How to Start Your Own Hospitality Business: The Complete Finance Guide

Starting your own hospitality business, such as a restaurant, bar, hotel, or nightclub, can be an incredibly rewarding but challenging journey. With 25+ years in the industry, owning my own establishments and working from the bottom to the top since 1992, I’ve learned a thing or two about what it takes to launch and run these types of businesses successfully.

In this complete guide, I’ll share everything you need to know about the finance side of starting a hospitality business. We’ll cover:

• Raising Capital
• Budgets
• Operational Costs
• Renovations
• Leasing vs Renting vs Buying

And much more! Whether you’re looking to open your first pub or your fifth hotel, read on for my best tips to get your hospitality venture financed and off the ground.

Step 1 – Raise Enough Capital

The first and most important step is financing. Without proper funding, your hospitality dreams will not come true.

You need more money than you think you’ll need. If you’re buying a property, budget for the purchase price, all closing costs, licenses, permits, renovations, equipment, inventory, operating expenses for at least 3-6 months, and a contingency reserve.

The ideal scenario is to purchase the building and business outright. This gives you the most control and flexibility if things don’t work out as planned. You can sell, rent out the space, or repurpose the property.

If buying isn’t feasible, a long-term lease of 5+ years is the next best option. Ensure your lease terms allow you to exit early, if needed, for a predetermined fee. Month-to-month rental agreements offer the most flexibility but the least security.

Explore all financing options – your savings and investments, partners or investors, small business loans and lines of credit, financing from equipment leasing companies or distributors, and crowdfunding. Get professional legal advice to protect all parties.

Forecast realistically – create detailed financial projections for your best and worst-case scenarios. Build in contingencies and overestimate expenses. It’s much better to have leftover funds than come up short.

Have at least 6 months of operating capital before opening day to cover expenses as you ramp up. Consider 12 months of capital for high-risk ventures with long ramp-up times.

Document everything—keep meticulous financial records and have formal agreements with all partners and investors. This will avoid misunderstandings down the road.

Step 2 – Master Your Budget

Once capital is secured, you need a well-planned budget to allocate it correctly. Track every penny spent to keep spending aligned with your original business plan.

Break out all start-up costs, such as purchasing or leasing your property, licenses and permits, legal fees, renovations, equipment purchases, inventory, marketing expenses, insurance, initial staffing, etc.

Estimate operating expenses – rent/mortgage, payroll, taxes, utilities, maintenance, cost of goods sold, payment processing fees, advertising, accounting services, etc. Some fluctuate with sales volume, others are fixed.

Factor in reserves and contingencies for unexpected repairs, slow periods, and unforeseen costs. A good rule of thumb is 10-15% of operating expenses.

Use spreadsheets religiously – create templates to track daily revenue and expenses. Update inventory, profit and loss statements, and critical ratios weekly or monthly.

Revisit and adjust your budget regularly – especially during the first year as you gather accurate data. Tweak staffing levels, inventory orders, marketing spending, etc.

Watch labour costs—wages are often one of the largest line items. Scheduling too many staff during slow periods can eat into your bottom line.

Don’t overlook theft – institute controls to guard against employee or vendor theft. Require counting/checking cash and inventory daily.

Mind the pennies – scrutinise every expense, no matter how small. They add up quickly. Look for ways to cut costs and operate efficiently.

Following a well-thought-out budget and keeping close tabs on the numbers will pay big dividends as your business matures.

Step 3 – Understand Operational Costs

In the hospitality industry, success boils down to efficiently managing two key operational costs: the cost of goods sold (food, beverage, liquor, etc.) and labor.

For instance, if a dish sells for $10, the cost to make it should be $2.80 or less. Similarly, if cocktails sell for $ 10, your liquor cost per drink should be between $ 2.10 and $ 2.30. These percentages are key indicators of your business’s financial health.

Shoot for 21-23% liquor cost percentage. If cocktails sell for $10, your liquor cost per drink should be $2.10 – $2.30.

Use spreadsheets to calculate precise COGS weekly or monthly—factor in beginning/ending inventory, purchases, waste, theft, promotions, etc.

Implement inventory management: Use parts, place frequent orders to prevent running out of key items, and use FIFO (first in, first out) inventory rotation.

Standardise recipes and portions to minimise waste and ensure consistent quality. Weigh/measure portions.

Use labour management software to schedule, track hours, and see weekly payroll costs. Match schedules to sales patterns.

Cross-train employees so you have flexibility in scheduling during slower periods. Incentivise top performers.

Hire carefully—take time to assess candidates’ skills and fit. A stellar team is invaluable, but moderate hires can sink you.

Consider running payroll biweekly rather than weekly. There are typically 26 pay periods per year and biweekly can save 2 days of payroll expenses.

Diligent oversight of COGS and labor is required to maintain profit margins in this low-margin industry. If costs creep up unchecked, profits suffer.

Step 4 -Factor in Build Out and Renovations

For newly purchased or leased spaces, you’ll likely need renovations to adapt them to your concept. From flooring to lighting fixtures, this can be a huge expense.

Prioritise must-haves—focus first on critical systems like electric, plumbing, HVAC, and fire safety, then tackle cosmetic improvements.

Have professionals inspect foundations, roofs, electrical, plumbing, and HVAC before signing a lease or closing on a property. Fix significant issues upfront.

Choose durable commercial-grade finishes, fixtures and equipment – avoid flimsy residential grades to reduce maintenance and replacements

Stick to a renovation budget – it’s easy to get carried away improving a space. Scale back plans if needed to avoid cost overruns.

Complete renovations efficiently—work overnight or on closed days to minimize disruption. The timeline should support a prompt opening.

Consider phasing larger projects – open first with basic renovations completed, then tackle expansions in future phases.

Use reputable contractors/tradespeople you or your network can vouch for. Get bids from 3 companies for comparison.

Create detailed scopes of work—be very specific about materials and exactly what’s included. Leave no room for misinterpretations.

Hold retainage from payments—typically 10% of each invoice—to have leverage in case of disputes and to enforce completion per contract terms. Pay retainage when the job is done.

Inspect the work thoroughly at each phase and before final payment to identify and correct any deficiencies. Document with photos or video.

Renovation projects often take more time and money than expected. Careful planning and contracting will help you stay on time and budget.

Step 5 – Buy, Lease or Rent Your Location

One of the biggest financial decisions you’ll make is whether to purchase your restaurant, bar, or hotel location, lease the space, or rent it out month-to-month. Each option has pros and cons.

Buying offers the most control – you can renovate and design the space to suit your needs and tastes without landlord restrictions. Your asset value also builds as you pay down the mortgage.

Leasing provides security – options over five years give you time to establish your brand and gain a following without concern over losing your space.

Renting offers flexibility—if your concept tanks or you get a better location offer, you can relocate without being tied to a long-term lease or mortgage.

Study sales history – ask to see past sales figures when taking over an existing space. Review competition and area demographics.

Hire lawyers to review contracts – they can often negotiate better terms. Look out for restrictive clauses, hidden fees, and personal liability.

Understand operating expenses—factor in utilities, insurance, taxes, and maintenance. Some leases make you responsible for some or all operating expenses.

Get to know your landlord – an antagonistic relationship can ruin your business. Look for partners willing to collaborate.

Have an exit strategy. Make sure you know renewal terms, purchase options, sublet, and early termination clauses. Know your contingencies if you need to move.

Taking the time upfront to understand leasing or buying options will thoroughly prevent nasty surprises.

Key Takeaways

Starting and running a successful hospitality business takes careful financial planning and management. Here are some key tips:

• Raise plenty of capital – at least six months operating expenses – before opening
• Create detailed budgets and stick to them
• Constantly monitor revenue and expenses
• Control costs – food, beverage, labour, rent, supplies
• Institute procedures to prevent theft
• Renovate intelligently
• Understand lease and ownership options fully
• Hire professionals – legal, accounting, and contractors
• Watch every penny – success lies in the details

With proper funding, number crunching, and sweat equity, your dream of owning a lively restaurant, bar, inn, or club can become a prosperous reality. I wish you the best of luck in your exciting hospitality venture! Let me know if you have any other questions.