Lack of funds is one of the big reasons bars fail. There are many operators who only have enough cash in their account to handle last week’s bills. This is a mistake. You should always have at least 6 months’ worth of rent as cash in your account. It’s why doing solid research before buying a bar and knowing how much money you need to borrow is so important.
Sufficient capital is required to properly build and then operate a bar, nightclub or restaurant. Many people try to start and run their businesses on shoestring budgets, which sets the business up for failure from the beginning. And while having 6 months’ worth of rent in the account at all times sounds like an unattainable scenario, not having this money in place is really just failure on the part of the operator to raise sufficient capital at the beginning.
No, it’s not always fun to spend time on a writing a detailed business plan, drafting a realistic budget, meeting with bankers, and raising capital from private investors. But executing each of those tasks properly will set your business up for success from day one.
I once again reached out to my colleague Jamal Afzaly of Lounge Eighteen in Calgary, Alberta, Canada, so we could discuss the perils of undercapitalization. Here are just a few reasons why you need to have a cash cushion of at least 6 months’ rent.
1. Unexpected Delays
Delays that are out of your control will occur. What happens if your contractor doesn’t do a good job? Halfway through construction, you may find out your contractor is only on site sporadically, or the quality of their work is poor. If you must replace them, this delays the project and you’re still responsible for all the carrying costs. In an ideal situation, all contractors do what they say and finish at the agreed upon deadline. But in the real world, things don’t always work like this and you must be prepared.
Read this: The 4 Worst Reasons to Buy a Bar
Comparable delays can also include shipping delays for equipment. When I ordered my kitchen equipment, it was shipped in from out of town. We had multiple delays for the shipment that were completely out of my control. Without sufficient capital, expenses from delays could kill a new bar before it even has a chance to ever open.
2. Unexpected Infrastructure
You’ll try your best to budget but unexpected expenses will pop up and they’re always more expensive than you think. For my lounge, I knew that I would require a ventilation system for my kitchen. However, I didn’t anticipate the amount of ventilation required for the front of house.
My concept was a shisha lounge, where people can smoke shisha indoors, so the ventilation system required more ducts, more material and more labor, which ultimately translated to more money out of my pocket. I knew I needed more air conditioning than the average bar but had no idea it was going to cost as much as it did. This was a huge expense that I wouldn’t have survived without my cash cushion.
3. Initial Training Expenses
While training is essential to ensuring the guest experience, it costs big money. The whole time you’re paying these wages, you’re not making any sales. Plus, you always slightly overstaff at the beginning of a new bar, so those extra bodies add more even more expense.
These costs add up quickly and you must be prepared to endure this expense. Many new operators are focused on the construction of their new businesses and often neglect the cost of initial staff training. This is something for which the cash cushion is required.
4. Bad Decision Making
As soon as you don’t have cash, your mind will start going in the wrong direction. You’ll contemplate firing managers, cutting back on critical systems, and doing tasks yourself instead of managing people. Instead of thinking about effective marketing, you’ll focus all your attention to cutting costs at the risk of sacrificing the guest experience.
A common error made by some operators is to skimp out on ordering inventory if their cash is low, which to me is inexcusable. You should never be out of anything. You want to have all products on hand and be able to provide great service by having adequate staffing. Neither is possible if you’re running your business on a shoestring budget—you must be comfortable. You can’t stress about bills not being paid, you need to be laser focused on making sure your guests are happy.
Kevin is an operations consultant with over a decade of experience working directly with bar, restaurant and nightclub owners on all points of the spectrum: from family-owned single bar operations to large companies with locations on an international scale. Kevin works with them all and understands the unique challenges each kind of company faces.
He is the author of a book entitled Night Club Marketing Systems – How to Get Customers for Your Bar. He is also a regular writer for Nightclub & Bar, providing information high-level operators seek to get the extra edge in their marketing, sales and operations.
He continues to write today, providing specialized information directly to nightclub, bar and restaurant owners from his workshops, newsletters and magazine articles. He is also active in the field, operating an inventory auditing practice with Sculpture Hospitality.