How to Recognize and Fix a Failing Bar Before It's Too Late

Is your bar showing warning signs of failure that you're choosing to ignore?

Many bar owners struggle to identify critical business problems until it's too late, often mistaking temporary setbacks for normal business fluctuations.

In today’s episode:

• Learn how to spot early warning signs of business decline
• Understand the key financial indicators that matter
• Discover proven strategies to turn your business around.

Get the essential knowledge you need to protect your bar's future - press play now.

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Transcript

Chris Schneider (00:00.92)
Today, learn how to identify the critical warning signs of a failing bar before it's too late. Master financial metrics that reveal your business's true health and learn proven turnaround strategies.

Today we're exploring how to recognize when your bar is in serious trouble, understand the key metrics that matter and implement effective turnaround strategies. Many bar owners find themselves in denial about their business's health, often waiting too long to take corrective action. And this is something I see all the time. Like I am not going to lie to you guys. It is so amazing how we can keep our heads in the sand with a business that isn't going the way we want it to. And I've been guilty of this in different businesses too, but

We keep our heads in the sand and we act like everything's peachy and rosy when it's really not. And the whole thing here is if we can learn how to spot these warning signs early and then take decisive action, you have the ability to protect your investment and turn your business around.

But if you don't, then honestly, you stand a good chance of failure. while I have had episodes on the podcast before where we've talked about how I don't believe the 80 % of bars and restaurants fail in five years. I think that's a BS statistic. I cannot find any study that actually says that, including the Ohio State study that was misquoted in Forbes, which is where that all comes from.

However...

Chris Schneider (01:32.526)
According to the BLS data and there's a podcast episode, you can go back and listen to it, where I go through all this in detail, about 50 % of bars are going to fail in three to five years. So it's imperative that you understand when you're declining and then how to fix it.

So let's jump in here. Okay, first thing I want to talk about is warning signs of a failing bar. And this seems pretty... I mean, most of these things to most of you, it's probably gonna be a slap in the face where you go, oh yeah, of course.

the thing here to keep in mind is you have to be able to measure these things. You have to be watching for these things in order to understand that, of course, yeah, you are in decline. And you have to be honest. Again, you have to be honest with yourself. You have to have an open mind to your numbers and understanding what's going on rather than a closed mind where you assume you already know everything. So what are our warning signs? Well, the first one is declining sales over consecutive months. But if every month your sales are lower, you might have a problem.

Now the thing to always keep in mind too though is if you're in a seasonal area, right? If you're where I live in southern Indiana in a tourist area and our tourist season runs March to November.

Well, you're going to decline December. January is probably going to be slower than December. February is probably going to be slower than January. Those three months, okay, so you had three months of declining sales. That's known and expected in this market. But if you're seeing declining sales and it's not a seasonality thing with where you are, then you probably have an issue. And obviously one bad month can happen to anybody. Bad months can be very random. It can be based upon a street being closed or construction.

Chris Schneider (03:19.11)
or the weather, all sorts of different things. But consecutive declining months generally indicates you have a problem.

The second warning on the sign to look for, and this is especially true with inflation, because we've gone through a lot of inflation. It looks like inflation is around to stay at least in the short term. So this is going to be an ongoing struggle for all of us. So if you have increasing costs without corresponding revenue growth, right, if those percentages change, if your cost structure changes, you're going to eat into all your profits. And if you listen to the episode we did a couple weeks ago with Jordan Silverman going over benchmarking for Q4.

of 24. One of things we talked about is costs are going up and we're not seeing revenue keep up and we're seeing a lot of people make a lot less money. That is a thing.

Another warning sign, and this is potentially one of the biggest, is high staff turnover and declining morale. And the problem especially with all these, but really the high staff turnover and declining morale, is that you end up in a downward spiral. You replace them with people that aren't as good, and things just get worse and worse and worse. And if you go too far down that spiral, there is no way you will recover. You are stuck there.

So it's really important to remember that you need to watch your team, watch your turnover, and when you see turnover go up or if you see morale decline, you need to fix that immediately.

Chris Schneider (04:55.682)
The next warning sign that we look for is customer complaints and negative reviews. I mean, I know we all hate review sites, Yelp especially, but I like Google reviews, not going to lie. And they're pretty broad. People are pretty nice there. And so if you see your Google review score declining month to month, you probably have a problem. And probably in those complaints online, in those negative reviews, is the answer to what your problem is. You just have to read them.

and recognize it. And it's really important to kind of watch where that rating is month to month. How did I do this month compared to last month?

Chris Schneider (05:35.99)
Another warning sign, cash flow problems, late vendor payments. When you start paying people late, that generally is the sign that you're going down a downward spiral. Cash flow problems are real. And we'll talk about this more in the financial metrics, but cash flow is the way you stay alive. P &L doesn't matter, cash flow does. Another warning sign of a failing bar, and this is one I notice a lot when I go out to eat, is deteriorating facility conditions. If your facility is getting worse,

If things that are broken aren't getting fixed, that tends to mean that the money is not there, that the business is not as healthy as it should be. So deteriorating facility conditions are a big indication that your customers even see. And when your customers see high turnover and, you know, they see that other customers are complaining and your facility is deteriorating, what comes next? Loss of regulars.

Loss of regulars is one of your biggest indications that you are... you don't have much time left.

Because they were people that liked where you are. They were people that came in every day and now they're going somewhere else and they're probably not coming back to see you. So that is a big issue. Now all of those signs, right? Any one of those signs in and of itself. If you just had some high turnover for a little bit, if you just had some regulars leave because another bar opened down the street and they wanted to go there and sit, none of these are a kiss of death in and of themselves. If they're short.

And if it's just a very, to use a medical term, an acute problem. It just happens and then it resolves and you're fine. If this is an ongoing long term thing, all of those indicate you're probably failing and you need to get back on stuff as quickly as you can. Now let's talk a little bit about critical financial metrics. So those are kind of the warning signs. The warning signs we talked about before are soft, right? None of that

Chris Schneider (07:41.39)
particularly measurable. It is in some ways, but in other ways a lot of that is things you just notice. Well, the critical financial metrics, this should be something you notice before you even get to the point that you have deteriorating facilities or declining sales over consecutive months or high staff turnover. The financial metrics, normally you can see what's going to happen in those first.

So what financial metrics are an indication that you probably need to work on turning your bar around? obviously if your monthly profit and loss is always trending down, if your revenue is trending down, that's one thing, but if your profit is trending down, that's worse than your revenue trending down. Because in theory, if your revenue trending down because you raised prices, less people are coming in, but your profit is flat, you're not behind.

But if your profit is trending down, you got a real problem. But the bigger problem is if your cash flow is trending down. And a lot of times, we've talked about this before, but a lot of times people conflate profit and cash flow. They're not the same. So for example, let's say you took out a loan. And that loan, your payments, $1,100 a month. If...

say a hundred bucks is interest and a thousand dollars is a principal payment.

On your P &L, you expense the $100 interest payment. That's interest expense. You can use it as a legitimate expense. You don't expense the $1,000 payment. That's all on your balance sheet. Now, because you don't expense that $1,000 payment,

Chris Schneider (09:31.566)
If you have a profit of $1,000 that month, your cash flow is actually zero because you did not factor, because that factor is in that payment. So profit and loss is a great way to look at trends. It's a great profit. It's a wonderful figure to know. Cash flow though. Cash flow is different. And let's be honest here, you can't

buy anything with a P &L, you can buy things with cash. So cash flow at the end of the day matters more than profit on your P &L.

Chris Schneider (10:07.394)
Another critical financial metric that you should be looking at to see how you're doing and as an indicator of where things are going for your business is your cost of goods sold percentages. You know, if your beer cost was 20 % this month and it's 21 next month and 22 the month after that and 25 the month after that, pretty soon you're not making money on beer. So it's really important that you understand those percentages and you look at them. And this goes back to the conversation that we've had.

number of times, you can't just count for inventory, you have to count and reconcile. You have to actually know what your cost of goods sold is. And for those of you who don't know, cost of goods sold equation, cost of goods sold equals beginning inventory plus purchases minus ending inventory.

Very simple equation, but you have to actually use that calculation to figure out your cost of goods sold percentages. Otherwise, it's hard to know if your costs are just inching up slowly in a way that is going to kill you. Now, that should also show up in your cash flow. It should also show up in your profit. But it might not. And looking at all these metrics separately allows you to know where that problem is. If you see something in your cash flow or in your profit.

Another key financial metric to look at is your labor cost ratio. So what is labor as a percentage of your business? Now, if you're using a POS system like SpotOn, it's gonna give you sales per labor hour. Sales per labor hour is a great metric.

But 20 % sales per labor hour is not the same as a 20 % labor cost. That sales per labor hour doesn't factor in benefits, doesn't factor in all the other expenses associated with an employee, nor does it factor in salary to employees. So a lot of times you say, well, I want to run a 27 % labor cost. So in your POS system, your sales per labor hour needs to be like 18 to 20.

Chris Schneider (12:07.618)
There's a gap there and you've got to understand that that gap exists.

Next thing I would look at is inventory turnover rates. Now, inventory turnover rates are a critical financial metric, and they're not always an indication that you're failing, but if your inventory is not moving as quickly, that also means less sales. So that's another place where we're going to see the same trends going along.

Now, if you see less sales and your inventory is turning over at the same rate, you're going through the same amount of stuff, then there's something wrong there. So inventory turnover is a very important thing to track, especially when it comes to your food because of waste and everything else associated there. And I've said this before, I will say this again, you guys can look up what inventory turnover rates are, or you can go back to one of the KPI episodes where I break this down in detail. But with inventory turnover, your big goal here

is to keep about 14 days inventory on hand. No more. You don't really want to go less than 14 days of inventory either because then if something happens, you're going to run out of things. But 14 days is where I like to be, to be real honest with you. Then look at your operating expense trends. So we talked about cost of goods sold percentages, but outside of cost of goods sold,

Chris Schneider (13:28.75)
when we're thinking about things like rent. You know, again, going back to that conversation I had with Jordan a few weeks ago, he mentioned that rent in a lot of major cities is increasing significantly. Well, if your rent goes up...

You got a problem. So look at your controllable operating expenses. Look at your non controllable operating expenses. But you should be digging into all of those. And if your expenses start to go up and your revenue isn't, again, you've got a problem. Another metric to look at and one that we don't talk about a lot because it's more of a financial metric more than anything else is your debt to income ratio. Ideally, you don't want debt. I think we all know that, right? You just want the bar paid off and no debt. That's the best place to be.

But if you have debt, you need look at your debt versus your income because you need enough income to cover all your debt. And that income has to pay the debt, which is going to come out of your cash flow, not showing your P &L. So it's important that you keep your debt as low as humanly possible. And like I said, I don't believe in debt. I think if you, especially if you have like partners and stuff, you don't need to make distributions and

If you're in a position where you don't have to distribute pay off all your debt before you even pay yourself. If you're in a position where you need to pay yourself, pay yourself and then pay your debt. you guys can make that call. The bottom line here is you want as little debt as possible. And if your quantity of debt goes up quickly, you got a problem. Another note I will say here real quick. Avoid merchant services loans. Merchant services loans are the payday loans of the bar and restaurant industry.

and you fall in the same trap that someone that gets payday loans would fall into where you're constantly kind of circling the drain on the way down because you have to get a loan to pay the last loan to get a loan to pay the next loan and it just it's not good. It's not good. So avoid merchant services loans as much as you humanly can. So let's say some of those critical financial metrics aren't looking good for you or that you've seen some of those warning signs.

Chris Schneider (15:43.586)
that we talked about. What can you do? Well, let's talk about how to turn a bar around. Now.

I'm going to go through these points very quickly. There are episodes that we've talked about all of these in different points. But if you guys have any questions, right, as always, feel free to reach out. I am here. Join the bar business nation Facebook group. Great place to ask questions. I'm in there. Other bar owners in there. We have some great conversations. So we're going to go quickly through the turnaround strategies. But if you need help with anything, join the Facebook group, reach out to me. More than happy to help you out.

So what are our turnaround strategies? Well, the first one is immediate cost cutting measures. Let's be honest here. You you hear people say all the time, you grow your way to profit. If your cost is too high, your cost is too high, it has to come down. Period. End of story. Now your revenue can go up, you can charge more money. That makes your cost go down as a percentage. Sure. But if you're losing money, your first thing you have to do is stop bleeding. Right? It's like a

somebody that was in a bad car wreck or got shot or something. You have to get them stable and then you fix the problems and then you get them into recovery.

immediate cost-cutting measures is how you make your business stable. with all of that said, you have to be very careful where you cut. Cut things that don't matter. Cut out of your tech stack. I mean, I'm all about having a great tech stack, and I... I mean, you guys know I talk with people that own some of these tech companies on here. But cut things that don't impact your customers.

Chris Schneider (17:29.752)
When you cut costs and then your customers suffer, your food quality goes down, your service quality goes down. If anything about your customer experience, the quality of that goes down, you're just nailing shut your coffin. Because those cost cutting measures will end up costing you regulars, which will make your situation worse. But almost anywhere, I've never seen a business

that you can't look at and go, OK, if we do this, we can save 2 % here, and if we do this, we can save a percent here, and we can save a percent here and save a percent here. That's the kind of cost cutting I'm talking about. Not too drastic, never in a way that impacts your guest experience, but in a way that gets you able to survive and keep the doors open.

The next thing I would look at for a bar turn around menu engineering and pricing analysis. I mean, chances are you're not charging enough.

Or you're charging way too much. If you're charging a fair price...

You normally don't have these issues. Now you could have other structural issues and things that are causing you not to make money, but menu engineering and pricing analysis, that's how you're going to get the price right. That's how you are going to make sure that you are earning the revenue you need in order to be successful. The next thing I would look at is staff restructuring and training. So we've talked a lot about team training. Team training is absolutely critical.

Chris Schneider (19:03.916)
And if your team is not trained, they're not delivering a consistent experience to your guests, you are not winning. So it's all about consistency like we've talked about so many times, and that comes through training. So when you're in a bad spot, you need to turn around a bar, you really need a hammer on the staff training. You may need to restructure your staff. You might have to get rid of a manager and jump in yourself as an owner, as the GM. You may have to, you know, maybe not have so many cooks in the kitchen.

And if you don't have so many cooks in the kitchen, maybe you need to change your menu a little bit to accommodate that. It's different for every bar. However, there's almost always some staff restructuring you can do and training. Training will pay back every single time, provide a more consistent experience and solve your guest related issues.

The next thing I would look at is a marketing and promotion overhaul. How are you marketing? Where are you marketing? What are you marketing? What is your marketing plan?

And this can include a lot of different things, right? There are a lot of pieces potentially to a marketing plan.

But you have to do it. And you have to put some time and effort into where you're marketing and how you're marketing, making sure all your online directory listings are accurate and that no one is confused about who or what you are and who and what you're doing.

Chris Schneider (20:34.018)
The next thing I would look at for a turnaround strategy, vendor relationship renegotiation. Maybe you can switch food supply companies and get some a better deal on the same food. You don't want cheaper food. You don't want to hurt your quality, but maybe you can get a better deal on the same stuff. You could also look at some different vendors and say, OK, can I negotiate contracts here or there? For most bars, we're independent. We're dealing with small companies or we're dealing with large companies and we're on contracts.

We don't have much room to renegotiate, but where you can, renegotiation is always a smart move. The next thing to look at is operation streamlining, and this is something we've talked about a lot. This is where we're getting into continuous improvement, root cause analysis, problem solving, how can I make this easier? How can I make my bartender take less steps? How can I make my cooks take less steps in the kitchen? What can I do to make everyone's life easier?

because when their lives are easier, they take better care of the customers. When the customers are taken better care of, they become regulars more, they spend more money, you win more. So what can you do from an operational standpoint to streamline everything in your bar? And if you go back, I think it's season one, so like two years ago, there's a lot in there about continuous improvement and KPIs that talk a lot of episodes that talk.

about this operation streamlining in quite a bit of detail. The final thing I would look at as a turnaround strategy is capital investment planning, right? Do you need to bring in a partner? Do you need to get a loan? Do you need to put more money in yourself? What makes sense here? If you don't have cash, you need cash to operate. So do you need to get more cash? There are a lot of potentials here when it comes to capital investment planning.

Chris Schneider (22:28.696)
But without a doubt, absolutely, always, it's important to look at how you're dealing with your capital, even if you're being very successful and you're not in a position where you're looking to turn your bar around. Understanding capital investment is huge.

Like I said, a lot of times if you're failing, maybe that means you have to bring in a partner. That's okay. Especially if you're going to bring in a partner, bring in a partner that fills the gaps in your knowledge. Bring in a partner that knows things you don't so that you can be more successful because you have a partner.

Chris Schneider (23:10.414)
So to wrap us up for today.

Understand the warning signs of a failing bar, right? If you have declining sales, staff turnover, loss of regulars, increasing costs, things like that. Those are all signs you're going to fail. Understand your financial metrics, your P &L, your cash flow, your cost of goods percentages, your labor cost, your inventory turnover, your operation expenses, your debt to income, not something even if you're not failing, you should have all those down. But if you feel like you might be

Look at all those. Look at them over time. Look at them for different periods. And then finally, look at things like immediate cost cutting followed by menu engineering, staff restructuring, new marketing, renegotiating vendor contracts in order to get yourself out of the hole that you've dug. By recognizing the signs of a failing business early and taking immediate action, you can prevent failure and succeed.

But you have to monitor key metrics, implement strategic changes, and maintain a proactive approach to business health before you become just another industry statistic.