2021 Scenario Planning: Budgeting and Forecasting Tips for Restaurants
- The budgeting process allows you to align on objectives and financial targets.
- To budget for revenues and expenses properly, make a list of unusual items from 2020 (i.e. PPP, sales closures, etc.) and planned initiatives for Q4 2020 and 2021.
- Keep operating and administrative costs as low as possible in 2021 while still meeting commitments for required compliance.
- Pull together worst-case, expected, and best-case scenarios that incorporate sales level assumptions and a “break-even” analysis.
Need help planning for 2021?
As restaurant companies navigate their way through 2020 — and the ongoing impacts of COVID-19 — 2021 planning becomes even more important. If you haven’t done a financial budget in the past, this is the time to start.
While creating a budget helps you obtain financing, set financial targets, and hold managers accountable for financial results, you often find the most value in the process itself. Once you get all stakeholders involved, including owners and members of the management team, you can create alignment on objectives and financial targets.
The pandemic has affected different industries in different ways. Restaurants have been hit especially hard. The fourth article of our series on scenario planning provides guidance on how you should approach budgeting and forecasting for the coming year.
Consider these planning steps for 2021
In normal circumstances, budgeting is already tricky. You must consider many variables in terms of revenue levers, including:
- Input costs for food, liquor, and labor
- Operating costs for occupancy and other necessary expenses
- General and administrative costs
The uncertainties of COVID-19 create even greater complexities for restaurants to make and achieve a plan.
Keep in mind these additional factors as you begin your budgeting process for 2021.
- New government programs that provided financial assistance in 2020, such as the Payroll Protection Program (PPP), Economic Injury Disaster Loans (EIDL), or other various loan and grant programs.
- Timing associated with deferrals of various costs that will need to be repaid in 2021 (e.g., employer and employee payroll tax deferrals).
- New debt/interest commitments that need to be included for 2021 (e.g., PPP loans not forgiven, new EIDL loans, or other business loans).
- New lease or vendor liabilities that have been deferred or adjusted during 2020 and their impact on 2021 (i.e., cash flow planning).
- Revenue seasonality and year-over-year monthly changes in top-line sales in 2020.
Sales levels will likely be the most difficult line item to budget for in 2021. In the planning process, make a list of any planned initiatives for Q4 2020 or 2021 that will increase sales. These can include (but are not limited to):
- Online sales enhancements
- Planned pricing changes
- Off-premise delivery increase
- Drive-in window installation
- Expanded patio for next season
Given the pandemic’s widespread impact and duration, you can be cautiously optimistic in terms of changes in social distancing and dine-in capacity during 2021, especially in Q1 and Q2. This applies to revenue levels, since those quarters typically see lower levels of sales in many regions in the U.S. It might make the most sense to look at months from 2019 that will hopefully be more comparable for budgeting purposes to 2021.
Labor estimates should follow estimated sales levels. Most restaurants have determined their new staffing needs for the revenue levels they are currently experiencing. Once you’ve decided to implement any new strategies or tactics, determine the impact on your headcount. Consider whether you plan to continue to curtail hours of operation, reduce menu offerings, or lean into off-premise sales as much as possible. All of these decisions impact labor and need to be a part of 2021 planning.
Determine your current sales per labor hour and use that number to inform your labor budget, and to figure out the labor costs that support your revenue targets. Create a budget by hour, by day, and by role, to determine what amount of labor cost is incurred for each hour of operation (as well as prep for opening and closing times). Create these labor models for seasonal times as well — a “winter” model, a “summer” model, etc. — as needed, depending on your location and climate.
Include the impact of any known minimum wage increases in your state and when they are scheduled to take effect. Also, make sure that any cash flow forecast that you create for 2021 includes the impact of any deferred payroll taxes from 2020 that will be due (half at the end of 2021, and half at the end of 2022).
Keep operating and administrative costs as low as possible in 2021, while still meeting commitments for required compliance with the Internal Revenue Service, Centers for Disease Control and Prevention, Occupational Safety and Health Administration, and other state and federal government authorities. Examine administrative staffing levels to determine if all roles are necessary and essential to have in-house. Explore outsourcing options that can assist at a lower cost than an in-house full-time equivalent employee with benefits. For example, consider hiring consultants for:
- Food and liquor cost management
- Human resources
- Social media
Incorporate scenario planning as you budget and forecast for 2021. Pull together several versions of the budget: worst-case, expected, best-case, as examples. Incorporate assumptions around sales levels to determine how that impacts labor and food cost. Complete a “break-even” analysis by identifying all variable and fixed costs, to understand the minimum sales levels needed to hit your break-even point.
Forecasting is where you make a copy of your budget and then override it with actuals each period to be able to predict the full year. Institute a regular process, either monthly or quarterly, to analyze recent revenue and expense trends. Make updates to future months accordingly, with additional insights and knowledge gained since the initial budget was created. You can also create a “rolling forecast” that can provide a look at the projected financials for 12 months at a time.
How we can help
If you’re a restaurant owner who needs help budgeting, forecasting, and planning for 2021, our team can help with one aspect of the process or provide comprehensive assistance. We have a deep understanding of how COVID-19 has impacted the restaurant industry, so don’t hesitate to reach out for guidance, no matter where you are in the planning process.