If someone asked you about your cost of goods sold (COGS), prime costs, overhead rate, or sales per square foot, could you tell them your current numbers? What about your food costs? Not just your overall monthly costs, but which is your lowest cost item, or which item nets the highest profit dollars?
These are the gauges of your machine. Like any machine, not only do you need to know how to read the gauges, you need to know how to project where the optimum place where the needle needs to point. Additionally, when you don’t watch the gauges, you can’t know what aspects to tweak, or what opportunities you’re missing, thus leaving money on the table. Plus, there are the additional frustrations and confusion of not netting enough profit.
According to recent studies done by Professor Dr. HG Parsa, 59 percent of hospitality businesses fail in the first three years, and 26 percent fail in the first year alone. One of the largest contributing factors is a lack of both accounting skills and a basic understanding of important restaurant matrixes for costing.
Let’s go over a few of the most important formulas and numbers to know.
Food Cost = Beginning Food Inventory + Food Purchases – Ending Food Inventory / Food Sales
The target number can vary from 12 to 35 percent, depending on whether the restaurant is quick serve, fast casual, or a trendy elevated chop house. Your monthly target and individual plate target should be very close.
However, don’t get too caught up in keeping each plate a uniform cost. A good rule of thumb is: The higher the per plate food cost, the higher the gross profit dollars made on the item should be. For example, you might be able to sell dishes that utilize frozen items at a 15 percent food cost, but you’re probably only making a dollar or two on each item, whereas your Tomahawk steak might run you a 34 percent cost, but net you $29 on each plate. There’s also nothing wrong with a loss leader if it drives in guests, as long as you have items that balance out the month’s numbers by carrying a lower food cost.
Pour Cost = Beginning Alcohol Inventory + Alcohol Purchases – Ending Alcohol Inventory / Alcohol Sales
Your pour costs should typically be from 17 to 21 percent, although there are always exceptions. If your pour cost is below 16 percent, you are stealing from your guests; if your pour cost is over 22 percent, your staff is stealing from you. Again, you should know your individual pour costs on your top sellers and specialty drinks, but don’t let one cocktail’s high pour cost distract you if it’s a good drink and your monthly number is in range.
Cost of Goods Sold (COGS)
COGS (Cost of Goods Sold) = Food Cost + Pour Cost
OR: Beginning F&B Inventory + F&B Purchases – Ending F&B Inventory / Total F&B Sales
These two versions of a COGS formula provide a great snapshot of where you stand overall on all goods purchased. If this number is off, first look back into your pour cost or food cost and pinpoint exactly where the issue is. You may need to renegotiate some costs, reevaluate your menu prices, look to swap out high-cost ingredients, focus on what products have high waste or spoilage, or figure out if perhaps someone is having a weekly barbecue at your expense.
If your pour cost is below 16 percent, you are stealing from your guests; if your pour cost is over 22 percent, your staff is stealing from you.
Labor Cost = Total Hourly Labor / Gross Sales
Depending on your concept type, this number might change, but typically this will be at 20 to 30 percent. Like pour and food cost, your daily labor cost won’t always reflect your weekly or monthly labor cost. Your weekday labor could run much higher, whereas you weekend labor, due to increased sales, might be much lower.
Jason Schiffer of 320 Main in Seal Beach, California, says he likes to grab a snapshot of his percentage of profitability by looking at the business in five sections divided by total net sales: Food cost percentage + pour cost percentage + payroll cost percentage + overhead cost percentage + profitability percentage = 100 percent. When looking at it this way, the formula changes a bit, dividing each area by total net sales instead of the corresponding department sales (food, pour, payroll, and overhead). A healthy business will aim for 15 to 25 percent.
Prime Costs = COGS + Payroll Costs (salaries, hourly wages, benefits, etc.)
To maintain a healthy restaurant, you typically want this at or below 60 percent. Your payroll cost number will be the total you spend on the summation of all labor expenses for the given time period. If your prime costs are too high, it makes it nearly impossible to find profitability. If this number is high, look back to your pour, food, and labor costs individually to determine where the issues are.
Break-Even Point = Total Fixed Costs / ((Total Sales – Total Variable Costs) / Total Sales)
If you are opening a new restaurant or location, this is a very important number and you should have it circled in red above your desk. This is the point of breaking even or recouping your original investment. This formula is also good when making any large purchases or improvements.
Overhead Rate = Total Indirect (Fixed) Costs / Total Amount of Hours Open
This is simply your cost per hour, on average, to run the business. Once you understand just how much each hour costs you, it changes the way you view your floor, operating hours, staff use, and menu items.
Cost Per Square Foot
Cost Per Square Foot = Prime Cost / Total Square Feet
This is a great formula to use in conjunction with sales per square foot. Once you know your cost per square foot, you know exactly how much sales per square foot you need before you make a profit. It’s also a nice easy number to work with, think about, and compare. I like setting goals with this. “Can I reduce my square foot costs from $5.24 to $5.04?” Those 20 cents in a 5,000-square-foot restaurant make for an annual savings of $12,000.
Sales Per Square Foot
Sales Per Square Foot = Total Sales / Total Square Feet
This is a great equalizer that measures your efficiency. It doesn’t matter if you’re 2,500 sq. ft. or 10,000 sq. ft. This measures your profitability for each square foot that is yours. Looking at your restaurant through this lens can really help shape the way you maximize every square foot of the floor that drives sales. Not only should you be constantly on top of this number for an operating restaurant, but this should be one of the key numbers you look at when evaluating acquisition of a new property.
Costing in a Vacuum
Costing isn’t only all about the big picture. Yes, we should be viewing weekly flash reports and monthly profit and loss statements looking at the overall health of the restaurant, but it doesn’t stop there. We need to drill down and get as micro as we can, not just knowing this week’s or month’s food cost, but the cost of each plate. We need to know not just the cost of each menu item, but of each ingredient within the item. This is called costing in a vacuum.
This gives you the ability to intelligently see inside each item, and if it is profitable compared to its cost. Then ask yourself, how labor intensive is the item, or how popular is the item? Determine if it’s worth producing, or if changes could/should be made. This also allows you to pinpoint which single ingredients are driving up the cost. Maybe there is an alternative ingredient at a lower price. Additionally, I don’t mind having a 45 percent food cost on a single item if I know it’s driving in customers, encourages additional sales, or if I make high-profit dollars on it. But we just have to know; we have to make it part of our plan. Otherwise, we are just guessing in the dark.
Markup Is the percentage of how much you increase the menu price over the raw cost. So if an item cost $1.50 to make and you sell it for $6.00, that’s a 400 percent markup, or four times more than cost. This number is typically targeted at 350 to 450 percent. Again, don’t get too caught up in this, especially on high-cost items. I hear many people who mark up every bottle of wine at 400 percent. On a cheaper house wine or by-the-glass that may make sense, however for a higher priced bottled you might want to drop that to a markup of 160 to 230 percent. Always remember we deposit whole dollars not percentages.
Costing/negotiating as the lowest denominator
Cost vs. Price
Have you ever tried to compare one vendor to another vendor, just to get frustrated that one vendor sells an item in a 12 lb. case for $32 while the other sells an 8 lb. case for $22? So who has the better value? While on the surface the second vendor can claim they have a lower price, the first vendor actually has the lower cost. The 12 lb. case costs $2.66 per pound, while the 8 lb. case costs $2.75 per pound.
Price is how many dollars you pay for a case/item. Cost is how many dollars you pay for each unit within the case. Always break the cost of each case down to the cost of each ounce, gram, or pound.
In this business, you can either be reactive or proactive. Those that are reactive fight and struggle, just to be ultimately forgotten, while those that are proactive are praised and create many great memories. The difference here is having your ear to the rail. We can’t correct the errors or tweak profitability if we don’t read the gauges. Make viewing and knowing these numbers a part of your daily routine and you will greatly increase your chances of not just surviving, but thriving.