STARTING UP: TOM AND EDDIE'S

This video features the start-up company called Tom and Eddie's, an upscale hamburger restaurant in the Chicago area. Started in 2009 at the height of the great recession, the partners had a difficult time securing bank financing. As a result, they financed the operation themselves with the help of a third partner, Vince Nocarando. The partners both had long and successful careers as executives with McDonald's. Tom was executive vice president for new locations and Eddie was the president and CEO of North American operations. Both partners, as a result of their experience at McDonald's, are well suited for the restaurant business. One of the most challenging and important elements of a successful start-up, like Tom and Eddie's, is a talented financial manager. Recognizing the importance of the financial function, they hired another former McDonald's executive, Brian Gordon, as CFO. Gordon explains that cash flow is the most important element in starting up a restaurant. In fact, cash flow is more important than profits in the first and perhaps second year of operation.

Second to cash flow in terms of importance for sustainability is the management and control of inventory. Cash flow is important, according to the CFO, because of the "known" costs, such as rent, payroll, inventory, taxes, and utilities. These are "known" costs because they are recurring and the relative costs are known on a weekly or monthly basis. CFO Gordon explains that cash flow is important in managing these known costs because of the significant "unknown" factor, which is sales. Tom and Eddie's uses a very technologyintensive inventory management and control system because of the perishable nature of foodstuffs associated with the restaurant business. According to CFO Gordon, the restaurant has "net 14" terms with its food vendors. This means that the invoice is paid 14 days after the receipt of the goods.

This is a form of financing, according to the CFO, that allows the company to turn that inventory once or twice during the 14-day period. At the time of the video, Tom and Eddie's was in its fifteenth month of operation with three restaurants in the Chicago area. According to one of the partners, Eddie, the goal is to grow to 10 stores and then look at franchising the operation. When considering where to open a new operation, Eddie indicates that careful consideration is given to the demographics of the area, including the average income level of those working and living in the area to be served, the age of the population, the square footage of the surrounding commercial space, and ease of access to the location. Equipment is purchased rather than financed by the partners. According to the partners, entrepreneurs think in terms of opportunities, not in terms of potential failure. With 15 months of successful operation, capital will be easier to raise from traditional sources of financing, such as banks, to expand the operation. Who knows, maybe a franchised Tom and Eddie's will be opening soon in a location near you.

1. What are the three factors associated with operating funds, according to the video?

2. What is meant by the term "front of the house"?

3. Why, according to the video, was bank financing unavailable for Tom and Eddie's start-up?