Knee-deep in an accounting engagement, I thought it was an appropriate time to write about financial metrics. For a lot of people, crunching numbers just isn’t their thing—getting creative in the kitchen, socializing with regulars, or even the rush of Saturday night dinner service is a welcome challenge. Well, it doesn’t necessarily have to be your thing. As I’ve said before, you can’t do it all, and you’ll be miserable trying. Outsource the stuff you don’t like to do you or where you don’t excel. But before you outsource too much, you can implement systems to efficiently track your performance. These systems will enable you to make insightful changes to ensure profitability and longevity.
So what does this mean, really? There are benchmarks in the industry you should be measuring your business against regularly so you can make timely changes to reach them. If you’re only measuring quarterly or annually, it’s likely too little, too late. If you’re operating full time, you should be measuring your prime costs at least on a weekly basis. If you have a part time operation, or one that is events-based like our friends at Food Underground, you should be analyzing each job’s performance. You should know at every step of the way, where you are making and losing money.
The average profit margin for the restaurant industry is only about 5 percent, so you can see how every penny counts. Consider each cost as a percentage of sales. The largest are food and labor costs (prime costs), which make up about 60-70 percent of the total, followed by occupancy costs. According to restaurantowner.com, when operators track their prime costs on a weekly basis, they typically add 2-5 percent or more to their bottom line. I can attest to that. With the right systems in place, you can track (or delegate tracking costs) easily. Analyzing and making changes might require some assistance at first, but in no time you’ll be on the right track to profitability!
Occupancy Costs – If you’re just starting out, this may seem like a shot in the dark. You should have a financial forecast as part of your business plan that will give you an idea of what you’re sales goals are. (Contact me if you need help with this.) This will be a function of how many people you expect to come in on any given day and the price point of your menu. Occupancy costs should not exceed 10% of your sales, so when you feel confident in your sales forecasts, take that into consideration before signing a lease. If you’re already operating, you may want to try renegotiating your lease if you’re not hitting this target. Occupancy costs include rent, CAM, insurance, real estate taxes, and utilities.
Cost of Goods Sold – aka COGS. This can be broken down further into food costs, alcoholic, and non-alcoholic beverages, but overall, they shouldn’t exceed 28-32 percent of sales (maybe a little higher if you’re choosing organic or sustainable foods like I did). So what happens when your costs exceed this percentage? For me, figuring this out is the fun part! Your pricing is off. Your costs went up (vendors tend to not let you know about price increases all the time). Your portion control is, well, out of control. You have too much inventory on hand, which makes it easy to grow legs and walk out the door (check the linen or trash bags). Employee discounts aren’t being enforced. I could go on. I know what you’re thinking—“could this all possibly be going on under my nose?” The answer is “yes.” And you wouldn’t be aware of it unless you were tracking your costs on a weekly basis. Now, don’t go off the rails and scare off your entire staff (that’s the other part of prime costs to keep in mind). Stay cool and implement systems to get your costs under control.
Labor Cost – Your total payroll cost, including manager salary and benefits, should not exceed 25-30 percent of sales. Again, this should be tracked on a weekly basis. As you develop your labor budget, take into consideration the trends from the week before (hopefully your POS system can track hourly sales and labor costs), any upcoming events, the weather forecast, and the season. These will all have an effect on scheduling, which can cost you whether you’re under or over staffed. Other things to consider are the costs of turnover, training, and legislation changes like last year’s paid sick leave bill in Philadelphia and the looming minimum wage increase. So, other than the delicate balance of scheduling, how can you reduce turnover and make your training most effective? These things go hand-in-hand. While training should be seen as an investment in your staff, it’s still a cost to consider, and if it’s truly an “investment” then it should ultimately save you money by reducing turnover. If your turnover is high, maybe it’s time to revamp your training program, among other things.
Business metrics may seem daunting at first, but they are necessary to survival. An engagement like this would take just a few short weeks to get up and running, and increasing your gross profit margin. It’s an investment you can’t afford NOT to make. Start measuring so you can start IMPROVING!