I Visited A Local Restaurant And Noticed Large Plates Of Food & Low Prices. This Is Not A Good Idea!
Updated: May 4
We get it.... when you serve your customers you want to make sure they're happy and they return for more so you pile on the food and drop the prices. This is a typical strategy for many new restaurant owners however there is a reason that most restaurants have smaller portions and higher prices and it has nothing to do with who their customers are!
Let's say that your restaurant is running a 40% food cost and 35% labor cost. The average restaurant will also have fixed costs and other operating costs that average out to about 25%. As you can quickly see, your total expenses will be 100% of your revenue which means that you will make no money!
Example: let's say that last month your restaurant made $100,000 in revenue but you spent $35,000 on labor, $40,000 on inventory, and $25,000 on other expenses. This would mean that your restaurant generated a $0 profit for the period. Now, what if I told you that your competitor across the street had very similar numbers but a very different outcome.
Your competitor's revenue was also $100,000 however they only spent $28,000 on labor $32,000 on inventory and $24,000 on other expenses making their net profit $16,000. In this article, we'll provide you with tips on how to control your cost and a budget for each.
It's not about how much revenue your restaurant can generate, it's about how much of that revenue your restaurant gets to keep!
When it comes to maximizing profits for restaurants, the two biggest expenses include labor and inventory. Both can be challenging but it should be very clear that allowing either one of these expenses to go over budget can cause unsustainable problems!
Understanding Your True Inventory Cost
As a restauranteur, you should be very familiar with the term COGS which stands for Cost of Goods Sold. Technically your COGS would refer to the value of items that you actually sold. For example, if you sold 50 beef patties and each patty cost $1.25, your COGS would be (50 x 1.25) $62.50 but this is only 1/2 the story.
Unfortunately, our industry is notoriously known for having a problem with inventory losses which can come from a number of different things such as:
Failure to properly cost out recipes
Pricing our items incorrectly
Inconsistent unmeasured serving sizes or excess portions
Insufficient software tools for cost accounting and reporting
Staff eating and drinking for free
Customers eating for free
Bad habits by owner or managers
Calculating your cost of goods sold is fairly simple however you need to go beyond just knowing the cost of what was sold, you'll also want to make sure that you're not losing inventory. In order to determine if your restaurant is losing inventory, you will need to actually count how much inventory you have on hand and apply the following formula:
Beginning Count + Purchases - Ending Count = Inventory Used
Example: On June 1st Jack counted 20 steaks and 13 bottles of Vodka. From June 1st thru June 30th, Jack purchased 100 steaks and 15 bottles of Vodka. On July 1st Jack counted 9 steaks and 20 bottles of vodka. If we follow the formula above (beginning count + purchases - ending count), our report will look like this.
Steaks: 20 Beginning + 100 Purchased - 9 Ending = 111 Used
Vodka: 13 Beginning + 15 Purchased - 20 Ending = 8 Used
This formula would tell us how much inventory was removed from our shelves so now we want to compare it to what was actually sold in our POS. So let's say that according to the POS, from June 1st through June 30th your restaurant sold 89 Steaks and 5 bottles of vodka. Your report would look like this.
Steaks: 89 Sold - 111 Used = -22 unaccounted for
Vodka: 5 Sold - 8 Used = -3 unaccounted for
Based on this example, the restaurant lost 22 steaks and 3 bottles of vodka during the month of June.
By simply looking at your purchases it would be extremely difficult to know exactly how much inventory you're losing but it can also be challenging to make these calculations. This is why we encourage you to invest in technology. Programs on the market like Skrible can offer a lot of help. The Skrible app works for both food and alcohol, it helps to calculate and store your recipe cost, automatically collects data from most POS systems, allows your restaurant to re-order inventory items via their mobile app, and includes an interface that restaurants can use to count their inventory. (Starting cost $49 per month)
Aside from Covid-19, labor cost has always been one of the biggest threats to the restaurant industry and that threat is only expected to grow as we continue to see minimum wage levels increase throughout the country.
We've seen restaurants with labor costs as low as 18% and as high as 40% but unless your sales are extremely high or your alcohol sales account for at least 60% of your sales or the owner is working in the restaurant but not taking a salary, your labor cost will probably never be below 25%. Realistically, however, setting a goal that allows you to keep your labor cost below 30% of your gross sales will likely be more achievable.
Calculating your labor cost is simple but understanding how to control it is a bit more complicated. Here are a few tips:
Too many menu items can cause your labor cost to be higher than necessary
Not analyzing or breaking down your labor cost by position such as line cook, prep cook, host, bartender, barback, dishwasher, runner, bar manager, general manager can make it more difficult to discover problems.
Not budgeting or creating a schedule based on your budget
Failing to properly train staff can cause added stress and additional labor hours
Cross-train your staff. On slower days, your employees should be able to do multiple jobs which will help save a position that might not be as busy (like host) on a slow day.
Stage the restaurant, especially the kitchen for efficiency. A kitchen that is set up inefficiently can cause employees to move around excessively which in turn will slow everything down.
Ideally, you want to monitor your labor cost each day but compare it to the budget on a weekly basis because of the fluctuation in sales. On Monday your labor cost might be as high as 60% because of lower sales while on Saturday your labor cost might be in the mid to low teens because of higher sales but overall, by the end of each week, you should hit your goal.
To help better control your labor cost we always recommend you invest in a software platform like 7Shifts. It has mobile apps for your employees, it helps with budgeting and includes a host of other tools. (Free for 10 or fewer employees)
Fixed, Variable and Operating Expenses
Fixed cost are those cost which does not change in response to how you operate. An example of fixed cost is rent, insurance, leases, and salaries. With fixed costs, you always want to negotiate the best deal upfront. For example - rent should be no more than 6% - 10% of your gross revenue.
Operating cost are those cost which may or may not change in relation to how your restaurant changes however they are necessary in order for your restaurant to operate. Excluding inventory and labor, an example of operating expenses might be utilities, taxes, and supplies.
Variable expenses are those cost which may or may not change in relation to how your restaurant change and they may or may not be necessary. Operating expenses are also typically categorized as variable expenses. An example of variable expenses that are not necessarily required for operating includes marketing, consulting, contract labor, accounting, repairs and linen.
Keeping track of these costs can be easily done in software programs like Quickbooks which is made for people with or without accounting experience as it allows both you and your accountant to work together or independently. (Starting cost $26.95 per month)
Operating a restaurant is not an easy task, especially now, but it's not an impossible task either. A good rule of thumb is 30% food cost (18% bar cost), 30% labor cost, 12% fixed cost, 12% variable/operating cost.