A good number of independent restaurants are started by first time owners, who may or may not have intimate understanding of the financial components of their business. Most start ups are based on a unique concept or a collection of family recipes, with the owners usually working at some point and time as a cooks, servers, or junior managers in previous restaurants. As most owners haven’t graduated Business College, their passion for their vision is essential for their business success.
Fast forward three to six months, your customers have embraced what you are doing, and the results are very promising. But you get your P&L statements from your accountant or bookkeeper and there seems to be little profit at the bottom line. There could be many reasons for this but one of the first places to look is your Cost of goods. This is usually the first line of defense on the war of profitability.
Financial Anatomy Of A Restaurant
To understand how to control your numbers and in return retain your profits, we need to look at the financial structure of a restaurant in a nutshell. The following is a diagram flow chart of the financial components of a restaurant.
The two most integral components of this matrix is Cost Of Goods and Labour; combined these are sometimes referred to as Prime Numbers. These two numbers make up a combined 60% of your costs on any given reporting period and are mainly the responsibility of your staff and managers to control. Prime numbers are usually the most controllable, and the first place to look when tightening your operations fiscally.
The main components of the chart are:
• Cost Of Goods- These are your purchases regarding all food, and beverage. This is where we are going to focus our attention in this article. It is important that we separate and track the revenue of these streams separately. It would not make sense for you to go to your Chef and ask him why you’re bar costs are way out of range, and vice versa with your Bar manager.
• Labour- Labour costs are the costs of all your hourly employees, salaried employees, and employee paid benefits, holiday pay, and all other labour related costs. Please remember that all banking fees, cost of payroll, or any other expense will go in the next section under operating expenses.
• Operating Expenses- These are the rest of the expenses related to the business. Such costs include lease expenses, taxes, utilities, repairs, payroll expenses, banking expenses, marketing, paper goods, cleaning supplies, and you will realize, if you don’t know already, the proverbial list goes on.
Step one- Inventory
Most owners might think, why do I need to do inventory? Aren’t my purchases the same as my costs of goods? Here is why this may be true in a broad sense, but inaccurate of what is really going on with your operation.
The calculation for COGS (cost of goods) is opening inventory + purchases- closing inventory. This magical number divided by food sales gives you your cost of goods percentage. For example:
Our food inventory last month was $10,000 (Ending inventory from last month is always the opening inventory for this month)
We purchased $2,000 this month in food and when we counted our inventory we had $8,000.
Say you did $13000 in food sales. $4,000 / $13,000 = 0.3076 (31%)
Now there are a few rules when figuring COGS.
When counting food inventory, only count food items (items you can consume), as small wares, paper goods, and cleaning supplies are categorized under operating expenses.
When figuring out food cost % just divide food sales by your usage number, not total sales.
Count your inventory the same time every month – the key to accurate numbers is consistency.
Reviewing Your Profit & Loss Statement
Now that we figured out what our food costs are, how does it play into the overall big picture? When we look at the Profit & Loss statement, we can see where COGs (Costs Of Goods) come into play.
The P+L statement will tell you whether your business is profitable by providing accurate costs of sales, labour, and operating expenses. Notice that it reports food & beverage costs as a percentage of their respectable sales, not total sales. This is very important to achieving accurate numbers.
Here is an example of a Profit & Loss statement we can look at. As we look at the above report, there are a couple of things that are interesting. First do you notice that their food cost percentage is 35%. You may ask, isn’t that high? According to the chart, my cost of goods should be 30%.
The number you want to compare to the chart is the total cost of sales line which says 31.8%. This is around 2% high, which must be made up in labour or operating costs or it will detract from the profit. In this case, the Harborside restaurant does $1,166,700 in revenue and a 2% loss would add up to around $23,334. Ouch.
The second thing is that the food cost number is derived from the usage number from your inventory, not total costs of your invoices. Say there was $22,000 more spent in paper goods and cleaning supplies for this restaurant. If you added that to your cost of goods it would give you a value of $392,428. Divide that by the sales – $392,428 / $1,166,700 = 34%. That’s a 2% swing from the proper number. The main reason for keeping your statement as accurate as possible, and broken into sections, is to be able to have a clearer look on where your money is going. How do you expect to figure out your trouble spots if all the data is blurred?
Tools Of The Trade
Now that I have hopefully opened your eyes a bit, you might be wondering where I start to blaze a path to profitability. There are a few tools that will make your job a lot easier.
Implement a purchase journal. This is where you log and categorize all your purchases. The key to this process is to separate your food purchases to your beverage costs, bar costs, paper goods, small wares, and cleaning supplies.
Implement a accurate and consistent Inventory system to figure out your usage number. The key to this is having current pricing and consistently count the same time every reporting period. A separate inventory should be implemented for each department. Some restaurants combine the soft beverages with the food, but some pubs combine the soft beverage with the hard beverage.
Request from your accountant or book keeper to separate and categorize the three sections of your profit and loss statement- Cogs, Labour, and operating expenses. As well separate your revenue streams for statistical analysis.
The restaurant business has many working parts and I have always compared it to the game of Jenga, (The game were you remove blocks of wood trying to prevent the whole structure from falling). Focusing on the details of where your money is coming in and going out will aid you in retaining profitability in the end. Implementing tried and true systems like inventory, purchase journals, and proper accurate profit and loss statements are key to being successful in one of the most difficult business’ out there.
Until next time ......
See ya on the flip side.