Better Stay Closed

10th June 2020

There was a sad piece in the Guardian last month, about the plight of restaurants in Australia[1].

Under the government’s plan, restaurants would be able to open up gradually – first welcoming 10 patrons, then 20, and finally 100.

But while the plan was meant to be helpful, it meant that many of the more upscale restaurants have to stay shut for the time being – or forever.

You see, many of them operate on very tight margins. And with high running costs, it just isn’t worth opening for 10 or 20 people.

“All of our staffing models, our wage costs, food costs… depend upon us turning over a certain amount of money a week, which isn’t going to happen with the restrictions that they’re proposing,” said Jacqui Challinor, executive chef of Nomad, a high-end Sydney restaurant.

They calculated that they need 1,500 covers a week to turn a profit.

“It doesn’t seem like a model that is going to work on fine-dining restaurants. It seems to be more of a model that would suit casual, franchise, takeaway kind of venues.”

Restaurants here in the UK are not quite at this stage yet. Still, the Australian example holds two important lessons for British businesses – in all industries.

First, if your business is currently “frozen”, you shouldn’t necessarily rush to re-open the second you are legally allowed to.

Just because you are able to start operating again does not mean that doing so is the financially sensible decision.

Even if you were previously profitable, it’s very possible that by re-opening, you will make a loss – for many reasons! It’s not just that the government may have restrictions in place that will limit your ability to do business (as in the case of Australian restaurants).

Consumer demand may change… For example, if you are very reliant on the “grey pound”, your business may suffer if many elderly consumers continue to isolate.

Or your operating costs may skyrocket… For example, if your supply chain has been disrupted, and you now have to source parts from a costly new supplier.

Under these circumstances, it may be better to stay closed.

Second, in order to calculate the point at which your business becomes viable and profitable once again, it helps to know your numbers.

In the case of the Australian restaurants, you’ll notice that Nomad knew exactly how many “covers” it needed each week in order to be profitable.

You, too, need to understand the exact point at which re-opening makes financial sense for you.

Now, in “normal” times that’s pretty easily done. If you have good monthly reports – the kind we provide, which delve in-depth into your numbers and track all your key KPIs – you can pretty quickly calculate what it takes to turn a profit.

The problem is that this is a very complex economic environment, in which it is virtually impossible to guess what is going to change from one day to the next, let alone try and predict consumer behaviour.

In fact, in all my years in business, I’ve never seen a situation where it’s so difficult to make even basic assumptions about how to go forward.

Under these conditions, the best you may be able to do is to map out different scenarios, and play around with the numbers as best you can.

Let’s take that business which is reliant on the “grey pound”. If that were you, you could try and figure out how your business might cope if people over the age of 70 were all instructed to continue isolating… Or if that were lowered to 60… Or if it were left to people’s own discretion.

And you could think about the difference it would make if it turned out that the elderly population couldn’t wait to go out and spend all the money it had saved throughout lockdown… Or if they turned out to be afraid of a deep recession, and resorted to strict saving.

Unfortunately, there is very little precedent on which to go on… So many of your assumptions will be completely wrong.

Still, you have to start thinking through what might happen.

You must consider the financials as best you can, even if that is limited, and refine your projections as the situation becomes clearer.

You cannot make a decision about when to re-open your business on a whim, at short notice, because you’ll get it horribly wrong – at potentially great cost.

Now, I appreciate that this is complex. And possibly intimidating.

And that’s why you might appreciate the help of a seasoned finance director – and his very experienced, capable team – who can work through the financial possibilities with you, so you make the very best financial decisions for your company’s future.

If that’s the case, please get in touch today. Let’s discuss how we can help.

Warm regards,

Garry

[1] https://www.theguardian.com/food/2020/may/11/its-just-not-worth-opening-restaurants-in-australia-can-trade-again-but-will-they

 

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