Improving the prediction of restaurant failure through ratio analysis
1983
Olsen, Michael | Bellas, Carl | Kish, Lynn Ventrice
There are numerous approaches a restaurantuer can use to foresee and prevent business failure. Useful predictors are the financial ratios of liquidity, leverage, solvency, activity and profitability. The best approaches used to predict failure are classified as either the univariate or multivariate approaches. In this study the univariate approach, which is based on liquidity and cash flow ratio, is stressed. Three multi-unit food service operations that had failed were examined, and data were collected and compared to an operation considered successful. The data were ratio analyzed for liquidity, leverage, profitability and asset-utilization for both the successful and unsuccessful restaurant. The ratios between the 2 types of operation were then evaluated to determine their predictive power. The data of selected ratios for 2 different successful/unsuccessful pairings were plotted. The graphs visualized the data, which reinforced the findings of the indicators. More information is needed to determine the full impact of ratio analysis as a predictor of failure in the restaurant business. (kbc)
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