Cash Flow Lessons from The Profit: Honest Foods Catering

The Profit TV show airs on Tuesday nights, 10 pm on CNBC. Last night’s episode featured Honest Foods Catering, a caterer in Chicago.

As we move through the season, the episodes are providing less and less financial data. Still, each episode is packed full of valuable lessons for small business owners. Let’s dive in! Read the blog post below or listen to me read it in the video below.

The Facts

  • Honest Foods Catering is a catering business in Chicago
  • The business was started in 1997 by Tad Devlin with $3K
  • 80% of its revenue is received from the film industry when movies or TV shows are filmed in Chicago
  • 12 employees
  • Year 2015
  • Gross revenue $1.312M
  • COGS $302K
  • Overhead $905K
  • Profit $105K or 8%
  • Marcus says an 8% profit is “not bad”
  • Each year the business grew until this year, with revenue being down 30% this year
  • Cash in bank $10K
  • Kitchen has 90 hours of capacity and Honest Foods is using only 60 hours of it
  • Marcus wants to add two food trucks to smooth out revenue

Analysis

  • COGS is 23%, which is great. Most restaurants strive for 50–60%, and catering should be less because FOH (front of the house — servers, hosts, waitstaff) labor is less. Restaurants often have idle FOH, where there is conceivable zero idle labor in a catering business.
  • Overhead is 70%, and this is high. I also can’t imagine how overhead can be so high when the kitchen space appeared small. Unfortunately, they did not provide information on what made up the $905K in overhead. Most of the time, when overhead is high like this, it’s because of fixed management salaries, rent or interest related to debt.
  • The business is using 66% of its capacity (the kitchen), bringing in $1.312M in revenue. This means each hour per week of capacity earns $416. If the businesses can increase its sales and use the 30 hours of idle capacity, it can increase it’s gross revenue by $649K/year. Remember, the kitchen space is a fixed cost. The business pays for that space whether it’s being used to generate revenue or not.
  • Adding two food trucks will bring in an additional $180K in net profit per year.
  • Each truck will cost $50K-$60K to purchase and rehab
  • Each truck will bring in $300K gross sales per year, or $600K/year
  • Assume 30% COGS, the gross profit is $420K/year
  • Assume $10K/mo additional cost over and above COGS to operate the trucks, $240K/year
  • Equals $180K/year in net profit

Lessons Learned

  • The most important take-away from this episode was revenue diversification. Honest Foods Catering relied too heavily on the film industry filming in Chicago. Most small businesses encounter this problem. See my blog post, Cash Flow Lessons from The Profit — DiLascia — California TShirts, for the steps to determine if your business is relying too heavily on one customer. It’s not always about percentages.
  • I’m not 100% convinced that the food truck idea was the best way to diversify the sources of revenue, and I think Marcus is using Honest Foods to test out the food truck business. Food trucks are a very attractive business because of the low overhead. Adding a food truck business was not diversifying the customer base, this was diversifying the sources of revenue and adding a profit center. The food trucks did nothing to increase brand awareness of Honest Foods Catering as one sold grilled cheese sandwiches and the other sold shaved ice. I would not have done this. I would have made efforts to increase the customer base such as catering for faculty departments at Northwestern University and for Chicago’s top corporate employers.
  • Marcus said he moved into the food truck business to reduce the unpredictability of revenue. This is a different problem than customer diversification, and it’s a valid point. We would all like our revenue to be smooth and predictable during the year. However, this is impossible in some industries. If you choose to run a seasonal business, then become an expert in how to manage and smooth out your cash flow during the year. See my blog post, Cash Flow Strategies for a Seasonal Business. If seasonal and unpredictable revenue create stress and anxiety for you, then consider other related profit centers that will reduce revenue fluctuation. You should know your strengths as a personality-type, a business owner and a leader and operate in an arena that uses those strengths.
  • This episode spent a lot of time on the owner’s management style. If you’re a business owner that tends to micro-manage, watch this episode. It will give you insight into how it makes your employees feel and how it sabotages what you’re trying to do. Tad micromanages and gives employees conflicting instructions from moment to moment, especially in the pressure-laden hours right before a catered event is about to begin. Tad said, “I get so scared that if something is not right, I’m going to lose my business.” Marcus said, “A boss should tell everyone it’s going to be okay, not pour gas on the fire. He (Tad) worries that people aren’t doing their jobs, then he interferes, then he wonders why people can’t do their jobs.” Tad was given constructive feedback from Marcus and his employees, and he appeared to have made some changes.
  • Tad also failed to let his employees know he was moving into the food truck business. The employees felt blindsided and resentful. They wondered why money was being spent on business expansion when they were not being given raises or bonuses. Marcus vied for the employees’ buy-in by telling them they would receive bonuses from the food truck revenue. When you make major business decisions, always communicate with your employees and ask them for ideas and opinions. If it is a decision that will increase revenue based on them doing additional work or learning new skills, create an incentive program so they can share in the profits.

Join me next Wednesday for another blog post of The Profit.

Please note: The assumptions and opinions here are for teaching purposes only. I in no way mean to insult or throw shadow on anyone’s character or business acumen. I understand that very limited facts are presented in the TV show, and I’m aware that there’s always more to the story.