How to Estimate Revenues for your Business Plan? Restaurant Example

Revenue forecasting could be one of the most challenging yet interesting tasks when developing a Business Plan.  One way to approach this activity is to first break down revenues into variables (i.e. what do revenues for a particular business really mean?).  For example, restaurant revenues may be composed of:

Average food sales ($) x Average No. of Customers per Day ($) = Average Daily Revenues ($)

But how does one estimate average food sales and average no. of customers (i.e. what do these numbers really mean?)?

1)  Average food sales can be estimated by thinking about what dollar amount will the majority of customers spend when they come to the restaurant.  For example, if the idea is to open an Indian restaurant, the average food sales can be estimated in the following way:

• Menu composition and price ranges:  With the menu composition, one can estimate the average sales price.  For a typical menu (i.e. appetizer, entrée and dessert), one may expect customers consuming an appetizer and a low priced entrée or just a high priced entrée, and they may or may not get dessert.  Assigning monetary amounts to this exercise, on average customers may consume a $5 appetizer plus a $9 dollar entrée or just a $14 dollar entrée.  And to be conservative, one can assume that about 25% of customers get dessert priced at $4 (i.e. $4x25% = $1).  In summary, the average food sale is $15 (i.e. $14 meal + $1 dessert).   
• How about hours of operation:  Lunch and/or Dinner? If offering lunch and dinner, one needs to adjust the average according to the price difference and the volume at each time.  For example, if the restaurant focuses on lunch and offers a menu for $12, the average food sales will come down.  If more than half of sales are expected to be made at lunch time (e.g. 2/3 of sales), the average food sales will come down to $13 instead of $15 (i.e. 1/3 x $15 + 2/3 x $12 = $13).
• How about beverages:  Other items in the menu can be added to the average food sales in a similar fashion as done above. 
• How does one come up with menu and prices:  A menu will result from the founder’s vision, target food segment, level of sophistication and quality, existing market offerings (i.e. current players), cost of ingredients, labor and overhead costs, target profit levels, etc.  If one needs to do a quick estimate, general numbers as shown above can be used as shown above.  

 2)  Average number of customers per day can be estimated considering:

• Current volumes of restaurants in the target area:  By gagging volumes of restaurants in the target area one may get an idea of what type of volumes are achievable.  This could be done through observations, article research, word of mouth, etc.
• Target population of serviced area:  This consists of the number of people in the geographic target area, with the characteristics of a target customer (e.g. the restaurant may target single professionals).  For example, if the restaurant will market to customers at driving distance (e.g. destination restaurant), the number of customers can be estimated within a certain mile radius (e.g. 5 miles considering of a 10-15 min drive).  This data can be obtained from the census office (online or over the phone) or at the local library databases.  With this data, one can estimate the percentage of people coming to the restaurant by assuming how often they will eat out Indian food, combined with marketing efforts (e.g. direct marketing, events, etc.).  If the restaurant will market to customers walking or driving by (e.g. convenience restaurant), one may estimate street traffic by through observations and target population within walking distance.  With traffic data, one may estimate a conversion rate (i.e. number of people who will enter the restaurant vs. number of people passing by). 
• Restaurant capacity:  Another variable to consider is how many customers can be served per hour.  For example, how many customers can be seated per hour and served according to target quality standards. 

 With the resulting numbers, the average daily revenues can be calculated, which multiplied by the number of days open in a year will result in yearly revenues.  Other factors to consider include:

• Variations in customer’s volume during different days of the week (e.g. weekend vs weekdays).
• Expected customer’s growth during the first year and onwards, depending on the forecasting horizon.