There are many good reasons to be a part of Facebook groups. Comradery, marketing ideas, recipes, venting and bragging are just a few. There are, however, some areas where Facebook groups are not the best source of good advice. Those areas are anything legal and anything tax related. Asking for contracts or business structure advice is like asking a chef to represent you in court. Oh wait! That is what people are doing.
This week’s questions: Which should I use, LLC or sole proprietorship? Gets answered with the completely incomplete: “LLC protects your personal assets in case of a lawsuit.” Yes, LLC’s are able to do just that, BUT certain things have to be in place to maintain that protection. Not the least of which is proper accounting of cash flow. Small business owners have a very bad habit of grabbing cash out of the register (if they even have one) and using it for personal expenses. Likewise, an owner will use personal money to purchase something for the business without proper accounting documentation. Guess what happens when this owner gets sued for food poisoning? During the trial the opposing lawyer shows unaccounted for cash income and unexplained expenses, demonstrating the business is really an extension of the owner’s personal wealth and not a real business. Now everything, both personal and business, are on the table to pay for the lawsuit.
According to nolo.com the most common factors that courts consider in determining whether to pierce the corporate veil are:
This question: When will I show a profit? Goes hand in hand with the LLC veil piercing “inadequately capitalized” test. Every bit of cash that goes into your business BEFORE you open to the public has to come from some place and should have some paper trail explaining its origin and how the business will repay those funds to the investor. Even if the investor is the owner all that cash should be considered a loan to the business with a repayment schedule just like a bank note. Financing from a formal source as well as owners and investors simply means the business has debt. Just like 98% of businesses in America. Those debts have a known monthly payment. That payment is just like every other expense your food business has.
As owner you should know the EXACT the amount of money your food business requires to breakeven for a single day. That breakeven point includes all loan repayments, expenses and inventory. E.g. your break even is $200 so your sales goal HAS to be at least that much. Guess what happens at $201? The only thing coming out of that dollar is whatever it took to produce the food. If your variable costs (see this video for an explanation) are 35% you have made a PROFIT of $0.65 for the day. If you hit $400 in sales your profit is $130 for the day.
I know, I know. What about buying food for tomorrow? Everything you consumed to make your food (ingredients, propane, gasoline) is covered either as a fixed cost (propane, gasoline) or a variable percent (food and paper) within that $400 of total sales. Meaning you have already paid for everything you used today and that money is in your hands right now to buy more to use tomorrow. If your food cost goal is 28% and you made all your products EXACTLY to your recipes with no waste you should only need to buy $112 worth of inventory for tomorrow.
TIP – The best way to control your food cost is to only purchase what you need when you need it.
Know your total inventory dollar amount on hand and how many sales dollars that it supports. E.g. $216 in inventory with a 28% food cost goal will cover $771.42 in sales. If you portion and serve your food perfectly while your guests only order what is in stock you will not need to restock until sales hit $772.00
Bottomline is you should technically show a profit from day one or at least week one. Will you be debt free? NO, but you should be able to make all your loan payments and business expenses with money left over. If you are not making a profit you needed my help yesterday and your business tomorrow may not come if don’t call me today.
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I have had a passion for helping people since an early age back in rural Kentucky. That passion grew into teaching and training managers and owners how to grow sales, increase profits, and retain guests. You’ll find a ton of information here about improving restaurant and food cart/trailer operations and profits. Got questions? Email me at Bill_Moore@live.com