Having a solid understanding of the numbers that define the health of your business is a crucial component of being a successful restaurateur. The average profit margin of mid-range restaurants is just 3 percent which leaves little room for guess work. Knowing these performance metrics will help you take the necessary steps to increase profitability and efficiency, and go the long haul even in times of economic downturn.
Your break-even point is one of the most critical numbers for you to be aware of. It defines just how much you need to sell in order to make a profit. This is the first number many potential investors will request. The equation for this is as follows:
Total Fixed Costs / (Total Sales – Total Variable Costs) / Total Sales) = Break-Even Point
Your fixed costs represent your operational costs that do not fluctuate. This would include rent, insurance, property tax, utilities (on average), phone, internet and licenses Your variable costs represent your prime costs—your labor and food costs—plus other costs that tend to fluctuate depending on your sales. These include items like credit card processing fees, napkins and to-go containers, and any other non-fixed expenses your restaurant may incur.
Using this calculation, a restaurant that made $100,000 in a one month period, with variable costs of $60,000 and fixed costs of $35,000 will come up with a break-even point of $87,500.
Cost of Goods Sold (COGS)
This is simply the cost of your food and beverage—the items that you sell to your customers. The equation below will help you determine your cost of goods:
Beginning Inventory + Purchased Inventory – Final Inventory = COGS
Food and Beverage Cost Percentage
These important figures tell you if you’re in the ballpark of successful restaurants and determines the need to reduce cost of goods or increase menu prices. It represents the difference between the cost of creating a dish or drink and what you’re charging for it. This helps you determine which items may not warrant space on your menu and which ones you may want to highlight to increase revenue.
Depending on the type of restaurant, a profitable one generally generates food costs between 28 to 35 percent of the menu price. Beverage costs vary depending on type of beverage sold and the venue. Breaking this number down into categories can be useful. As an example: liquor falls somewhere between 15 to 20 percent, bottled beer in the 24 to 28 percent range and wine somewhere between 30 to 40 percent. This equation is as follows:
Food or Beverage Cost / Total Sales = Food or Beverage Cost Percentage
As an example: It costs you $4.20 to make your halibut special which you then sell for $14. Your food cost percentage would be 30 percent—in line with typical food costs.
Your restaurant’s prime cost is your cost of goods sold plus your labor costs which includes salaried, hourly, benefits and taxes—anything that relates to your labor pool. Most restaurants should aim for a prime cost that is anywhere from 55 to 60 percent of the total sales. These represent costs that you can control and can suggest a closer look at the cost of both labor and goods. The equation is as follows:
Labor + COGS = Prime Cost / Total Sales = Prime Cost Percentage
If your prime cost percentage is above the 60 percent mark, consider lowering food costs by negotiating with vendors, revamping the menu or taking a look at the actual recipes. Let your FOH and BOH managers know what their budget is regarding labor and that it is non-negotiable. They may have to roll up their sleeves a little more, and that’s ok.
Using these business metrics on a regular basis is like taking a pulse on your coronary function. They allow you to make the necessary changes before the challenges are insurmountable.