During the research phase, you should analyze both the external factors (outside your control) that will influence the restaurant’s business and the internal factors (within your control) that will determine the future performance of your restaurant.

External factors may include:

• Sales Generators: any other business or gathering of people that may generate sales for your restaurant. Common sales generators include office buildings, residential areas, and schools. Visit your local chamber of commerce and city planning commission to learn of any new developments, such as office buildings that may be in the planning stages
• Competition: another business in the same industry as your restaurant concept that offers similar menu items, restaurant environments, and customers. Any business that has the potential to take away revenue streams from your restaurant concept should be considered competitors. Refer to our competition section for additional information and guides
• Community Events: events organized or participated by individuals in nearby communities. These events can have a significant influence over the amount of customers your restaurant will potentially attract. These events can include local festivals, carnivals, concerts, sporting events, and church events. Refer to your local events calendar for additional information
• Local Economic Conditions: the financial stability of the local government, suppliers, utility companies, and other local entities that have an impact on your restaurant's business. Some questions you should be asking include:

• Are local economic conditions expected to get better or worse and how will they impact your restaurant? If economic conditions are expected to get worse, potential customers may be less willing to spend their money on more expensive items
• Will the local utility companies be increasing rates? Rate increases will affect your restaurants profitability by increasing your fixed costs
• What is the financial stability of my food suppliers and beverage suppliers? Are any of them threatening to go out of business, thus forcing me to purchase from more expensive suppliers?
• Are any major increases in foods or other costs anticipated that may greatly affect my restaurant’s sales?

• Relevant Regulatory Criteria / Updates: these can include licensing or zoning changes as well any regulatory codes that must be met by your restaurant

Internal factors may include:

• Inventory Costs: reflects the cost of ingredients and inventory that comprise the menu items you sell to guests. Leverage our Menu Breakdown and Inventory Budget Tool in the Supply Chain / Inventory Workspace to help you determine how much these costs will be. This tool will allow you to break down your inventory costs across food, non-alcoholic beverages, and alcoholic beverages. As general guidance, the total inventory costs (including beverages) for the restaurant industry typically range from 25-38% of total sales, depending upon restaurant style and sales mix
• Labor Costs: generally the second-highest costs for restaurants after inventory costs, labor costs reflect the cost of your restaurant's employees. On average, full-service restaurants generally have labor costs between 30-35% of sales and 25-30% for limited-service restaurants. Leverage our Hourly Employee Shift Scheduling Tool for help in estimating your hourly employee labor costs.
• Other Controllable Costs: any other expenses that fall directly under the control of management. Below are some examples. Note that management may only have partial control in some scenarios (e.g. contractual services)
• Marketing / Advertising Costs
• Equipment and Technology
• Maintenance and Repairs
• Professional Vendor Fees
• Real Estate Costs: reflects the costs associated with your restaurant's real estate. While costs are generally set after signing an agreement (e.g. lease agreement), you have control over the initial process of finding a property that fits your budget / price range. Check out our Real Estate workspace for additional guidance and information

Leverage your research to begin generating estimated numbers for your initial financial forecast. For further guidance, refer to the 7 steps below in addition to our Financial Forecasting Tool.

Note that all changes made to your financial forecast have to be fully considered. For instance, if you decrease your advertising / marketing budget, you should consider the decline in sales that may follow.

Step 1: Forecasting Sales & RevenueThe first step is projecting annual sales. You should use the analysis of the external and internal factors in the research phase to arrive at the appropriate sales figures. When forecasting sales, it is generally best to categorize the sales expected from weekends / holidays versus from normal business days since restaurants often have dramatically different sales between the two. In addition, identifying your sales mix after projecting total annual sales is also very helpful down the road.

Note that if your restaurant has other income outside of your restaurant's normal operations (e.g. financial investments, selling licenses), your revenue will be different than sales since revenue includes these additional streams of income unlike sales. Otherwise, revenue = sales.

Refer to the "Sales & Revenue" worksheet in the Financial Forecasting Tool for calculations and specific instructions.

Step 2: Forecasting Cost of Goods SoldCost of Goods Sold (COGS), also known as “cost of goods used” or simply “cost of usage,” is the cost your restaurant directly incurs from each food and beverage product sold.

When starting a new restaurant, the inventory costs you researched during Phase 1 will ultimately drive how you estimate COGS since your restaurant will not have made any purchases or sales at that point. For your initial forecast, you can estimate COGS as a percentage of forecasted sales. However, make sure to also compare the resulting estimates in the forecast with the numbers you calculated in the Menu Breakdown and Inventory Budget Tool.

For future reference, the standard formulas for COGS and COGS percent after obtaining a period of sales are also included below:

     Beginning Inventory + Purchases – Ending Inventory = COGS
     COGS / Sales = COGS % 

-Beginning inventory means the amount of product that you have in your kitchen and storage rooms at the beginning of a period, usually the beginning of the week. For instance, if Monday is the start of your business week, and you have $5,000 worth of food and beverages on your shelves, $5,000 is your beginning inventory.

-Purchases means the amount of inventory you purchase in food and beverage orders in that period of time. If an order of another $3,000 worth of inventory arrives on Friday, this would be considered the purchase.

-Ending inventory is the amount of food product you have left when the work week is over. Although you purchased product during the week, but you will have less inventory at the end of the week since you sold the food to your customers. For example, at the end of the work week, you have $4,000 worth of inventory remaining.

-Numerical Example: if your restaurant has $5,000 worth of inventory on hand on Monday, and then purchases another $3,000 of food and beverage product, you have a total of $8,000 worth of inventory at the beginning of the week. The following Monday morning, you arrive at the restaurant and count $4,000 worth of inventory. This gives you a usage cost, or COGS, of $4,000. This also means that you sold $4,000 worth of inventory.

Refer to the "Gross Profits & Prime Costs" and "Descriptions & Calculations" worksheet in the Financial Forecasting Tool for additional calculations and specific instructions.

Step 3: Forecasting Labor Costs
Based on your forecasted sales, your estimated staff levels may have to be changed and wages and salaries may have to be adjusted as well. Labor costs generally include the cost of management, back of the house employees (chefs, line cooks, kitchen helpers, etc.), front of the house employees (servers / waiters, cashiers, counter helpers, etc.), and any statutory benefits (payroll taxes, employer withholding dues, workers compensation benefits, etc.). 

Refer to the "Gross Profits & Prime Costs" worksheet in the Financial Forecasting Tool for calculations and specific instructions

Step 4: Forecasting Controllable ExpensesControllable expenses are costs that fall directly under the control of management. In addition to prime costs (COGS + Labor Costs) which should comprise the majority of controllable expenses, there are several other costs that fall under this category, including marketing / advertising costs, music and entertainment, and maintenance and repairs. Note that some of these costs are better forecasted as a percent of sales while others are better forecasted as a fixed dollar figure.

Refer to the "Controllables & Occupancy" worksheet in the Financial Forecasting Tool for calculations and specific instructions.

Step 5: Forecasting Occupancy CostsThe fifth step is to forecast occupancy costs which include items like rent, property taxes, and property related insurance.

Refer to the "Controllables & Occupancy" worksheet in the Financial Forecasting Tool for calculations and specific instructions.

Step 6: Forecasting Profits and Net IncomeThe sixth is to forecast profits and net income. Note that the word "profits" is a broad term and can be calculated as gross profits, controllable profits, operating profits, and net income.

To calculate net income, you will also need to estimate any interest expenses, depreciation expenses, and business income taxes in addition to the prior costs forecasted.

Refer to the "Profitability & Net Income" worksheet in the Financial Forecasting Tool for calculations and specific instructions.

Step 7: Compare Against Industry Benchmarks / Direct CompetitorsAfter you generating your initial forecast, you should always compare the numbers you have against industry benchmarks and your direct competitors if accurate financial information is available.

For reference, below are some industry benchmarks as provided by Jim Laube (founder of RestaurantOwner.com).

• Prime Costs
• Full-Service Restaurants: 65% or less of total sales
• Table-Service Restaurants: 60% or less of total sales
• Food Inventory Costs
• Generally 28-32% of total food sales
• Non-Alcoholic Beverage Inventory Costs
• Soft drinks (post-mix): 10% to 15% of soft drink sales
• Regular coffee: 15% to 20% of regular coffee sales
• Specialty coffee: 12% to 18% of specialty coffee sales
• Iced tea: 5% to 10% of iced tea sales
• Alcoholic Beverage Inventory Costs
• Liquor: 18% to 20% of liquor sales
• Bottled beer: 24% to 28% of bottled beer sales
• Draft beer: 15% to 18% of draft beer sales
• Wine: 35% to 45% of wine sales
• Total Labor Costs
• Full-service Restaurants: 30% to 35% of total sales
• Limited-service Restaurants: 25% to 30% of total sales
• Labor Costs (Management)
• Generally 10% or less of total sales 
• Statutory Benefits
• Generally 5-6% of total sales
• Generally 20-23% of gross payroll costs
• Occupancy Costs
• Rent / lease payments: 6% or less of total sales
• Total Occupancy Costs: 10% or less of total sales
• Sales Per Square Foot
• Break-even for Full-service Restaurants: $150-$250
• Break-even for Limited-service Restaurants: $200-$300

Calculating how much capital you will need for your restaurant initially is a direct function of your startup costs. As a general rule of thumb, be sure to have enough capital to cover at least 6 months of expenses for your restaurant (we recommend having 12 months covered to be safe) and always error on the side of overestimating, A major reason why many restaurants run out of capital in the midst of operating is because restaurant owners often underestimate their startup costs.

Leverage the "Startup Costs" worksheet in the Financial Forecasting Tool for help in identifying how much capital you will need initially.

See below for some general guidance on restaurant startup costs. On average, starting a new restaurant can cost between $400,000 to $525,000, but these ranges will definitely vary depending on your restaurant.

Rent / Operating Costs:

• Security deposit (typically one month of rent at $10,000 to $12,000)
• First-month rent ($10,000 to $12,000)
• First-month utilities, including Internet and phone service ($2,500)
• If you decide to build and buy rather than rent, there can be governmental impact fees. Depending on your location, those can range anywhere from $20,000 to $120,000.

Location Improvement Costs:

• Construction of customized build out, including kitchen ($250,000 to $350,000)
• Restaurant tables and furniture ($40,000)
• Tablewear, utensils, dishes, kitchen, and bar equipment ($80,000)
• Initial supply of food and beverages ($8,000); This estimate for initial food and beverage costs depends on what you serve and how you serve it, but try to keep this initial order as small as possible until you are cash-flow positive

Marketing / Advertising Costs

• Signage ($15,000)
• Menus ($1,500)
• Fliers/ads/coupons ($5,000 to $10,000)
• Buiness cards ($70 for four people, if self-designed)
• Public relations services ($6,000)
• Restaurant-opening event ($15,000)

Miscellaneous Opening Expenses

• Insurance ($6,000)
• Permits and licenses ($5,000 to $6,000)
• Accounting costs (vary)
• Ordering and payment technology ($20,000)

There are many ways to obtain capital, but not all of them will be the ideal method for your specific restaurant. Carefully considering the terms and conditions that apply to each method will help you determine which sources are best for you.

Below are descriptions of seven of the most common methods recommended and used by past / current restaurant owners.

Method 1: Local Banks / Lending InstitutionsLocal Banks / Lending Institutions can help you obtain capital at reasonable interest rates, but are often very difficult to actually get capital from. In almost all instances, you will need to have a substantial amount of collateral, a large down payment, proven restaurant experience, and an almost perfect credit score. Note that you will also need a robust business plan at your disposal before applying to these institutions.

• Traditional Bank Loan: This is typically the first financing route pursued by restaurant owners. Navigating this process can be tricky as banks are wary of lending to first-time business owners, but if you do get a loan, interest rates can be fairly low (if you have enough assets to make the bank want to take a chance on you). Budget a lot of time for the extended approval process and don’t get too discouraged by rejections as you will still get helpful feedback
• SBA-Backed Loans: Thousands of banks offer competitive loan programs through the U.S. Small Business Administration. Try to shop around and find the right SBA loan deal for you. One option is the 7(a) loan program in which the SBA guarantees most of the value of the bank’s loan, so lenders feel secure in making an otherwise risky investment. However, note that you will need to put up 20% to 30% of the cash upfront for this option. Another option is the SBA Express which provides loans of up to $350,000 with an approval window of 36 hours. The maximum duration is 7 years, but it has higher interest rates and shorter maturities than other SBA loans. A third option is the SBA Microloan which is backed by the SBA for average amounts of $13,000 and must be paid within 6 years. Since lenders are obligated to provide initial training and guidance, this option is often less common, but still worth exploring
• Credit Union Loans: With credit unions, interest is charged on the balance of the loan. So if you pay off a solid amount of the loan each month, the amount of interest you pay will go down as well. If for some reason you expect to make a lot of money initially, this can be an especially good option for financing

Method 2: Crowdfunding Platforms
Crowdfunding platforms allow capital seekers to approach the general public for small amounts of money in exchange for perks or rewards. Though each individual person may not contribute much, compounded together it can add up to a lot of money. While obtaining capital from crowdfunding platforms are often times more difficult than approaching a local bank or lending institution (especially for restaurants), it can also act as a great marketing campaign. You can market to and obtain loyal customers before even you open your restaurant. Also, instead of paying people back in cash, you pay them with discounts and free menu items (e.g. free dessert). Refer to the "Other" category in our Quick Links section for a list of relevant crowdfunding platforms.

Method 3: Equity Investors / High-Net Worth Individuals
Although uncommon in the restaurant industry, equity investors or high-net worth individuals can sometimes fund a restaurant concept for an ownership percentage. As great as that would be, make sure to carefully work out how much equity is allocated to each of your investors as an impromptu agreement can lead to conflict in the future. In general, you will also have less flexibility in how you operate your restaurant since your investors will have an ownership stake in your restaurant and may have conflicting ideas to maximize their own profit.

Method 4: Peer-to-Peer Lending Platforms
Peer-to-Peer Lending Platforms can help connect you to individuals who will lend you startup money (it’s a little more complicated as you are actually borrowing from an intermediary who is, in turn, offering a security to the lenders). In any case, the average nominal interest rate borrowers pay is 13.8%, which can be quite high. That said, be sure to compare the rates and conditions obtained from Peer-to-Peer Lending Platforms with those obtained from Local Banks / Lending Institutions. Refer to the "Other" category in our Quick Links section for a list of relevant crowdfunding platforms.

Method 5: Your Landlord
When you are searching for potential restaurant locations, you may want to ask your landlord if you can strike a deal with him / her. In return for equity or a portion of the returns, the landlord is sometimes willing to reduce your rent.

Method 6: Family / Friends
Your family or friends can also be a good source of funds. These individuals tend to recognize your passion and trust your instincts better than anyone else. However, make sure to lay out the terms for the loan in writing up front. While this method may seem best initially, make sure to fully think through if you really want to share operational control with a family member. Compared to methods involving equity, methods involving debt generally have more straightforward terms that can help minimize the chance for conflict.

Method 7: Personal Savings
While it’s great to start your business without taking on debt, pulling money from your personal savings can be scary. Always keep in mind that if the restaurant goes south, you will be out of not only a job but also your savings. Nevertheless, using your own funds provides you with more flexibility in how and when you use that capital for your restaurant (e.g. you won’t need to take into account how much interest is accruing on your funds).

IF POSSIBLE, AVOID THE FOLLOWING METHODS:
Merchant Cash Advance: The idea seems simple – get cash upfront and pay ’em back over time through your credit card terminal, but the effective fees can be extremely high. In fact, to avoid state usury laws, Merchant Cash Advance companies like Rapid Advance, Advance Me, and Merchant Capital Source work really hard to make sure they never call what they are doing a “loan” but rather “cash-receivable financing”. In any case, you’ll be paying anywhere from 22% to 40% of your credit-card revenue until you’ve them back plus their fees.

Credit Cards: It can be tempting to apply for multiple credit cards just to get fast cash. AVOID THIS TRAP! Set realistic goals for yourself for how many credit cards and how fast you can pay them off, and stick to it. And don’t be fooled by all those frequent flier miles. One rule of thumb for how to value these is a penny per mile. Thus an offer of 10,000 miles is actually worth only a $100 – hardly worth a ruined credit score and an interest rate of 25%.

Home Equity Loan / 2nd Mortgage: A home equity loan uses your home as collateral, similar to a mortgage. With this kind of debt, you don’t need to specify what purpose you’re using the loan for, and can use it to build your start-up capital to get your business going. That said, you should approach this with extreme caution – if your restaurant goes out of business (as 59% do within the first three years) then you’re out a job – and a house!