Projecting Start-Up Costs: Financial Planning for New Bar Owners

What if you could avoid the #1 reason restaurants fail in their first year - undercapitalization?

Many aspiring restaurant owners underestimate their start-up costs, leading to financial strain before they even open their doors. Accurate cost projection is crucial for long-term success.

Learn how to calculate realistic start-up costs, understand hidden expenses that catch new owners off guard, and create a proper financial buffer for your first year.

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Transcript

Chris Schneider (00:01.326)
Today, discover the art of accurate startup cost projections, uncover hidden expenses that surprise new bar owners, and learn how to build proper financial buffers for success.

Chris Schneider (00:17.696)
When I talk with clients, and this is especially true of folks that are looking to get into the industry and start a new concept. And this is true of both folks that have been in the industry for a long time and people that have not been. One of the hardest things for people to do is to approach calculating the money when it comes to starting up. And so today we're going to explore the critical components of projecting bar startup costs and how to make sure that you have enough capital.

Because one of the things that drives a lot of bars and restaurants down is they do not have enough working capital to make it through any hard times initially early on.

Chris Schneider (01:01.122)
And what this comes down to at the end of the day between the startup costs and the capitalization is that one of the biggest challenges that new bar owners face when they're doing a brand new bar and building it out is that they're underestimating their initial investment needs. And then that leads to financial stress before they really can get their feet on the ground. And that financial stress then causes them to make rash decisions.

So hopefully by the end of today's episode and by understanding all of the cost components and proper financial buffers, you can set up your bar for long term success from day one.

So the first thing I want to talk about today is essential startup costs. Now one thing I will say. From the get and this is true of your startup cost, your and what we're going to talk about next, which is hidden cost factors. You need a good chart of accounts. And if you do not have a good chart of accounts, I am more than happy to send you mind. You can. Send me a text through the send text button.

in the show notes. Just make sure you include your email there so I know where to send it to. Or you can go to the bar business podcast website and in the top right corner there is a envelope icon. You can click there. Shoot me an email. I will send you the COA I use. But one of the reasons why I think it's absolutely critical to have a detailed COA when we start talking about hidden costs and startup costs is because a lot of times people don't factor costs in.

It's amazing to me. I get people that have proformas made by other financial folks, particularly financial folks that are not directly related to the bar business. And I almost always can add another 10 % to their cost just in things that the person who initially prepared the proforma forgot. So having a solid chart of accounts is really your key.

Chris Schneider (03:06.798)
to making sure you're figuring out every line item possible. Now, I will say if you email me and I send you mine, mine has like 300 some accounts in it. It's absolutely ridiculously large and stupid.

But that's because I tried to cover every expense possible and so for any given business, rarely have I implemented that with more than give or take a hundred to 150 accounts because frankly most things don't apply on that to every business.

Now, when it comes to specifically startup costs.

One of the first things you have to think about is what does your space cost you?

And so yes, that's your lease. That's also your build out. And build out can get very difficult to predict for a couple reasons. One is it's construction and construction is expensive. Two is this is all going to depend upon if you're getting a build out allowance from your landlord, how that's all working in that agreement. But it's very important, obviously, that you don't go into a bar or restaurant thinking that the build out is going to cost less.

Chris Schneider (04:21.87)
than it is because that's an easy way to eat up cash. And something I would always recommend, and this is something I think that's true anytime you're dealing with real estate or building or construction or remodeling, budget 50 % more than what you think it's going to cost. Because chances are with inflation and tariffs and all this different stuff going on, cost of goods will go up a little bit.

build out is probably going to cost you more than you think it is by the time you get it done.

The second thing we have to worry about in startup cost is equipment and fixture costs. Now something that's really important to remember when it comes to equipment is not only do you need to get the right equipment, you need to have the right power for that equipment.

Chris Schneider (05:13.166)
So, gas powered kitchen equipment needs gas lines. Anything with a plug needs a socket. And it's important when you're looking, before you even are really doing your build out, to have an idea of what equipment you're putting in because different equipment in the restaurant business has different plugs, uses different voltages. There are a lot of that are restaurant equipment that are using 220 volt plugs.

So you need 220 volt outlets on 220 volt circuits.

Chris Schneider (05:49.004)
And because of that, if you don't know your equipment ahead of time, and I've seen people do this, they buy a bunch of equipment, they go to put it in and they don't have the right power in the right place. And now they have to spend a bunch of money for the electrician to come out and fix it. But when you're going from scratch, when you're doing the build out, you should already know what equipment goes where and already know what types of plugs that equipment takes.

Now the other thing you need to do is account for permits and licensing fees and insurance. So let's talk through this real quick. So permits and licensing fees. Those are going to be government permits and licensing. That varies. I mean, obviously it varies country to country, but even within the United States, it varies greatly state to state. Some localities require you to have a sales tax license or a municipality business license or a food license. Obviously you probably have a beverage license.

If you're selling tobacco products, you probably have a tobacco license. If you're in a state that allows gaming. So say you're in Michigan and you have keynote that you're going to have at your bar. Well, now you probably need a gaming license. So don't think those licenses are all necessarily easy to get and don't think that they're cheap to get. Depending on where you are, they could be no big deal and pretty cheap and quick. They could be a very long, painstaking process and cost you a lot of money.

So you need to accurately project that, especially because if you don't have a liquor license, you can't sell liquor. If you don't have a gaming license, you can't have gaming. If you don't have a food license, you can't sell food. So all this stuff has to be lined up, paid for, ready to go before you open. So it's really important that you get that identified as quickly as possible. And if you're not sure which permits and licenses fit your area, a great resource, start calling the regulators, call the government.

Ask. They will tell you.

Chris Schneider (07:45.368)
Two other essential startup costs that you need to... I've got the one there. Permits as license and insurance. Insurance is hideously expensive today. And I have heard of quotes for bars in Florida that are not that big, doing not that much volume. I mean, they're good sized bars and they're significantly better than average, I would say. However, they have insurance...

close to six figures around that $100,000 mark. So understand insurance is a huge cost and that's normally has to be paid either monthly or in full upfront before you open. And if they let you do it monthly, normally they're gonna ask for two or three months when you're first starting out. So make sure you're accounting for that cost. And then the final two costs to account for are inventory investment and professional services. So inventory investment, pretty simple.

You're going to buy an initial inventory. Whatever that inventory costs is what it costs. And so you have to calculate that factor that in. And obviously inventory, how much you need on hand. We've talked about this before, but I like to have about a 14 day inventory on hand. Because I think that's tight enough and yet gives you a little wiggle room if you miss a delivery for some reason.

Chris Schneider (09:08.024)
but you have to have inventory to open your doors. And that final one is professional service fees. And so a lot of times when you're opening, you think, I won't have that many professional service fees. Well, normally you're going to use your attorney more than you want to, and you're probably going to meet with your accountant for a couple of planning meetings. And if you hired somebody like me, you're going to meet with me a few times or, you know, another consultant to talk about pro formas and finances and all that.

And then maybe you have to have an attorney to go do liquor license work or some of those licensing and permit work that we were talking about earlier. And maybe you need an architect to do your build out. And maybe you need a equipment specific consultant to talk about what equipment to put in and where to go. So there's all sorts of different professional service fees that can be there. And quite frankly, professional service fees rack up quick.

You know, there are very few people in the professional services industry anymore that are under a couple hundred bucks an hour. And a lot of markets for a good attorney for a good account, you might be paying 456. $100 an hour for a good attorney in some markets, you're paying 1000 bucks plus. An hour. So just make sure that you have ample reserves to pay for those professional service fees. Now, the second thing you need to worry about when it comes to predicting and making sure that you have ample funds.

is hidden cost factors. So hidden cost factors, these are things that are not necessarily, you know, the startup costs we just talked about, we're more all in the startup phase, but these are other things that people don't necessarily account for.

One of them is pre-opening labor and training. So if you think about it, you're probably going to have everyone on your staff in your bar two weeks before you open to train them and to get them up to speed. And so you need money to pay for that labor. You need money to pay for the time that they're training.

Chris Schneider (11:08.384)
Another hidden cost that a lot of people forget is marketing and promotions. Now, a lot of times I'm going say if you're opening a bar, you don't need to do that much. But maybe you want to put it out on paper. Maybe you need to do a press release. Maybe you want to do a little bit of a media blitz. Whatever that looks like, you're going to need some marketing and promotion when you first open so that people know that you actually exist. Otherwise, you stand a decent chance of being open for a few months.

with no one coming in the door until people figure out you do exist. So it's really important to include marketing and promotional in that first set of. Accounting and financial projections that you're doing and not only to include it, but to include it a little bit of a higher amount, say the month before you open in the month you open in order to make sure that you have awareness in your community.

Another hidden cost factor, and this isn't so much hidden as it's just something people don't add up, which is SaaS and technology. So you're going to have a POS system. You may have other SaaS systems in your bar. For example, maybe you're using Starfish. Maybe you're using Ovation. Maybe you're using Marketman or Margin Edge or one of those. Maybe you're using all sorts of different programs. And so you need those programs.

Chris Schneider (12:32.51)
If you want to use what they do, right? I mean, you can do without all of them at the end of the day. mean, it's theoretically possible not to even have a POS system. But the thing about when you start stacking all that tech together, you go, it's not that much as 12 bucks here for Google and 30 bucks there for the website. 40 bucks. Next thing you know, it's a thousand dollars. So you need to make sure you account for that.

And the last thing that is a hidden cost that a lot of people miss is utility deposits. So quite frequently, utility companies are going to require substantial deposits on commercial accounts. And yes, you will get that money back, but that's usually a year or two down the road. So you need to have extra cash to pay those utility deposits in order to get up and running.

Chris Schneider (13:16.834)
Now the final part I want to talk about and we're going to spend some a little bit of a longer time here is operating capital requirements. So what is a legitimate amount of operating capital?

Chris Schneider (13:32.831)
Now I would always start by going back to that chart of counts that we talked about at the top of show and creating a detailed P &L.

that for the first year. So you have first year expenses, operating expenses, controllables and non controllables and prime cost all guesstimated.

Now the thing is that you probably

won't be right. I have made some darn good pro formas that are using a huge amount of detail to try to get as close to correct as possible.

Chris Schneider (14:16.129)
And I'm really not within 10%. I've said it before on the podcast, and I firmly believe it. If your pro form is within 20 % of actual, you did a bang up job because it's impossible to predict the future. And that's what you're trying to do. And you're trying to do it without data specific to your store. It's a lot easier to predict third year revenue than it is to predict first year revenue because third year you have first and second year data to rely on.

Chris Schneider (14:45.976)
So make sure you know what those first year operating expenses are. And then you need to have a reserve for operating expenses. Now, a lot of people would say you should have a year of expenses in the bank. That's not a bad idea. I would say at bare minimum, you need three months of expenses in the bank. That's going to get you through, hopefully. And hopefully you gain traction in that period.

But three months of expenses isn't always enough. So the more money you have in the bank, the better.

In addition to money for operating expenses in the bank so that you don't have to get that revenue right away to pay for things, you need contingency funds. And so one of the things that I always talk to my clients about doing is having four bank accounts and doing what I call a waterfall approach. So you have a checking account, that's account number one, and account number one maintains one month of expenses.

That flows down into a savings account. That savings account maintains one month of expenses. And every time, so the money just sits there and then. Like I do it, I used to do it normally once a month. If the money in the checking account exceeded one month's expenses, I would move everything that exceeded that to the savings account. When that exceeded one month of expenses, I would move that to a money market account.

Chris Schneider (16:16.056)
and then keep.

a month of expenses in that money market account. And when you exceed a month, flow that down into a separate money market account that's specifically for distributions. And then if anything falls below full at the end of the month, you would move them up, right? You would move the money up the waterfall, not down the waterfall. But if you do that, that maintains solid cash reserves.

And it makes the math really easy and you see all the time. Hey, here's what I have to distribute. And if you're a partnership, that's really important because your partners want to get checks and you want to get checks. If you're sole proprietorship, it's still important to do it that way because it allows you to better gauge how much money you're going to be able to put in your pocket.

Chris Schneider (17:06.734)
Now the third piece on operating capital requirements, and this is something where I see a lot of people go wrong, realistic revenue ramp up periods, realistic revenue projections. And what a lot of people do, and this is because in other industries, this is very common, where you see kind of a hockey stick, slow growth, and then it starts to take off and grows exponential. In a tech company, you can do that. In a bar, you can't.

More frequently, what you're going to see in a bar is that actually the first couple months you're open are the busiest months you'll ever have. So to me, it's kind of a steep peak for months one and two, then it drops down and kind of becomes a curve that then curves back into not really a hockey stick, but kind of slowly rising line.

Chris Schneider (18:02.26)
Unlike other businesses, part of this is just because bars have capacities, right? You can only grow to a certain extent and then it's very hard to get additional growth. But expecting 20 % or 30 % year over year growth is never going to happen. And expecting that first month that you open, especially if you open with some fanfare and some media, you may never be that busy again.

So you just have to understand, unlike most businesses where you see slow growth and that hockey sticks into a steep exponential climb, in bars you see a peak followed by a drop that kind of curves down and then becomes a much slower, less exponential climb. Still has a little curve to it. It's not a straight line. Still has a little curve. But it's definitely not exponential and it's definitely not quick.

The other thing you need to do when you're looking at operating capital requirements is look at seasonal fluctuations. So I was talking to a bar owner the other day who opened a bar right before the slow season started.

And did alright. Now that's partially because that spike I just talked about first couple of months tend to be really busy. They were, but they opened in the slow season. In a way, they got lucky because how did they not have that spike in business? All that business that popped in the middle of the slowest season in the market where this bar was.

had they not had that, they probably wouldn't have had operating capital to get through to the actual busy season. So you need to understand seasonal fluctuations and what kind of revenue adjustments you need to make in your forecasting based on those seasonal fluctuations. And then make sure you have enough cash to actually support your business depending on when you're opening based on seasonality. Now the final thing that I will say under operating capital requirements, and this is the thing that

Chris Schneider (20:06.462)
Everyone freaking forgets. And it's stupid because when you forget it, it means that you eat ramen. Which is they not including owners living expenses during startup. So a of times I'll talk to somebody and they'll be like, yeah, you know, I'm going to open this bar. I currently have a job. I'm going to quit the month before, two months before and just work the bar. Okay, great. Maybe have vacation. Maybe get a little severance or something for leaving.

But unless you have vacation time, that's getting paid out, you gotta eat those two months. So, other income, borrowing money from a job that you just quit to go run your bar that you just bought.

Assuming that you are going to run the bar 24-7, right? I mean, maybe you keep your other job and have the bar. People do that all the time. But assuming you're the bar 24-7, if you quit your job two months before the bar opens, you need two months of money to pay for groceries and gas and your mortgage and insurance and all that sort of great stuff. So never forget. Never forget your own money when you're calculating your capital requirements.

That is a huge thing that so many people neglect because that's not on your chart of accounts. That's not something that you necessarily see while you're doing the pro forma. That's extra money you have to calculate in.

Chris Schneider (21:36.238)
So the bottom line here for everything we've talked about today, make sure you know your essential startup costs, your hidden cost factors, and your operating capital requirements. Make sure you're digging in those in detail and looking to see if you missed some of the things we're talking about. But proper financial planning and accurate cost production are crucial for your success. If you understand both the obvious and the hidden costs, which is what we discussed today,

while maintaining adequate operating capital. You can avoid common pitfalls that lead to bar failures in the first year, that lead to bars closing before they even get out of the gate.

Chris Schneider (22:19.052)
And the best case scenario, you estimate this all out and you overestimate your expense until you have too much money set aside and then you can just distribute it to yourself later. Worst case scenario, you're under capitalized, you don't have additional money and you are set up for failure.