### Author Topic: I Want My Money!!  (Read 4944 times)

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#### Chicago Bob

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##### I Want My Money!!
« on: December 10, 2013, 08:02:40 PM »
Gross margins.....is there such a thing as a "pretty darn close" percentage figure for a busy mom & pop type establishment located on any "main street of America"?
"Care Free Highway...let me slip away on you"

#### Tampa

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##### Re: I Want My Money!!
« Reply #1 on: December 11, 2013, 08:18:27 AM »
I'm guessing from the lack of replies that other dine-n-dash readers are as confused by the question as I am.

There is one rule of thumb that might be amusing and informative pertaining to your question.  It is called the turns and earns calculation.  In one simple form, the number of inventory turnovers per year (turns) multiplied by the profit percentage should rule-of-thumb be 100.  So, for example, if a car stays on the lot an average of 2 months, that is 6x turnover per year at say 20% profit = 120 (close enough to 100).  There are other and more sophisticated ways do the analysis.

Dave

#### TXCraig1

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##### Re: I Want My Money!!
« Reply #2 on: December 11, 2013, 10:37:05 AM »
Try to deposit a gross margin percentage in the bank and see what they tell you. Likewise, rules of thumb are almost never a good way to run a business. Calculations like "turn and earn" are at best a metric to evaluate improvement (or lack thereof), not rules to manage by.

The most important number is cash flow. I don't care what your margins look like, if you can't pay your bills, you are SOL. If you can pay your bills, then you might want to look at return on capital next. For example, could you make more money in the stock market than buying a restaurant? Or conversely, could you make more money by selling your restaurant and investing the money in the stock market? All of this assumes that you will or already are running a tight ship and have done your homework with respect to pricing, value, marketing, etc.

Of course, you might undertake a slightly different analysis if running a pizzeria is something that is going to make you happy. You still have to pay the bills though.
"We make great pizza, with sourdough when we can, commercial yeast when we must, but always great pizza."
Craig's Neapolitan Garage

#### Chicago Bob

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##### Re: I Want My Money!!
« Reply #3 on: December 11, 2013, 12:21:21 PM »
Try to deposit a gross margin percentage in the bank and see what they tell you. Likewise, rules of thumb are almost never a good way to run a business. Calculations like "turn and earn" are at best a metric to evaluate improvement (or lack thereof), not rules to manage by.

The most important number is cash flow. I don't care what your margins look like, if you can't pay your bills, you are SOL. If you can pay your bills, then you might want to look at return on capital next. For example, could you make more money in the stock market than buying a restaurant? Or conversely, could you make more money by selling your restaurant and investing the money in the stock market? All of this assumes that you will or already are running a tight ship and have done your homework with respect to pricing, value, marketing, etc.

Of course, you might undertake a slightly different analysis if running a pizzeria is something that is going to make you happy. You still have to pay the bills though.
And how do you come up with that number in a hypothetical scenario? I thought gross margin(sales minus cost of goods) was cash flow?
I was reading where Scott told Walter that if he had a "storefront" he would sell 50 pizzas a day ,easy.
50 pizzas a day is not going to pay the bills if you are in high rent, large seating, full service,etc. place.
I was just wondering if anyone in a small mom & pop place had a # for how much the sale of one pizza actually gets to go in their pocket. I could then calculate a whole lot of other things if I knew that number.
« Last Edit: December 11, 2013, 12:27:35 PM by Chicago Bob »
"Care Free Highway...let me slip away on you"

#### weemis

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##### Re: I Want My Money!!
« Reply #4 on: December 11, 2013, 12:37:24 PM »
You have to first decide at what capacity you're going to be running. How many seats? how many pizzas per hour can you make? how much dough and ingredients will you have the capacity to handle? will there be other value added products? alcohol? sandwiches? what would you like to make? how much will it cost to accommodate these things? how many employees?

Cash flow is the amount of cash on hand. you can own \$100,000 worth of equipment, but it won't help you buy ingredients. you should really spend some time looking into financial understanding and what it is to be a successful business. the library will help here. It seems like you have some learning to do before you can get it all together, so you should probably set some short term goals of understanding the small stuff before tackling the big stuff. Remember, 9 out of 10 small business fail in the first 5 years, and of those, 9 out of 10 fail in the next 5 years. Know your %\$#, bob.
Nick Gore - just a dough eyed wanderer

#### Chicago Bob

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##### Re: I Want My Money!!
« Reply #5 on: December 11, 2013, 12:48:13 PM »
You have to first decide at what capacity you're going to be running. How many seats? how many pizzas per hour can you make? how much dough and ingredients will you have the capacity to handle? will there be other value added products? alcohol? sandwiches? what would you like to make? how much will it cost to accommodate these things? how many employees?

I've said it twice now......does anyone know how much it costs for a small mom & pop joint to make a pizza?
"Care Free Highway...let me slip away on you"

#### Tscarborough

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##### Re: I Want My Money!!
« Reply #6 on: December 11, 2013, 01:22:37 PM »
Mom and Pop might know what it costs in their store, but that is about it.

#### Aimless Ryan

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##### Re: I Want My Money!!
« Reply #7 on: December 11, 2013, 01:23:50 PM »
I was just wondering if anyone in a small mom & pop place had a # for how much the sale of one pizza actually gets to go in their pocket. I could then calculate a whole lot of other things if I knew that number.

It's not possible to figure it out that way. You're using (and paying for) the same amount of gas and electricity regardless of whether you sell one pizza a day or 500 pizzas a day. To a certain extent, you're also paying the same amount of labor regardless of how many pizzas you sell. If you do everything inefficiently, your sales will have to be much higher to break even than someone who does everything the most efficient way possible, because inefficiency costs money. Also, if people don't want to work for you, it'll cost you a lot of money to constantly have to hire and train new employees.

I haven't done the math in a few years, nor have I thought about this stuff in a long time, but it probably costs about \$3 for a small mom & pop joint to make a large pizza. Of course, that only accounts for food costs, and you just can't do it that way. Because if you sell one pizza in a day, that one pizza is also costing you that whole day's gas, electricity, and labor. If you sell two, your costs per pizza are pretty much cut in half, but those costs are still huge, per pizza. If you sell 500, however, then those costs per pizza are very small.
Ryan
http://www.ryanspizzablog.blogspot.com

Disclaimer: Don't necessarily believe anything I say here. My brain ain't quite right anymore (unless it is). If I come off as rude or argumentative, that's probably not my intention. Rather, that's just me being honest, to myself and everyone else; partly because I don't have enough time left to BS either you or myself. If you are offended by anything I say, it's probably because you think lying to people (to be "polite") is a good idea. I don't.

#### Tscarborough

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##### Re: I Want My Money!!
« Reply #8 on: December 11, 2013, 01:28:53 PM »
Here is the formula, Bob:

CG+L+P+OH/number of pizzas=cost per pizza.

The hard part, of course, is figuring out Cost of Goods, Labor, Profit, and OverHead.

#### Aimless Ryan

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##### Re: I Want My Money!!
« Reply #9 on: December 11, 2013, 01:37:40 PM »
Also, your pricing can make a huge difference. If your pizza costs a dollar less than people are willing to pay, and you sell 100 pizzas daily, then you're making \$100 less than you should make every day. Doesn't seem like a huge chunk of money, does it? Yeah, well that's \$36,500 a year difference. And if you're selling just 10 more pizzas per day, it's \$40,150 that you're not making every year just because your pizza is priced too low.
Ryan
http://www.ryanspizzablog.blogspot.com

Disclaimer: Don't necessarily believe anything I say here. My brain ain't quite right anymore (unless it is). If I come off as rude or argumentative, that's probably not my intention. Rather, that's just me being honest, to myself and everyone else; partly because I don't have enough time left to BS either you or myself. If you are offended by anything I say, it's probably because you think lying to people (to be "polite") is a good idea. I don't.

#### Chicago Bob

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##### Re: I Want My Money!!
« Reply #10 on: December 11, 2013, 01:49:56 PM »
Is there an "average" CG+L+P+OH figure for a nice 'lil pizzeria......come on mom & pop, where are you!?
"Care Free Highway...let me slip away on you"

#### Aimless Ryan

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##### Re: I Want My Money!!
« Reply #11 on: December 11, 2013, 02:10:01 PM »
No, there's not, because some pizzeria owners do it right, while other pizzeria owners do it wrong. The only person who can figure this stuff out is you. If you are realistic with your numbers, they won't lie to you. And the numbers are different in every circumstance. If you only need 1,500 square feet of space but you open in a place with 3,000 square feet, you're gonna pay twice as much as you should for rent. You'll also pay more for gas and electricity than you should. If you pay \$1,000 every month for stuff you don't need, you're giving away \$12,000 a year for nothing.

That's your decision, just like it's your decision to charge either market value or \$1 less than market value for each large pizza. \$36,500 + \$12,000 = \$48,500 that you could be giving away just by making bad choices, which someone else may not make. There are plenty more bad choices to make, which could cost you plenty more money. If you don't do those things, you won't pay that price. A lot of the people you hope will reply here are doing those things.
Ryan
http://www.ryanspizzablog.blogspot.com

Disclaimer: Don't necessarily believe anything I say here. My brain ain't quite right anymore (unless it is). If I come off as rude or argumentative, that's probably not my intention. Rather, that's just me being honest, to myself and everyone else; partly because I don't have enough time left to BS either you or myself. If you are offended by anything I say, it's probably because you think lying to people (to be "polite") is a good idea. I don't.

#### Chicago Bob

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##### Re: I Want My Money!!
« Reply #12 on: December 11, 2013, 02:38:13 PM »
Are there any situations where a business' financial statement is public record.....like say, maybe if they got their business through an SBA minority loan or something like that? Sure wish I cold take a peek at the income statements of a couple pizza joints in my area.
"Care Free Highway...let me slip away on you"

#### GotRocks

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##### Re: I Want My Money!!
« Reply #13 on: December 11, 2013, 02:54:45 PM »
So, I'm guessing that you are trying to project your P&L's.

Heres what I did,

Look at your population, figure that 20% (very high end) of the population goes out for pizza two times/month, divide that by the number of competitors on your area for your baseline.

Do three sets of calculations, 20% being optimistic, 12%-13% being realistic, and 8%-10% being poor end.

Figure your "Break Even Point"  Make sure your combined food & labor costs are below 55%, (below 50% is better) and using those calculations, see if you will be able to make it in the area that you want to open in.

Restaurants are not a "If you build it, they will come" operation.

You'll get a heavy hit when you first open, and first impressions will make or break you.

How many franchises are in your area, and can you compete with all their "giving it away" specials and stay afloat?
A skinny cook is not to be trusted!

#### Chicago Bob

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##### Re: I Want My Money!!
« Reply #14 on: December 11, 2013, 03:23:12 PM »

Figure your "Break Even Point"  Make sure your combined food & labor costs are below 55%, (below 50% is better) and using those calculations, see if you will be able to make it in the area that you want to open in.

Thanks Rocks,
Food and labor costs....55% below what? The break even point and the other 45% goes to rent, utilites, etc.?
"Care Free Highway...let me slip away on you"

#### gabaghool

• Posts: 551
• Location: GLASTONBURY, CT
##### Re: I Want My Money!!
« Reply #15 on: December 11, 2013, 05:04:15 PM »
Sometimes, what you ACTUALLY make on a menu item is better than what your MARGIN is.  Steak, for instance, has a high food cost, meaning a lower percentage of profit....but, the REAL profit is still better than a lower priced HIGH profit percentage item......am I explaining myself clearly??

#### Chicago Bob

• Posts: 12639
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##### Re: I Want My Money!!
« Reply #16 on: December 11, 2013, 05:16:23 PM »
Sometimes, what you ACTUALLY make on a menu item is better than what your MARGIN is.  Steak, for instance, has a high food cost, meaning a lower percentage of profit....but, the REAL profit is still better than a lower priced HIGH profit percentage item......am I explaining myself clearly??
No.... how can a " lower priced HIGH profit percentage item' be better than a "Steak, for instance, has a high food cost, meaning a lower percentage of profit."    Where does this "REAL" profit kick in?
Thanks!
"Care Free Highway...let me slip away on you"

#### Aimless Ryan

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##### Re: I Want My Money!!
« Reply #17 on: December 11, 2013, 05:23:11 PM »
Restaurants are not a "If you build it, they will come" operation.

You'll get a heavy hit when you first open, and first impressions will make or break you.

I definitely agree that those two sentences are two of the most important things for any new pizzeria owner to know and understand. Contrary to conventional lending wisdom, people want to try out the new place. And they will, as long as they know it's there. But they're only gonna give you one chance. So when you open, you and your staff will need to be ready to handle getting slammed.

Many (or most) new pizzerias--both the ownership and the staff--aren't prepared for this, and consequently they end up disappointing many (or most) of the prospective lifetime customers. Then, instead of learning from their mistakes or figuring out how to be more efficient without cutting corners, they cut corners. Downward spiral from here. At this point, "If you build it, they will come" is history. They did come, but they're not coming back, nor are any of their friends gonna come... unless you learn from what you've done wrong, make drastic changes, and hope your few remaining customers will get the word out. And even if you do manage to get your stuff together, you still have to deal with the "Fool me once" factor.

How many franchises are in your area, and can you compete with all their "giving it away" specials and stay afloat?

If you know what you're doing, that's not an issue. It's stupid for any independent pizzeria to try to compete with chains and other cheap pizza joints. You're not going to beat the chains at their game. As an independent, you should be able to offer a product and customer service that blows away the chains and the independents who want to try to play the chains' game. Some pizza consumers want what the chains offer. Some don't. The people who don't want chain pizza or chain service usually don't have many (or any) options. If you offer better pizza than they can get elsewhere AND you treat your customers like they rule, they will come back.

The easy way is to do this from the start.
Ryan
http://www.ryanspizzablog.blogspot.com

Disclaimer: Don't necessarily believe anything I say here. My brain ain't quite right anymore (unless it is). If I come off as rude or argumentative, that's probably not my intention. Rather, that's just me being honest, to myself and everyone else; partly because I don't have enough time left to BS either you or myself. If you are offended by anything I say, it's probably because you think lying to people (to be "polite") is a good idea. I don't.

#### TXCraig1

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• Location: Houston, TX
##### Re: I Want My Money!!
« Reply #18 on: December 11, 2013, 05:28:34 PM »
Sometimes, what you ACTUALLY make on a menu item is better than what your MARGIN is.  Steak, for instance, has a high food cost, meaning a lower percentage of profit....but, the REAL profit is still better than a lower priced HIGH profit percentage item......am I explaining myself clearly??

Exactly my point when I say you can't deposit a margin% in a bank or use it to pay a bill. Cash is what matters. I'd rather make \$10 at a 20% margin off a customer than \$5 at 40%. All day long. Way too many people get hung up on margins. Are they important to understand? Yes, but like a rule-of-thumb, they can lead you to make bad decisions if you don't know what you are doing.
"We make great pizza, with sourdough when we can, commercial yeast when we must, but always great pizza."
Craig's Neapolitan Garage

#### waltertore

• Posts: 2578
• Location: Reno, Nevada
##### Re: I Want My Money!!
« Reply #19 on: December 11, 2013, 05:40:33 PM »
Bob: I am a non math guy.  I basically instictively figure out in my head what my rent will be, how many pies I want to make a day, what I will charge, what it costs, how many days/hours a week I will be open,  what equipment will I need, and how many employees will I need.   Also if you plan to do same day dough the fridge space will be minimum.  If you want to do 24hr, then you need more, and 48hr still more.  Here is my next step if and when the educational current derails my current program.  I am not out to make a lot of money.  I am a control freak.  I will have to make every pie, dough.  Hire employees and quality goes to crap in 90% of the time.  I want to make great pies more than a million bucks. People have told me all my life I can't do what I do and survive.  Well, I am almost 60 and did music in a way that the music industry would never accept yet I played full time for 20 years, and now with my bakery/pizzeria I am again going so far against the grain that conservative people cringe.

For now my set up is good but I have learned in my years in education that all this can change real fast.  I live spontaneously and as of right now own enough equipment and knowledge to open but am in no hurry to close what I have going as long as I am allowed to continue as is.  I never see myself  in the NYC/NJ/northeast areas because rents and houses cost too much.  I can't imagine my vision even breaking even there.  I have learned out here in OH I could charge \$12 for an 18" cheese and \$14 with pep and basically \$2 per topping.   It will be an old school small shop. Seating will be very limited as will the topping choices, 1 size pie, and not a very large production number per day.  I will make all the dough, ball, and  pies myself unless the shop ends up here in OH and I can hire Paige.  My wife will run the register and do the books.  She is from the Bay area and gets overheated when the temp goes above 70 degrees.  She will have to have a small fan going on her all day(that should add some old school NJ vibe too )  I will hire 1 or 2 disabled people for basic prep and  clean up.  Money will not be my driving force.  I can get a 1,000 sq ft shop out here for a grand a month in a hip area and basically for nothing in an area the hipsters will have to drive to.   I have been amazed at how much a crap pizza ends up costing you out here.  Good pizza, good artisan bread (maybe will do this) will be about it.  No alcohol just water and soda.  I will also only be open 3-4 days a week from like noon to 7pm.  Call ahead (no internet ordering for me) orders will be encouraged(days in advance even more so).  I figure I can leisurely make 10 pies an hour.  That will allow me time to mingle, listen to my sinatra on the stereo, and smile alot.  It will net me more than enough money to make it work for us and pay my help well.  I will be on full retirement pension and wouldn't even need a salary if need be.  To employ a couple disabled people and make good pizza is more than enough for me.  My 1 thing I will need is enough kitchen space to be able to do 2 day refrigerated dough.  I own almost everything I need to run a shop.  I can easily get by with the 2 hobart 20qt mixers I have.  I mix 15-20oz balls per batch.  When 1 is done I start the next and when that is done I am ready for and start another.  this way the dough doesn't sit on the bench for more than 10 minutes.  I am different in my ways but for what I want in a shop I don't need the big mixer. Walter
« Last Edit: December 11, 2013, 05:44:59 PM by waltertore »
SMILING WITH HOPE PIZZA MISSION STATEMENT
TO CREATE HOPE AND MEANING IN THE LIVES OF PEOPLE WITH DISABILITIES
http://www.smilingwithhopepizza.com/

#### TXCraig1

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##### Re: I Want My Money!!
« Reply #20 on: December 11, 2013, 05:42:11 PM »
And how do you come up with that number in a hypothetical scenario? I thought gross margin(sales minus cost of goods) was cash flow?
I was reading where Scott told Walter that if he had a "storefront" he would sell 50 pizzas a day ,easy.
50 pizzas a day is not going to pay the bills if you are in high rent, large seating, full service,etc. place.
I was just wondering if anyone in a small mom & pop place had a # for how much the sale of one pizza actually gets to go in their pocket. I could then calculate a whole lot of other things if I knew that number.

You have to model your business put down on paper what you think will happen every day for a year - all your revenue and costs. Don't just make up numbers. Be granular. Start with the number of people you think will walk in the door. Estimate what the average customer will buy. Build a cost model based on that.

Cash flow may be sales minus cost of goods - if everyone pays in cash and you pay cash for your groceries every day. In any other case, there is a delay that affects your cash flow. If you have to wait 30 days for the credit card company to pay you, that affects your cash flow negatively. You don't pay rent or labor ever day - that helps cash flow. If you can get payment terms from a vendor. That helps cash flow. You can make tons of money and not have any cash to pay your bills if you are not collecting the cash in time to pay your bills.

Simply put, cash flow = gross margin (revenue - expenses) minus increases in receivables or inventory (or plus decreases in receivables or inventory) plus increases in payables (or minus decreases in payables) minus capital itmes needed to keep the business running such as new equipment, plates, glasses, etc.
"We make great pizza, with sourdough when we can, commercial yeast when we must, but always great pizza."
Craig's Neapolitan Garage

#### TXCraig1

• Supporting Member
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• Location: Houston, TX
##### Re: I Want My Money!!
« Reply #21 on: December 11, 2013, 05:47:02 PM »
Also, your pricing can make a huge difference. If your pizza costs a dollar less than people are willing to pay, and you sell 100 pizzas daily, then you're making \$100 less than you should make every day. Doesn't seem like a huge chunk of money, does it? Yeah, well that's \$36,500 a year difference. And if you're selling just 10 more pizzas per day, it's \$40,150 that you're not making every year just because your pizza is priced too low.

This is a really important point. Many people screw up trying to follow a rule-of-thumb like they should run a 33% food cost or something. As a result they either price too low and leave a bunch of money on the table as Ryan points out, or they price too high and don't sell enough to stay in business.

You have to understand your market. You need to think about how your volume will vary with price. When you do your homework, you will be able to model your business at different prices and thus estimate your profitability at different price points. Price where you expect the highest profit not where some rule-of-thumb says to price - not necessarily at the highest margin. Highest margin doesn't always = highest profit.
"We make great pizza, with sourdough when we can, commercial yeast when we must, but always great pizza."
Craig's Neapolitan Garage

#### TXCraig1

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##### Re: I Want My Money!!
« Reply #22 on: December 11, 2013, 05:49:32 PM »
Thanks Rocks,
Food and labor costs....55% below what? The break even point and the other 45% goes to rent, utilites, etc.?

He means of every \$1 in revenue, your cost of food and labor should be \$0.55 or less. That leaves you \$0.45 to pay everything else - including yourself.
"We make great pizza, with sourdough when we can, commercial yeast when we must, but always great pizza."
Craig's Neapolitan Garage

#### TXCraig1

• Supporting Member
• Posts: 20205
• Location: Houston, TX
##### Re: I Want My Money!!
« Reply #23 on: December 11, 2013, 05:56:44 PM »
No.... how can a " lower priced HIGH profit percentage item' be better than a "Steak, for instance, has a high food cost, meaning a lower percentage of profit."    Where does this "REAL" profit kick in?
Thanks!

16oz NY Strip. Menu price: \$20. Food cost:  \$9. Food cost% = 45%. Profit = \$11.
Hamburger. Menu Price = \$9. Food cost: \$3. Food cost% = 33%. Profit = \$6.

The hamburger has a 27% "better" food cost but 45% lower profit.

I don't know about you, but I'll sell the steak to every customer that walks in the door. Run a food cost that the rule-of-thumb says is too high, and laugh all the way to the bank.
"We make great pizza, with sourdough when we can, commercial yeast when we must, but always great pizza."
Craig's Neapolitan Garage