By Aman Narang, President and co-founder of Toast
If you’re a restaurant or foodservice business owner, there are certain metrics you need to track and evaluate over time to understand the health of your business. By regularly calculating performance metrics, restaurant owners can catch negative trends and identify areas that require improvement.
Increasing a business's efficiency and profitability doesn't happen overnight. There are so many moving parts involved in operating a restaurant - so many different costs and revenue channels and factors that ultimately influence net profit or loss - that you cannot simply expect to make one change and see all operations and margins improve.
Instead, operating a profitable enterprise requires constant tinkering and testing until you find the best practices for your business.
This article identifies seven key metrics restaurant owners should track regularly and how to calculate each of them.
1) Break-Even Point
Your break-even point is one of the first numbers you should calculate. This number lets you pinpoint how much you must do in sales to earn back an investment. The number can then be used to forecast how long it will take to earn that money back. Break-even is a must-have if you're looking for investors or opening a new restaurant.
You can also use break-even to justify a new big purchase, like a commercial kitchen redesign or launching a new marketing campaign. Saying something will cost $20,000 is one thing, but saying it will pay for itself in three months is a better way to put that number in perspective.
Calculating Break-Even Point
If your restaurant does $10,000 in sales one month, pays $3,000 in variable costs, and $4,000 in fixed costs, your break-even point in dollars is $5,714.29 for that month, meaning that you start earning profit after selling $5,714.29 worth of food & drink.
The equation for break-even point is:
Total Fixed Costs ÷ ( (Total Sales - Total Variable Costs) / Total Sales) = Break-Even Point
In this scenario, $10,000 - $3,000 (sales minus variable cost) equals $7,000. $7,000 / $10,000 = $7, and $4,000 (fixed costs) divided by $7 gives you $5,714.29.
2) Cost of Goods Sold (COGS)
Cost of Goods Sold refers to the cost required to create each of the food and beverage items that you sell to guests. In this way, COGS is really just a representation of your restaurant’s inventory during a specific time period. In order to calculate COGS, you need to record inventory levels at the beginning and end of a given period of time, and any additional inventory purchases.
It is important to track COGS because it is typically one of the largest expenses for restaurants. By identifying ways to minimize these costs, like negotiating better rates with your food distributor or selecting in-season ingredients, it's possible to significantly increase margins. Every dollar you shave off COGS is another dollar added to the restaurant’s gross profit.
If you have $5,000 worth of inventory at the beginning of the month, you purchase another $2,000 during the month, and end the month with $4,000 worth of inventory left over, your cost of goods sold for that month is $5,000 (beginning inventory) + $2,000 (purchased inventory) - $4,000 (final inventory) = $3,000.
The equation for COGS is:
Beginning Inventory + Purchased Inventory - Final Inventory = Cost of Goods Sold (COGS)
3) Overhead Rate
Fixed costs are good to know because they are straightforward. One bill, one price. But wouldn't it be helpful to know how much those fixed costs are on an hour-by-hour or day-by-day basis? Overhead rate is a form of cost accounting that helps you understand how much it costs to run your restaurant when looking only at fixed costs.
Calculating Restaurant Overhead Rate
Let's say your fixed costs for the month were $10,000 total. If your restaurant is open 80 hours per week in a 31-day month. Assuming you are open every day, your overhead rate would be $28.23 per hour and $322.58 per day. However, these numbers would go up if you were calculating for a shorter month, like the 28-day February, because you are allocating the same amount of money over fewer working hours. In that case, costs would go up to $31.25 and $357.14 per hour and day, respectively.
The equation for overhead rate is:
Total Indirect (Fixed) Costs / Total Amount of Hours Open = Overhead Rate
4) Prime Cost
A restaurant’s prime cost is the sum of all of its labor costs (salaried, hourly, benefits, etc.) and its COGS. Typically, a restaurants prime cost makes up about 60 percent of its total sales ways. Prime cost is an important metric because it represents the bulk of a restaurant’s controllable expenses. While you can't control fixed rent costs on a weekly or monthly basis, for instance, you can find ways to decrease prime costs by managing labor carefully. Thus, a restaurant’s prime costs represent the primary area a restaurant owner can optimize in order to decrease costs and increase profit.
Calculating Prime Cost
Now that you know how to calculate COGS, calculating prime cost is straightforward. Add up all of your various labor-related costs. These costs include salaried labor, hourly wages, payroll tax, and benefits. Then, simply add the sum of your labor costs and your COGS to find your restaurant’s prime cost.
The equation for prime cost is:
Labor + COGS = Prime Cost
5) Food Cost Percentage
Food cost percentage represents the difference between the cost of creating a specific menu item (the cost of all of the ingredients in a dish) and the selling price of that item.
Calculating Food Cost Percentage
If it costs $3.28 to prepare your salmon dish and you sell it for $15, your food cost percentage would be 21.9 percent. Although it depends on the novelty aspects of your dish, your guests’ expectations, and your restaurant’s service type, typically a restaurant’s food cost percentage should be between 28-35 percent. You can calculate your food cost percentage for all goods sold by dividing your total food costs by your total sales during a set time period. If you understand your food cost percentage for each of your menu items, you can choose to upsell or design your menu to promote the items that contribute the most to your revenue and bottom line.
The equation for food cost percentage is:
Food Cost / Total Sales = Food Cost Percentage
6) Gross Profit
Gross profit shows the profit a restaurant makes after accounting for its cost of goods sold. The resulting gross profit represents the money available to put towards paying off fixed expenses and profit. To calculate gross profit, subtract the total cost of goods sold during a specific time period from your total revenue (the total sales of food, beverages, and merchandise).
Calculating Gross Profit
If a restaurant's total sales number for the month is $15,107 and its cost of goods sold is $5,293, the restaurant's gross profit for the month is equal to $15,107 (total sales) - $5,293 (COGS) or $9,814.
The equation for gross profit is:
Total Sales - COGS = Gross Profit
7) Employee Turnover Rate
Turnover rate is the percentage of employees that leave or are fired that need to be replaced during a specific time period. The restaurant industry has a notoriously high employee turnover rate compared to all other industry segments. In the fast-paced foodservice environment, high employee turnover can hurt operational efficiency and require a lot of time and attention to get new hires up to speed.
How to calculate employee turnover rate:
Start by adding the total number of employees at the beginning and end of a given period of time. Then, divide the sum by two to find the average number of employees during the set period. Take the difference between the number of employees at the beginning and end of the set time frame and divide the number of employees who left by the average number of employees.
The equation for employee turnover rate is:
(Starting Number of Employees + Ending Number of Employees) / 2 = Average Number of Employees
Lost Employees / Average Number of Employees = Employee Turnover
If you have ten employees at the beginning of a given month and eight at the end the equation would look as follows:
(10 + 8) / 2 = 9
2 / 9 = .222
To calculate turnover rate, simply multiply the quotient (.222) by 100 to get the turnover percentage. So, in this example, the turnover rate is .222 * 100 or 22.2 percent.
In order to gain true business insight and value from these metrics, restaurant owners should get in the habit of calculating and recording them regularly, on a weekly or monthly basis. Over time, this allows restaurant owners to compare their establishment's current performance to historical data in order to identify problem areas and trends.
If you need insight into your restaurant's performance, download your free restaurant metrics calculator.
About the Author
Aman Narang is President and co-founder of Toast Restaurant POS. Prior to Toast, he worked on innovation initiatives at Endeca, now Oracle. Aman spearheaded the development of Endeca’s business intelligence platform as well as their mobile commerce platform, each of which became a major business units. He holds BS and MS degrees in Computer Science from MIT and currently leads innovation and business development initiatives at Toast.
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