Major development in our primary entertainment district has resulted in many new bars and restaurants. While I certainly do not wish failure upon any entrepreneur, the sad truth is that many of these new businesses will most likely not succeed. The even sadder truth is that the reason for their failure will be simple obliviousness to general cost equation and projection methods that govern our industry almost as reliably as gravity. Are there exceptions to the rules? Absolutely. As with art, however, you have to know the rules before you can break them with any success.

It is often a cart-before-the-horse scenario when looking for a bar space. It is difficult to devise a business plan prior to knowing income or expenses that depend heavily on a particular lease or purchase price. You cannot attract investors until you know the numbers, but you cannot really know the numbers before you have the space. The best method, therefore, is to work with the known industry standards.

For example, worst-case, rent/mortgage expenses should be no more than 10% of your estimated gross monthly income. If you sign a lease for 7K/month, whether you know it or not, you have just set your monthly sales goals at 70K. Likewise, the average labor expense should not exceed 25% of your GMI. If you have a space in mind, do a mock schedule for all hourly and salaried employees for one month. Take that number times four, and again, you have a projected, monthly sales goal. Liquor cost percentages may differ based on product selection, but you should know what tier you are operating in, and what to expect that percentage to be. Taxes should be factored in, so kiss another 25% good-bye. With all premium products, we work to maintain a 25% liquor cost. For those who are paying attention, I have already allocated a potential 85% of my GMI, and I have not discussed utilities, insurance, re-investment capital, advertising, or miscellaneous expenses. The whole financial planning process is much like bar string theory, where you create a theory of everything that makes all of the projections fit into a working model.

Now let’s say your rent-based projection put your sales goal at 70K, but your labor-based projection put it at 85K. Go with the 85K. Then, to check your stronghold on reality, you must ask, “Is the space I am interested in capable of generating 85K in gross revenue per month?” This is where you need to know your market and your clientele very intimately. What will your product selection and price points consist of? How much, on average, do you expect the average client to spend? How long will they be there? Our market follows a pretty standard 1:1:1:2:3:4:4 daily sales ratio from Sunday through Saturday, respectively. Once I have a monthly goal, I can determine an estimated weekly goal. I divide that by 16 (the number of sales ratio units). Then I multiply that number by the respective number of units for the given day (Sunday through Tuesday x 1, Wednesday x 2, Thursday x 3, Friday and Saturday x 4). Now I have daily sales goals. Note that different markets may have different business flow patterns, and that there are exceptions to the ratio rules. For example, bars that cater to service crowds on Sundays and Mondays may see more business on those nights than on a Tuesday or Wednesday.

I could go on forever about the importance of going into a start-up knowing the numbers. As our USBG Chapter shapes up, we have already been discussing the valuable opportunity membership affords to network with other industry leaders to become more acutely aware of the financial prospects. As we continue to re-image ourselves as professionals in our community, we need to do our due diligence to increase the success rate of our ventures. You do not need to sew together gravity, magnetism, strong force and weak force, but sewing together rent, labor, taxes, and liquor costs can sometimes prove just as challenging.

What advice do you have for would-be entrepreneurs in our industry? What unanticipated pit-falls have you encountered?