How to Conduct a Financial Stress Test on Your Restaurant

As a restaurant owner, success largely depends on getting customers in the door, making them feel at home and welcome, and providing quality food at a fair price. Poor service and bad food will surely cause your restaurant to lose customers. However, there are many other factors that could lead to a drop in your business revenue and impact your success — and some of these factors are completely out of your control.

When it comes to protecting your restaurant, it’s important to think long-term. What could happen that could cause your business to shutter its doors? A financial stress test can help you to pinpoint these risks so you can plan for them.

What Is a Financial Stress Test?

A financial stress test is a way for you to determine what your business risks are and what financial safeguards you need to have in order to overcome these risks. It’s a way to prepare for unexpected factors that could impact your business’s financial health so you can create solutions to avoid them.

Most financial stress tests are conducted by a financial adviser. These professionals will use software to project very specific financial outcomes associated with the risks you face. However, you can start working through this process and create a basic outline with the four crucial questions listed below.

#1: Who Is Your Primary Customer?

In the restaurant business, your customers can be made up of a variety of people. However, you can identify specific trends. For example, if your business is located near a highway, travelers may be a big component of your clientele. You may have more of an adult-oriented location or one that’s family friendly. The age and demographics of your restaurant need to be defined so that you can use this information to pinpoint specific risk factors impacting your business.

#2: Who Is Your Competition?

Most restaurants have numerous other competitors where customers can choose to go for a similar meal. While you can and should make a list of these within a 5-to-10-mile radius, you need to clearly define what makes your restaurant unique — and what makes your competition unique as well. For example, does your competition offer a more upscale experience? Are they trendy? Do they offer special offers, different types of service, or even better customer service than you do? Identify who your competition is and what they may offer that’s different from what your restaurant offers.

#3: What Are Your Financial Needs?

Every restaurant has a large number of accounts payable. You have inventory, upkeep of the building, and employees to pay. Take a few minutes to write out your expenses thoroughly. To keep the doors to your location open, how much income do you need to bring in on a weekly, monthly, and quarterly basis? It’s important to know this so that you can track variables, from sales to the amount of insurance you need in order to protect against workers’ compensation and liability risks. Monitoring variables like this can help you to minimize your risks in the future because you can see what’s happening and plan for it.

#4: What Are Your Risks?

Finally, document the risk factors impacting your restaurant. These can be numerous, and should be as specific to your location as possible. Here are some ideas to start considering:

  • How will changes in the economy impact your location? One of the biggest changes in the restaurant industry occurred during the Great Recession, when hundreds of restaurants closed their doors because customers simply could not afford to eat in restaurants anymore.
  • Could competition around you increase? Staying on top of building and commercial development in your immediate area is critical.
  • What could occur if minimum wage increases significantly? Would you need to increase prices to cover the expense of paying your workers more?
  • What happens if your suppliers provide poor quality products or shutter their doors?
  • How can providing insurance for your employees impact your business’s finances?

By taking the time to work through this financial stress test process, you’ll gain incredible insight into the financial stability of your business. What other factors could be points of concern for your restaurant? Start outlining them now so you can plan to avoid them.