Why restaurants fail, in the numbers

When a restaurant closes, the explanation people give is usually about the food, the location or bad luck. Look at the numbers from the year before, and a different story often appears: food and labour costs creeping up month after month, rent taking a larger share of falling sales, covers slipping below the level needed to break even and the bank balance shrinking while suppliers waited longer to be paid. Why restaurants fail is rarely a mystery in the numbers. The signs are usually there months before the doors close.

Most of those signs are in reports the venue already has: the monthly profit and loss, the bank statements, the till and the booking system. The trouble is that they appear gradually, each month only a little worse than the last, and a busy owner focused on the next service rarely steps back far enough to see the trend.

This guide covers the four financial patterns that most often come before a closure, how each shows up early, the reports that reveal them and what to do when they appear. It is general guidance, not financial or legal advice. Every venue and figure in it is an example.

From the outside, a closure can seem sudden. From the inside, it usually followed a long period of strain: months of thin margins, a growing pile of bills and decisions put off because there was never time. By the time the owner realises the business cannot continue, the options are few.

The point of watching the numbers is to see the strain while there are still many options: time to renegotiate, to change the menu, to cut costs guests do not notice, to raise prices or to find more trade.

A business fails financially when it can no longer pay its debts as they fall due, a state known as insolvency. For a restaurant, that point is usually reached through a combination of costs that are too high for its sales and cash that runs out before the problem is fixed.

The patterns below are not certainties. A venue showing one of them is not doomed. But a venue showing several, and getting worse, needs to act, and the earlier it acts, the more it can do.

Four financial patterns come up again and again before a closure:

Each is visible in ordinary reports, months before it becomes a crisis. The sections below take each in turn.

Prime cost, the total of food, drink and labour costs, is usually the largest cost in a restaurant. When it creeps up, a little each month, the margin left to pay rent, other costs and profit shrinks. Supplier price rises not passed on, a menu that drifts towards expensive dishes, waste, overstaffing and wage rises all push it up.

Because each month's rise is small, it is easy to miss. Over a year, a few points of prime cost can turn a profitable venue into a loss-making one.

There is no single right figure for prime cost, because it depends on the venue's style, prices and rent. A rule of thumb used widely in the industry is that food, drink and labour together should take somewhere around sixty to sixty-five per cent of sales, leaving enough for everything else. Your own healthy level may be different.

What matters most is the trend. A venue whose prime cost has risen from sixty to sixty-eight per cent over a year has a problem, whatever the rule of thumb says.

Prime cost can be watched weekly or monthly, from the purchases, the stock and the wages. A venue that checks it every week sees a rise within weeks, not at the year end. Our guide to prime cost: the one number to watch weekly covers how to work it out.

When it rises, find the cause: a supplier's prices, a dish whose cost has crept up, waste, a rota heavier than the trade. Each has a different fix, and each is easier to fix early.

Rent and other occupancy costs, such as service charges and business rates, are almost entirely fixed. They do not fall when trade falls. A venue whose sales decline, or whose rent rises at a review, can find occupancy taking a share of sales the business cannot support.

High rent is one of the most common underlying causes of closure, because it is hard to change quickly. Once signed, a lease commits the venue to its rent for years.

Rent as a percentage of sales, occupancy costs divided by sales, shows whether the rent fits the trade. A rule of thumb often quoted is that occupancy costs should be well under a tenth of sales, though prime locations and different business models vary. Again, your own figure and its trend matter most.

Work it out each month. If it is rising because sales are falling, the venue needs more trade or lower rent. If it was always high, the venue has been carrying a heavy cost from the start, and every other cost needs to be tighter to compensate.

If rent is too high for the trade, the options are limited but real. Raise sales, through more covers, more services or higher spend. Talk to the landlord early, before arrears build up, about a temporary reduction, a different payment schedule or a rent based partly on turnover. Consider whether part of the space could earn money another way.

Landlords often prefer a tenant who stays and pays something to an empty unit. A conversation held early, with clear numbers, has a far better chance than one held after months of missed payments.

The break even point, the covers needed each week to cover all costs, rises when fixed costs rise or when each guest's contribution falls. Covers needed to break even creep up while actual covers stay the same or fall, until the venue needs almost every seat filled to cover its costs.

A venue whose break even is close to its capacity is fragile. Any quiet week, any closure for repairs, any dip in trade turns into a loss. Our guide to break even point: the covers you need by Tuesday covers how to work it out and watch it.

Behind many closures is a slow loss of guests. Covers fall a little each month, often because regulars drift away and are not replaced, or because new guests come once and do not return. Takings may hold up for a while through price rises, hiding the decline.

Watch covers and the share of guests who return, not just sales. A venue whose base of repeat guests is shrinking has a problem that will reach the takings eventually. Our guide to repeat guests are cheaper than new ones covers why they matter so much.

The final pattern is cash running out. A venue can be profitable on paper and still fail if it runs out of cash, because bills must be paid when they fall due, not when profits arrive. Poor cash flow, from seasonal dips, large bills at the wrong time or slow-growing debts, is what usually turns a struggling venue into a closed one.

Watch the bank balance, not just the profit. Our guide to cash flow: profitable and still short in January covers how even a profitable venue can be caught out.

A dangerous sign is using money that belongs to others to pay the bills: tax collected from guests that is due to the tax authority, deposits for future events, gift card money for meals not yet served or tips that belong to the team. It feels like a temporary bridge; it usually deepens the hole.

When that money is due, it has to be found again, often at the worst time. A venue that relies on it to keep going is already in serious difficulty, and needs advice quickly.

Another early sign is paying suppliers later and later. It starts with a few days' delay and grows into weeks. Suppliers notice, tighten their terms, ask for payment on delivery or stop supplying altogether, which can stop a kitchen overnight.

Keep a simple list of what is owed to whom and how overdue it is. If the list is growing month by month, cash is running short, and the cause needs finding before suppliers lose patience.

Borrowing to invest, in equipment or a refurbishment that will raise trade, can be sensible. Borrowing to pay running costs, such as wages and suppliers, because sales no longer cover them, is a warning. It postpones the problem and adds interest to it.

If the venue is borrowing to cover ordinary costs, the underlying gap between sales and costs needs fixing. More borrowing without a plan to close the gap only makes the eventual reckoning larger.

The patterns rarely appear alone. Rising prime cost and falling covers reduce each guest's contribution and push up the break even point; high rent makes that worse; the shrinking margin drains cash; and the cash shortage leads to late payments and borrowing.

That is why it matters to watch all four. Fixing one in isolation, such as cutting labour while ignoring falling covers, may help for a while but rarely solves the underlying problem.

The reports needed to see these patterns are ones most venues already have. The monthly profit and loss shows prime cost and rent as a percentage of sales. The bank statements show cash. The till and the booking system show covers, spend per head and returning guests. The list of unpaid bills shows creditors.

The difficulty is not getting the information but looking at it regularly, and looking at the trend rather than one month. Our guide to a restaurant profit and loss you can read covers how to read the main report.

Once a month, check a short list:

If several are moving the wrong way, act now. If one is, investigate it. It takes less than an hour and is one of the most valuable hours in the month.

Act early. The best time to deal with rising prime cost, falling covers or tight cash is when the first signs appear, not when the bills are overdue. Early, there are many options and time to try them; late, there are few.

Set triggers in advance: if prime cost rises above a certain level, if cash falls below a certain amount, if covers fall for three months in a row. When a trigger is hit, it is time for a plan, not another month of waiting.

When the signs appear, the options include: cutting costs that guests do not notice, such as waste, contracts and subscriptions; raising prices carefully; changing the menu towards dishes with better margins; matching labour more closely to trade; winning back lapsed regulars; renegotiating rent or supplier terms; and planning cash more tightly.

A clear plan, with the numbers behind it, makes each step easier. Our guide to a restaurant budget for the year ahead covers building a plan from covers.

Ask for help early. An accountant can show where the money is going and what the options are. A business adviser can help with a recovery plan. If debts are becoming unmanageable, taking professional advice before a crisis can open options that disappear later, such as agreeing new terms with creditors.

Many owners wait too long, out of pride or hope. Advice taken while the business is still trading, with time to change course, is far more useful than advice taken after the money has run out.

New venues are especially vulnerable, because trade takes time to build while costs start on the first day. A new venue that opens with too little cash in reserve may run out before it has had a chance to find its guests.

Plan the first year carefully: a realistic budget built from cautious covers, enough cash to cover the months before the venue reaches break even, and the same monthly health check from the start. The patterns that close established venues can close new ones faster.

Some venues fail because of a second site rather than the first. A busy restaurant opens another, borrows against the first to pay for it, and the new venue loses money for longer than planned. The first venue's cash covers the losses until it, too, runs short, and a business that was healthy a year earlier finds it cannot pay its suppliers.

Before expanding, check that the first venue's figures are healthy without the owner working every service, that the new venue's budget allows for a long, slow start and that there is enough cash for both if the new one takes twice as long as planned to reach its break even point.

Not every closure is purely financial. A concept that does not suit its neighbourhood, a location that changes around the venue, a falling standard of food or service, a key person leaving: each can start the decline. But they almost always show up in the numbers, as falling covers, falling spend or rising costs.

That is why the numbers matter. They are where every kind of problem eventually appears, which makes them the best early warning a venue has.

An invented bistro has been busy for years, but its profit has thinned. A monthly health check shows prime cost up from sixty-one to sixty-seven per cent over a year, because supplier price rises were never passed on and the rota grew. Covers are down about eight per cent, mostly lost regulars. Rent, after a review, has risen to a larger share of the lower sales. Cash is falling, and two suppliers are being paid a month late.

The owner acts. She re-costs the menu and raises some prices, trims the rota at the quiet edges of service, invites lapsed regulars back with a new menu and talks to her landlord about the rent schedule. She also asks her accountant to help plan the next three months' cash. Within two quarters, prime cost is back to sixty-two per cent, covers are recovering and suppliers are paid on time.

servearound does not hold costs, rent or cash, so prime cost, rent as a percentage of sales and cash flow come from your accounts. What it shows early are the trade signals behind the patterns: the dashboard shows revenue, covers, spend per cover and the no-show rate against the previous period, and reservation analytics show covers day by day and bookings by source.

Guest analytics show how many guests came back, the repeat rate and the return rate by the week guests were first seen, so a shrinking base of regulars shows before it reaches the takings, and table analytics show utilisation, the time each table had a party against the service time available, which is the room's distance from full. See Analytics.

Often through a mix of rising costs, rent too high for the trade, falling covers and cash running out.

Usually, yes, months earlier, in the profit and loss, the bank statements and the booking and till reports.

Food, drink and labour costs together, usually the largest cost in a restaurant.

A rule of thumb is well under a tenth of sales, but the trend and your own figures matter most.

Yes, if it runs out of cash before the profit arrives.

Using money that belongs to others, such as tax or deposits, to pay running costs.

Monthly at least, with prime cost weekly if you can.

As soon as several signs are moving the wrong way.

Why restaurants fail is rarely a mystery in the numbers. Four patterns usually come first: prime cost creeping up, rent too high for the trade, the break even point creeping towards capacity as covers fall, and cash running out, with suppliers paid later and money that belongs to others used to keep going. Each is visible months earlier in reports most venues already have.

Run a monthly health check on prime cost, rent as a percentage of sales, covers and returning guests, the break even point, cash and creditors, and look at the trend rather than one month. Set triggers in advance, act early with a clear plan and ask for professional help while there are still options, not after the money has run out.