You like cooking and you want to open a restaurant. You have the layout of the restaurant in your head and have big aspirations. The restaurant is about to open and yet you have no one that wants to work.
One of the biggest hurdles restaurant owners have is not the dream but the reality. Being in business does not mean it is plug and play. No wonder why about 20 percent of small businesses fail the first year in business, according to the Bureau of Labor Statistics. Along with high food prices, labor is the next-biggest expense for a restaurant. In an industry with already razor-thin profit margins, the race against minimum wage is the difference between a restaurant staying alive to run another race or crashing and burning.
The federal minimum wage is $7.25 per hour in 2023 according to the Fair Labor Standards Act. States can have their own minimum wage but must at least pay $7.25 per hour. If your barbecue restaurant has the best ribs, you will have a line out of the door, and you would need enough staff to handle the business. The minimum wage in Texas is $7.25 per hour in 2023. Your profit margin would be higher since your labor costs would be low.
Let’s take the same example but your barbecue restaurant is in California. The minimum wage in California is $15.50 per hour in 2023. That is more than double per hour in labor costs. Your profit margin would be substantially lower since your labor costs would be high.
How do you then win the minimum wage race? It is called sweat equity. You will need to work in the restaurant while you find more labor. You are the last line of defense when it comes your restaurant. If an employee does not come in, you will need to make up the difference. Once you have enough employees you can pull away gradually.
Another way is to downsize. You can talk with your landlord to see if you could convert into a ghost kitchen. If not, you can look for a place that already has a set up for take-out. You can have patio seating option for those who want to just eat at the location.
Having a limited menu that has high profit margins is another way to win the race against minimum wage. It allows your customers to get what they want and you make more money per item. Let’s say you sell hamburgers. Your cost is $1 per hamburger, which includes ingredients, labor, and location costs. You sell it for $5 per hamburger. Your profit is $4 each. If you just sold 25 hamburgers in a lunch hour you would profit $100.
You have the above in place and now have the labor to staff your restaurant. Knowing the amount hours to be open is liking changing gears in a race. You come off the starting line fast when you open for business. The lunch rush is like maneuvering the race around the other race cars. You run along some bumps in the road but you manage to stay in the race. Finally, your lunch rush is over and the race is done until you start the race again for dinner.
Having the ability to modify your hours is key. As much as you want to be open from lunch to close every day of the week, sometimes you will need to make a pit stop and only be open when it makes sense financially. Some restaurants will be only open during dinner to closing during the week like fine dining restaurants. They also have the option to be open during lunch hours and close briefly to get ready for the dinner crowd. By not being open for lunch during the week, you save money by not needing the restaurant staff to come in because you are closed.
When it comes to gratuity, you as the restaurant owner, will need to know your state’s tip and gratuity law. In California a tip is money a customer leaves for an employee that is greater than the amount due on the bill. The tips belong to the employee and not to the employer. On the flip side, the restaurant owner can’t deduct tips from employee paychecks and can’t use employee tips as credits towards paying minimum wage. They can’t collect tips from their employees either.
Now that you have everything in place you are ready to win the race against minimum wage. It takes a lot risk to be a restaurant owner. If you are able to avoid the obstacles of the race you will be rewarded in the end and continue to thrive in the restaurant industry.
Rene Carlos is an Enrolled Agent with nearly 20 years of experience in the tax and accounting industry and business consulting. He, and his wife, Julia, own Summit Tax & Accounting Advisors. He specializes in corporate tax preparation and accounting for small businesses and individuals.
