If you own or run a restaurant, you know just how difficult it can be to maximize profit margins and manage capital over time. Many restaurants often don’t last for the long haul. But just why do restaurants fail?

For many, opening their own restaurant is a dream, but it’s important to know that the failure rate restaurants experience is high. However, understanding the signs of a failing restaurant, along with how to prevent it, can ensure long-term success for your business.

restaurant table set with dinnerware

Schedule a demo with Integrated Cash Logistics and learn how CashSimple® shortens your distance to cash.

How Often Do Restaurants Fail?

Before opening a restaurant, it’s imperative to understand just what kind of venture you’re starting. So, how many restaurants close within the first year? Statistics show that the average lifespan of a restaurant is brief, with 60% shutting down within the first year.

Furthermore, the percentage of restaurants that fail within the first five years increases to 80 percent. The challenges of opening a restaurant, such as finding a prime location and ensuring successful cash flow management, can quickly take a toll on how well restaurants perform.

With the national profit margin of restaurants only being 10.66%, it’s important to understand how many restaurants fail and how to prevent this before starting your business.

11 Reasons Why Restaurants Fail

So, just why do most restaurants fail? While the restaurant failure rate may seem daunting, many of the reasons that restaurants go under are preventable – as long as you know what to look for. Recognizing the following challenges early on can make the difference between success and failure for your business.

restaurant owner and manager making plans for business

Learn the benefits of cash management technology and how it can transform the way you do business.

Lack of Vision and Leadership

If you’re curious about what percentage of restaurants fail and why this is, one of the most telling signs is a lack of leadership or direction. Not only does this lead to confusion in daily operations, but it also creates issues with the restaurant..

  • Branding
  • Concept
  • Customer experience
  • Overall direction

Restaurants must have a strong vision and the knowledge to follow through on this to create a cohesive – and successful – experience for diners. Having a unique brand identity will make restaurants stand out from the crowd and increase the restaurant’s success rate.

Insufficient Working Capital

Many struggling restaurants fail due to underestimating how much working capital they need to cover both startup and operations costs. This is especially true during potential slow seasons for your restaurant, which will differ depending on where you’re located.

The average life of a restaurant can directly hinge on how well capital and profit are managed. Before leaping into a new venture, ensure you have enough capital to handle the following expenses:

  • Security deposit for your restaurant’s location
  • Rent for at least the first few months of operation
  • Cooking and operational equipment, such as grills, ovens, point-of-sale systems, and enough refrigerator space
  • Furniture for customers, such as tables and chairs
  • Advertising and signage costs
  • Labor costs
  • Potential pitfalls or unexpected issues, such as equipment repairs or slow seasons

High Operation and Food Costs

Many restaurants go out of business due to high food costs or operating expenses. Food costs are almost always rising, meaning that these expenses can quickly get out of hand if you don’t have the knowledge or cash-handling skills to reduce risk. Additionally, operating expenses, like rent, utilities, and staff wages, can erode profits if they’re not managed properly.

Restaurants that are struggling with these issues can monitor and control these issues in many ways, such as investing in a smart safe solution that increases the amount of time managers spend on the premises while reducing the risk of incorrect accounting.

friends gathered at a restaurant table and toasting each other

ICL’s software-first CashSimple® solution streamlines everything from change orders to tracking deposits.

Not Adapting to New Technology

Restaurant success statistics also often hinge on adopting new technology as needs arise. While this technology may seem like a luxury to many, it’s often necessary to streamline processes and enhance overall customer experience. In many cases, streamlining tools like using CashSimple® by Integrated Cash Logistics for your cash handling needs can reduce headaches and increase reporting efficiency.

New technology can streamline processes making business operations run smoother and more efficiently. To reduce the risks associated with falling behind, explore opportunities to use technology to your advantage in many key areas of your restaurant business.

  • Online ordering systems
  • POS systems
  • Smart safes, updated security measures or cash handling services
  • Mobile apps for your location
  • Delivery apps, such as DoorDash

Insufficient and Ineffective Marketing

Insufficient or ineffective marketing can also have an impact on restaurants that have failed. If there isn’t enough marketing to let potential customers know that you’re there – or if the marketing is reaching out to the wrong group of people for your niche – this can drastically decrease visibility and reach.

It’s imperative to have a strong marketing strategy, both online and offline, to attract and retain customers for your restaurant. This includes social media marketing, paid advertising online, print advertising or commercials. One of the most valuable and impactful tools of marketing that costs little to nothing, is to encourage customers to leave reviews and promote your business to friends and family.

Poor Location

Possibly one of the most noticeable signs a restaurant is failing is if it’s in a poor location. Restaurants in a location with low foot traffic, poor visibility, or expensive rent can quickly experience a drastic decrease in revenue, affecting overall performance.

Before opening a restaurant, ensure you look into a location that fits your target market and is in an area that experiences the traffic you require. Some tips on how to do this include asking yourself the following questions:

  • How densely populated is the area?
  • Are there any competitors nearby?
  • Is there accessible parking, or is it safe to walk to?
  • What is the clientele like in this area?

No Industry or Business Experience

Even if your restaurant’s food is delicious, your restaurant can quickly go under if you or your managers don’t have enough industry experience in running a restaurant. The restaurant industry is tough and there are many needs to juggle depending on busy seasons, trends in food or beverages, holidays or events in the area, hiring the right staff, and more. It’s imperative to either have industry experience – or partner with someone who does – to keep your business alive and running for years to come.

person paying waiter for meal using a card

Outsourcing to a solution like CashSimple® can solve the hidden costs of cash-in-transit services.

Inconsistent Food and Service Quality

Many failed restaurants can be attributed to inconsistent food quality or poor customer service. This can quickly lead to negative reviews or word-of-mouth marketing, hurting repeat business and affecting potential new customers as well. This is especially true of restaurant chains that fail, as handling multiple locations can become difficult.

Restaurants must strive for consistent customer service and impeccable food quality, as this helps build customer loyalty.

High Staff Turnover

Many restaurants struggle due to high staff turnover and additional training costs. In fact, the restaurant industry is notoriously known for high turnover rates, with the national average being 75% annually. However, many restaurants can reduce turnover by creating a positive work environment that encourages and supports its employees instead of focusing solely on profit or margins.

Competition and Saturation

The saturation of restaurants in your area can drastically affect how well your location stands out and attracts new customers. For example, if your restaurant focuses on Italian cuisine and the area you move into already has eight of the same type of restaurant in a couple block radius, this can make it difficult to find a loyal clientele.

Utilizing a unique selling proposition and investing in effective marketing can help your restaurant differentiate itself from competitors.

Sweeping Economic Challenges

Many larger economic challenges can affect why restaurants fail, especially for failed chain restaurants across the nation. These issues can range from:

  • Inflation
  • Rising rent prices nationwide
  • Economic downturns

To combat these challenges, restaurants need to have a flexible business model that mitigates these risks, along with a strong financial buffer.

restaurant manager reviewing her paperwork and documents on laptop

Banks charge fees for cash deposits and countless other expenses. Learn how to avoid them and streamline how your business controls cash.

7 Ways to Prevent Restaurant Failure

As you can see, there are many reasons why restaurants fail. However, there are multiple, concrete actions that you can take to avoid these pitfalls and create a flourishing restaurant that beats the odds. Fortunately, there is more than one way to prevent your restaurant from failing.

Ensuring Adequate Working Capital

Before even opening your location, make sure you have enough working capital to cover startup costs and sustain operations during slow months. Having a financial safety net that helps you handle unforeseen expenses, such as equipment breaking or potential building repairs, can ensure you stay on top of your cash management.

Using Technology to Your Advantage

Adopting modern technology is more than just a fringe benefit – it can directly impact how well your location performs. Investing in smart safes that provide automated cash reconciliation or advanced online ordering platforms can improve efficiency and enhance the customer experience.

Investing in Marketing

Marketing can drastically affect who finds your restaurant. In today’s ever-growing online world, it’s especially imperative to have a strong internet presence using different best practices:

  • Social media efforts
  • Search Engine Optimization (SEO) practices
  • Email marketing campaigns

Good marketing can drive repeat business for your restaurant and boost overall brand visibility and awareness.

Implementing Strong Financial Management Practices

After ensuring you have enough working capital to start your business, it’s also important to implement financial management practices that keep your business running for the long term. This includes practicing effective budgeting, cash flow tracking, and financial reporting to maintain overall financial health and profitability.

Listening to Customer Feedback

Your customers are what keep your business moving forward, so you need to listen to and actually act on customer feedback. This includes direct customer feedback about their dining experience but also noticing trends in menu items or peak hours. Are your menu prices reasonable? Are you staffed appropriately at the right times? Do menu items sell out frequently, or not sell at all?

Paying attention to these details will improve your overall operations but will also show your customers you take their feedback seriously, fostering customer loyalty.

Controlling Food and Labor Costs

While it’s normal for food costs to change from month to month, it’s important to closely monitor how much you’re spending on food and ingredients so you don’t lose track. The same is true for labor costs. Some ways to help control these costs include optimizing your staffing levels and streamlining financial operations with a solution like CashSimple®.

Creating a Positive Work Environment

Fostering a positive and supportive work environment is a priceless way to retain staff, improve morale, and provide consistent service to customers. Make sure staff knows you truly care about them and are invested in their success, as this will show them you see them for more than just a means to an end.

Simplify Restaurant Cash Management With CashSimple® from Integrated Cash Logistics

Are you looking for ways to enhance your restaurant’s profitability and ensure it stays financially healthy for the long term? Integrated Cash Logistics and our cash capture technology offer an innovative solution for your needs. CashSimple®, our all-inclusive cash management system, allows you to streamline processes such as cash handling, deposit management, and accounting, all with our single point of contact solution.

We’re here to help your restaurant run as smoothly as possible so that you can spend more time doing what you do best – running your business. Whether you’re running an independent restaurant or managing numerous franchise locations, CashSimple® has the support you need to drive success. To learn more about how we can help, reach out to our team to schedule a demo.