Understand the Rev/Rent relationship [Hack #056]

Restaurant financial tip: It's important to know what your break even point is.

Are you paying too much or not earning enough?

In a recent story, we commented on a startup that is helping restaurants create revenue from their facilities when they're typically closed. Leveraging as much revenue from your building as possible is a key way to insure you are managing a sustainable operation. To understand the impact of the rent/revenue relationship, we must first identify some benchmarks.

The accounting firm of Baker Tilly did a study that reported two measures of the revenue/rent relationship that should be used to help operators manage their business plan. The more traditionally invoked metric is the percentage of revenue associated to rent. The study claims that 6% is the ideal value of base rent as a percentage of gross revenue. So if your monthly sales are $100,000, your rent shouldn’t be higher than $6000, not including taxes or common area maintenance (CAM) expenses.

The other indication of a healthy business model is sales per square foot. Here the study asserts a full service restaurant must do more than $12.50/sqft monthly to break even. Again using that formula a 5000 sqft restaurant must do a minimum of $62,500 in sales monthly. To be highly profitable that number should be closer to $29/sqft. What are your results when you do the calculations?

Once you know where you stand, then it’s up to you to drive sales. Some quick ways to increase sales/square foot are driving carryout because it doesn’t require any more space to service food that is leaving your building. There's also catering because events are planned in advance and you don’t have to be concerned that you won’t be ready for sales that grow. Adding an outdoor dining area can also increase your performance because it allows you more to accommodate guests without increasing your rent…and they’re cool. As with any business metric, it’s only as valuable as what you it inspires to accomplish.

Got a cool restaurant hack of your own? Let us know!

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