It’s finally here! Your very own restaurant has launched in a brick and mortar location and your dream has finally come true. But once the excitement of the grand opening has worn off, are you confident in the calculations that will keep your restaurant running? Restaurant financial management can be tough, but it’s far from impossible. Let us help you do the math.
Whether it’s your cost of goods sold (COGS), your profit margins, or your restaurant’s budget, there are five financial management calculations that lead to key metrics that every restaurateur should know.
Selecting the Right System
While these tips and tricks will get you started—hey, the first step is often the most important one!—they’re no replacement for a good restaurant management platform that includes accounting capabilities. Having the right software in your corner can make all the difference.
Old legacy machines can be pretty easy to use and they’re the systems that plenty of people are familiar with, but the newer cloud-based systems make running a restaurant so much easier, especially when it comes to restaurant financial calculations. Rather than printing out miles of spreadsheets and analyzing them by hand, iPad-based POS systems like you make complicated calculations with the tap of a button—and knowledge is power.
Another great part about cloud-based systems is that you can run these calculations from anywhere that you can access the internet. Gone are the days when you had to be at your restaurant to access the information stored in your POS system. Imagine how much easier it will be to run financial calculations in significantly less time from the comfort of your own home. Pretty great, right?
Crafting the Perfect Financial Plan
The first place you have to start is with a plan. No matter how much you think you’ve got a handle on your restaurant’s finances if you don’t have a plan something is bound to slip through the cracks. Think back to the financial section of your restaurant’s business plan and start there. As Restaurant Owner explains, you’ll want to cover everything from the projected sources and uses of cash to the projections of sales, hourly labor costs, annual and five-year operations, and how you plan to break even.
The majority of what you have covered in the financial section of your business plan will translate right over into your restaurant’s financial plan. Once you’ve got the data in place, it’s time to start running some calculations.
Restaurant Management 101: Understanding Restaurant Overhead
Your overhead includes all of the indirect (non-food related) costs associated with running your restaurant. (This means that overhead doesn’t include the actual costs associated with food production itself, such as inventory, as they are deemed “direct costs.”) To determine your overhead, simply add together all of the applicable expenses listed below. Remember, your overhead is unique to your restaurant, so some of these may not apply.
- Property costs. If you rent or lease your restaurant space: the whole dollar amount. If you own your property: only the interest, as the principal payment itself will be a depreciation expense you may claim on your taxes.
- The salaries of your workers.
- Administrative costs, such as repairs to your building, parking rentals, food trucks, custodial services, and accounting and consulting fees.
- Any items that aren’t directly used for food production, such as cleaning supplies and dishwashing detergent.
- Utilities, including internet service.
- Monthly point of sale costs.
- Any paid advertising.
You don’t need to be an accountant to calculate food or labor costs or forecast your sales, you simply need a budget and a good expenses spreadsheet.Get Yours
Cost of Goods Sold (COGS)
The cost of goods sold is the amount of money you’ve invested in food and beverages to produce the dishes and drinks your customers love. Calculating COGS can be applied to inventory and used to make management decisions based on purchases. This equation will also allow you to perform “what if” analyses to determine what hypothetical changes your budget can support, such as the addition or subtraction of menu items.
COGS = Starting Inventory + Purchases – Ending Inventory
- To start, look at your inventory at the beginning of the specific period you’d like to measure. Typically this will be the end of your month or quarter.
- Then, add the inventory you purchased over the course of the month or quarter.
- Finally, subtract what you have left now that the month or quarter is over.
- The resulting number is your cost of goods sold.
There are five key metrics that every restaurateur should know.
Calculating Restaurant Gross Profit
Your restaurant’s gross profit is the amount of money you made after you take out the cost of producing your menu items. You can use this simple equation to assess how efficiently you are using inventory and staff and, from there, decide if you need to make any changes to your operations in order to improve your numbers.
Gross Profit = Total Sales – COGS
- To start, take the total sales for the period in question. Again, this will probably be the end of a month or a quarter.
- Subtract your COGS.
- The resulting number will be your gross profit. This figure can now be taken a step further to calculate your net income.
Net Income: An Important Part of Restaurant Financial Metrics
Net income is the total amount of money you’ve made over the last month. This is your profit after overhead, taxes and expenses have taken their cut. The equation is useful in determining your overall success as a restaurateur. It’s important to note that many restaurants won’t start showing a positive net income for the first year after opening.
Net Income = Gross income – Total Expenses
- First, total all of your expenses for the month, including payroll, overhead and inventory.
- Then, subtract the total expenses from your gross income.
- The resulting number is your net income.
Finally, Profit Margin
Profit margin is the percentage of money you’ve made based on how much you’ve invested in your restaurant for the month. A 30-percent profit margin means that for every dollar you’ve put in, you’ve made an additional 30 cents.
Profit Margin = Net Income / Sales
- Calculate your net income.
- Divide your net income by your total sales.
- This resulting decimal number is your profit margin. Multiply it by 100 to get a percentage. (0.05 x 100 = 5% return on investment, or a 5% profit margin)
There you have it! The five things you need to calculate in order to have a solid understanding of your restaurant’s financial situation. As we said before, this list is hardly exhaustive, but it’s a great place to start. If you can, it’s almost always worth the investment to hire a pro at the beginning. Once you see how financial plans are made and how restaurant financial calculations are done, you can eventually take over and do it yourself with the knowledge that you’re definitely doing it right, which is invaluable because these numbers matter—a lot.