Running a restaurant isn’t easy, and requires a lot of work starting in the kitchen, to the office, and out on the dining floor. However, it doesn’t end there. Math is a key element in the success of your business.
There are several restaurant metrics you need to measure to ensure your restaurant is running profitably. By calculating these metrics, you as a restaurant owner can identify the performance of your restaurant and also determine the areas that require any improvements.
Success is created overnight. It requires thoughtful planning, hard work and execution. The below restaurant metrics will make your job easier and help you determine your areas of concern. In a nut shell all your costs combined effect the net profit of your business; you cannot expect to make one change and see a significant difference. This is why you need to look at your business as a whole and keep a track of all the metrics to run a more profitable restaurant business.
1. COST OF GOODS SOLD (CoGS)
Cost of Goods Sold is the cost required to make each item on your restaurant’s menu. It also represents the total amount you need to spend on the inventory to acquire the raw material required for cooking over a period of time. It helps you determine if the menu items are priced correctly or if the food cost is high.
How to calculate the Cost of Goods Sold
For accurate COGs, calculate them on a weekly basis – same time, same day. Here are the numbers you need for COGs restaurant metrics:
Beginning Inventory: This is the value of inventory you have in your physical location on the designated day/time you do the COGs calculation.
Purchases: What you bought throughout the week from your distributor.
Ending Inventory: The total amount of inventory remaining at week’s end.
This formula will help you calculate the Cost of Goods Sold
CoGS = (Beginning inventory of F&B) + (Purchases) – (Ending inventory)
Technology can streamline the time-consuming process of taking inventory. Make sure your restaurant is using a modern POS system to make your inventory tracking more accurate.
2. LABOR COST PERCENTAGE
The Labor Cost Percentage is the percentage of the revenue that pays for the restaurant labor. It is the second prime expense for a restaurant business after the food cost. In order to yield more profits, this labor cost percentage should be low.
How to calculate the Labor Cost Percentage
Calculate the labor cost percentage of your restaurant using this formula
Labor Cost Percentage = Labor / sales
Use software that integrates with your digital POS to post staff schedules – as 1 in 3 restaurant and bar owners are doing today according to the National Restaurant Association. Labor softwares claim users spend 80% less time scheduling staff and see reduced labor costs of up to 3%.
3. PRIME COST %
The Prime Cost is the total sum of your labor costs and the cost of goods sold(CoGS), including the food and liquor cost. It represents the restaurant’s largest expenses, it affects your entire operations including how you price the menu, create your budget and set the goals for your restaurant.
Knowing – and then optimizing – your prime cost ensures your restaurant is a profitable enterprise. Prime cost is a percentage that shows how much of your total monthly sales are dedicated to covering variable expenses…and how much is left over for your gross profit.
How to calculate the Prime Cost Percentage
Use this formula to calculate the Prime Cost & Prime cost % of your restaurant
Step 1. Prime Cost = CoGS + Total labor cost
Step 2. Prime Cost /Total monthly sales= Prime cost %
Remember prime cost ignores your fixed costs (rent, utilities, and other restaurant metrics that don’t change much). Instead, prime cost focuses on the two biggest variables you can control to become more profitable: labor and COGs.
Work backwards with your restaurant metrics- If you know the net income you want to achieve each month, and your fixed costs are set, you can work on lowering prime costs to increase gross profits – and meet your goal.
4. BREAK-EVEN POINT
The break-even point is one of the most essential restaurant metrics to calculate. It helps you determine how your sales should be performing to earn back what you have invested. You can use this number to forecast how long will it take for you to earn back what you have invested in your restaurant business. It is also a crucial number if you are looking for investors.
How to calculate the Break-even Point
Break-even analysis can be challenging for restaurants: You’re measuring today’s business performance with tools and information based on historical accounting data from the past.
Your break-even point helps you understand how many people — based on a determined average price point per guest — your restaurant needs to serve in order for the business to make money. To do this, it’s important to conduct accurate cost accounting; it’s also important for your point of sale (POS) sales reporting to deliver accurate data on guest averages.
Break-even analysis also focuses on making sense of your fixed and variable costs. Here’s a breakdown of the two.
Fixed costs: These fixed costs are bills that don’t fluctuate from month to month. Fixed costs are things like rent, utilities, and payroll.
Variable costs: These are things like food and drinks, cleaning supplies, labor, credit card processing fees. They are costs that can fluctuate from month to month
Break-even Point = Total fixed cost / (total sales– total variable costs)/total sales
Be sure to revisit your break even point analysis frequently when you have real data to review.
5. FOOD COST PERCENTAGE
It is the difference between the cost of creating a specific item on the menu and the selling price of the food item. This restaurant metrics is important because you have to have an idea about how much you are selling a particular item for and if it is profitable for your restaurant business or not.
The food cost formula is one of the simplest restaurant metrics to run. That’s good news since it’s critical for determining profitability.
Basically, food cost percentage is the percentage of your total sales that are spent on the actual food or drinks. What’s left over is your gross profit. We’ll be referring to food cost in this section, but it works for beverages, too.
Again, the goal is to lower your food cost percentage so you have more profits. But what’s a good food cost percentage?
Ideal Food Cost Percentage: 25%-35%
How to calculate the Food Cost Percentage
Here’s the formula to calculate your Food Cost Percentage
Food Cost Percentage = Item Cost / Selling Price
Don’t forget “extras” when calculating your COGs in these restaurant metrics. It could be the paper wrapping around a burger or garnish.
6. PROFIT MARGIN AND RATES
There are two major profit margins and rates to look at. These are gross profit and net income. Though the two are commonly mixed up, they are technically separate accounting concepts. Gross profit margin indicates the revenues you earn, net of cost of goods sold. This total equals the money that’s used to pay down operational and fixed expenses.
Gross profit does not account for wages, rent, heat, utilities, etc. Those expenses are instead accounted for as part of net income. The net income rate reflects the percentage of total revenue that is truly left over when all costs are accounted for.
How to calculate the Gross Profit Margin
Calculate your restaurant’s Gross Profit Margin using this formula
Gross Profit = (Total sales-COGS)
Gross Profit Rate = (total sales-COGS)/Total Revenue *100
Net Income = (Total sales-Total costs)
Net Income Rate =(total sales-Total Costs)/Total Revenue *100
To improve your restaurant profit margin you need to either increase sales volume relative to your expenses or decrease expenses relative to your sales volume.
7. INVENTORY TURNOVER RATION (ITR)
The Inventory turnover ratio is an important restaurant metric that refers to the number of times your restaurant has sold out its total inventory during a period of time. This number prevents you from overstocking or under stocking your inventory and also keeps a tab on how often you use your entire inventory.
How to calculate ITR
This is how you can calculate your restaurant’s inventory turnover ratio
Inventory Turnover Ratio = [CoGS / (Beginning inventory + Ending inventory) / 2]
You also want to avoid selling out of goods, as this might upset customers and cost you revenue. By studying your ITR, you can optimize your inventory to reach a happy medium.
By constantly monitoring your key performance metrics, you can adapt your strategy and operations quickly and effectively. Running a successful restaurant is hard work, and finance is just one small part of it.
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See you next week!
Your devoted hostess,