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Restaurant kitchens can be tough places to be, full of boiling liquids, steam, sharp knives and, at times, a lot of pressure.  Restaurant boardrooms may have fewer physical dangers, but they can also be tough places even for the best and biggest names, Gordon Ramsay and Jamie Oliver have both famously struggled with restaurant-related debts, with the latter recently having to close some of his outlets.  It therefore seems an appropriate moment to look at the issue of debt and the restaurant industry.

Debt and business in general

While Shakespeare’s Polonius (Hamlet) advised “Neither a borrower, nor a lender be;” in real life both private individuals and businesses can, and do, use debt as a tool.  The basic idea of using debt, or leverage, is that the cost of the debt should never outweigh the cost of the benefit it is used to purchase.  This concept is simple in theory but may be a whole lot harder to put into meaningful practice in the real world, particularly in a restaurant environment.

Judging cost versus benefit in an uncertain world

Starting up a restaurant means organizing cooking facilities, including utilities, some kind of serving area to allow you to get your food to your public, adherence with relevant laws, such as health and safety and hygiene and having the necessary insurance in place and making sure your business is actually visible to your target market.  Restaurant chains need to cover these bases every, single time they want to expand.  Then, when your restaurant is up and running (and you can start bringing in an income), you still have the costs of keeping it going, some of which may be variable at least to some degree.  For example, the cost of servicing debt may change with prevailing interest rates, while the cost of buying ingredients may change for a variety of reasons such as whether or not there has been a good or bad harvest of a particular ingredient.  Restaurants will have varying degrees of control over how they respond to these changes, for example, in principle they could look at changing their debt to another lender or changing the ingredients they use, but, of course, how easy this would be in practice would depend on a number of factors.

None of this would be a problem if restaurants were guaranteed to make sufficient income at least to cover their costs, including staffing costs, so that their owners would at least either be able to make a decent living as staff or could see their investments tick over comfortably.  In reality, however, restaurants operate in the area of discretionary purchases and, as such, are highly vulnerable to economic contractions as well as to changing behaviours on the part of the public and/or changing circumstances in their local area.  For example, a restaurant which did well on passing trade may find itself struggling if developments in its local area draw people away from its doors and towards another part of town (or vice versa).

The restaurant industry in 2018 and beyond

Now would be a good time for restaurant owners to take a good, hard look at their financial situation, ideally together with a financial professional.  While it may sound harsh to say it, if a restaurant is already struggling, then the best course of action may be to wind it up now in an orderly manner rather than wait in the hope that the situation will get better on its own.  Of course, this would be a worst-case scenario.  It may also be possible to look at how the restaurant is currently being run and to suggest improvements to enable it to continue on a stronger footing.  The key point is to be realistic about the challenges facing any restaurant and to look for ways to overcome them.

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