10 Restaurant Financial Red Flags You Should Not Ignore

After 20 years in the restaurant industry (15 years as an independent owner/operator and the last five years as a consultant), I have observed just about every type of financial problem imaginable. As all restaurant veterans already know, this business is very unforgiving when it comes to achieving bottom line profits.

Based on a recent Restaurant Industry Operations Report published by Deloitte & Touche, LLP, average pretax profit margins range from 4 percent to 7 percent (4 percent for full-service and 7 percent for limited-service restaurants). Not only is there little room for financial management missteps, the problem is compounded by the lack of business experience and basic financial skills that most startup restaurateurs bring to the table. Unlike many other small businesses that employ full- or part-time financial personnel, most restaurant owners cannot afford that luxury, and spend their days jumping from one operational task (or crisis) to another with the financial management of the restaurant not receiving the attention that it requires.

In my role as a consultant I have developed an informal "punch list" of basic financial information that I request from new clients and a review of their basic financial procedures before getting started. This information usually provides me with what I need to assess the financial health, and often the prospects of the business. It does so in part by raising a number of "red flags" or indicators that point to where the problems are and where problems are likely to emerge. It also allows me to put in place a plan so that I can quickly offer the kind of support that will give them the best chance to survive and thrive well into the future.