Kharasch: There's nothing mysterious about the restaurant business

The hospitality industry can appear mysterious to those who are on the outside. A successful restaurant seems to have a mystique about it, making its success seem like a minor miracle based on a recipe of good food, great service and a welcoming atmosphere.

The restaurant business, in fact, is like any other business, and applying some basic principles can lead to success. Conversely, ignoring these same principles is a surefire way to lose money.

To avoid having to prematurely hang the "going out of business" sign, here are four principles I apply to any business I consult with, whether or not it's in the hospitality industry.

• Everything will cost more than you think it will. Undercapitalization is the single most common reason restaurants (or any business) is unsuccessful.

I tell my restaurant clients, "You need to have a rainy-day fund, and it's going to rain for the next 100 days." That's how long they'll be losing money before they can hope to break even and begin earning a profit. If there's a $1 million investment, I recommend a rainy day reserve of at least 20%, or $200,000.

• Watch the numbers and take action if there seems to be a problem. It's true no matter what business you're in. The numbers are what will help you grow (or lose) a business.

In the restaurant industry, which has to deposit thousands of dollars each night to keep the lights on and the investors happy, that means a manager or owner has to review every night's receipts and make sure they're getting deposited in the bank correctly. Profit-and-loss statements have to be reviewed at least every 30 days, and if you seem to be doing good business but are still losing money, start trying to find out why. Problems won't go away on their own.

• Share information with everyone. A lot of business owners like to keep information about the business close to the vest and not share it with their staffs. I think this is a big mistake. A restaurant manager or owner should meet regularly with staff, let them know how the business is doing and get their ideas on how to improve.

One of my non-restaurant clients is a propane company that wants to expand by buying other companies, but first they have to get their own house in order. I found that their customers owed them $180,000 in unpaid invoices - and they were still selling propane to these customers. After the sales staff learned that, they started collecting on those unpaid invoices. And now they have a goal: to end the year with less than $20,000 in receivables.

• Invest in great service. "Let's not spend money until we're making money" is not a winning philosophy. One of my restaurant clients didn't have enough bartenders and was ending up with unhappy patrons and lost sales. By not investing $13 an hour in more bartenders, they were losing $2,000 in sales.

Business owners should be very clear-eyed about what kind of service their employees are providing. They need to pay attention to social media reviews and customer comments and invest in training for their employees.

Can following these four principles guarantee a business will succeed? No, because there are a lot of other factors, such as a tight labor market, the economy and technological trends, that are not in an individual's control. However, a business owner can tip the odds in their favor by applying these four simple precepts.

Izzy Kharasch is president and founder of Hospitality Works, Inc., a bar and restaurant consulting company. Over the last 30 years, Izzy has helped more than 700 food service, retail and consulting businesses worldwide improve their operations and profits. He is offering a free phone consultation with Daily Herald readers. Email him at: Izzy@hospitalityworks.com.