Cost vs. profit in running a resto

Dear Nanay,

Thank you for your very informative column. You serve as an inspiration for all of us small business owners who dream of becoming an entrepreneur like yourself someday.

My husband and I own a small restaurant. It has always been our dream to own our own restaurant and a few years ago we decided to finally take the plunge.

Currently, our restaurant is having a hard time making ends meet mostly because of the high rent. We are being offered another space across the street. I don’t know if it is as good a location but the space is a little smaller and the rent lower. We really want to transfer already because the lower rent will allow us to make a profit but there is also the big transferring cost. We cannot decide if it is worth it. How do we decide if it is worth it to transfer? What are the things we should consider?

 — Jess AND Malou

Dear Jess and Malou,

As we always hear, there are three secrets to a successful retail business: location, location and location. Of course, this may be a bit of an exaggeration, but it is an important rule to remember for retail. The location of your store is crucial and possibly the single most important factor you need to consider when opening a store.

Given your current situation, it is already apparent that you are not going to make money in your current location. Is the space across the street better or worse? Only you can answer that. However, if you are confident that the space across the street can generate at least as much business as the current location, then it will be an easier decision to make.

Assuming your sales will be the same, then you can just take your transfer cost and divide that by the savings you will create by moving across the street and that will be your “payback period.”

For example, your current rent is P100,000. The rent across the street is P50,000. Your transfer cost is P500,000. Then P500,000 divided by your savings of P50,000 gives you a 10-month payback period. That means assuming your sales stay the same, it will take you 10 months to recover your P500,000 investment. That’s not too bad.

Don’t forget you need to factor in all your savings in the smaller space. Perhaps you will need fewer personnel? Will you save electricity from smaller air-cons? Will you need fewer lights?

Also important to consider is if you think you will become profitable because of the savings. You cannot run your business at a loss forever. You cannot survive on supplier credit indefinitely. It will eventually catch up on you. So if you project that you can make a profit by moving to the smaller space and you can recover the investment in 10 months, then it definitely sounds like a good idea to transfer to the smaller space.

Good luck!

Sincerely,

Nanay

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