reporting is convenient, most restaurants see higher sales on the weekend — this can make comparing two different periods tricky, as some months have five weekends and others four. Breaking the year into thirteen periods of four weeks each can help, but be wary of the significant impact of holidays like Mother’s Day and Thanksgiving.
Step 3: Calculate YoY Change
Once you have your totals for revenue and spending for each category, it’s time to calculate year-over-year change to inform your goals — instead of just pulling goals out of thin air. 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.
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
YoY Percentage Change = [($120,000 - $100,000) ÷ $100,000] x 100
YoY Percentage Change = 20%
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 expenses? 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 average June revenue is $300,000. Traffic is up across the board, 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. Getting more customers in the door, and then serving them, 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.
Helpful Tips for Creating a Restaurant Sales Forecast
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 four things to remember.
1. Account for External Factors
There are plenty of external factors you can’t anticipate, like a natural disaster causing a price hike for a key ingredient. But if, for example, minimum wage is set 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 forecasts will only be as good as the data backing them up. If you forecast based on general waves and trends that you’ve noticed, you’re setting yourself up for unpleasant surprises.
3. Create Two Versions
Go back to Step 4: Plan for Growth and reassess the percentage increase. Was it conservative or aggressive? 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 threatens to break the bank, you’ll have a ready-made plan in place for how to respond.
4. Follow Up
The point of sales 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.
What Does Your Forecast Call for?
Ultimately, annual restaurant forecasting isn’t about creating a static spreadsheet, it’s a reflective process that sets you up to understand your restaurant’s successes, shortcomings, and goals for the future.
Putting your hopes and fears on paper can be scary, but it’s crucial to creating a strategy that moves your restaurant beyond the status quo and toward the future you’ve been dreaming of.