As an independent or multiple restaurant chain owner in New York City(restauranteur) there are certain metrics or key performance indicators (KPIs) that you should be tracking and evaluating over specific periods of time to understand the health of your hospitality business. By regularly calculating financial performance metrics, restaurant managers can find negative trends and zero in on areas that need to be improved.
Increasing a restaurant business’s profitability and operational efficiency doesn’t happen overnight. Like how a car’s engine works, there are a ton of moving parts involved in running a restaurant – so many different costs, revenue streams and factors that will ultimately influence net profit or net loss – and you also cannot think that making one change will make all of your operations and margins improve. So here are few restaurant metrics to pay attention to. Normally when prime cost exceeds above 60%, it becomes difficult for a restaurant to maintain an acceptable level of profitability.
1 OverHead Rate
Fixed costs are important to understand because they are pretty straightforward. One bill, one price. What would be even more useful is to know how much those fixed costs are on a hour-by-hour or day-by-day basis. The overhead rate is a form of cost accounting that helps you or your restaurant CPA, to understand how much it costs to run to your restaurant when only viewing the fixed costs.
How to Calculate Your Restaurant Overhead Rate
Let’s suppose that your fixed costs for the month were $10,000 total and your restaurant is open 80 hours each week in a 31-day month. Assuming you open 7 days a week, then your overhead rate would be $28.23 per hour and $322.58 per day. Now, these numbers would increase if you are calculating for shorters months like February because you are allocating the same amount of money over less working hours. In that case, costs would go up to $31.25 and $357.14 per hour and day, respectively.
The equation for calculating the overhead rate is:
Total Indirect (Fixed) Costs / Total Amount of Hours Open = Overhead Rate
2 Break Even Point
Any new restaurant startup should want to calculate your break even point. This important because it lets you figure out how much you need to do in sales to earn back your investment costs. This number can also be used to even forecast how it might take to recoup back that money that was invested. Break even is an absolute must-have if you are planning pitching investors or a bank loan.
You also can use the break even scenario to justify a new upgrade or equipment purchase, like a new paid search marketing campaign, or new kitchen redesign, or investing in a digital ordering mobile app platform. Saying something will cost $30,000 is one thing, but figuring out and now saying it will pay for itself in 5 months is much smarter way to put that number in perspective.
How to calculate your breakeven point
If your food eatery does $20,000 in sales one month, pays $6,000 in variable costs, and $8,000 in fixed costs, your break even point in dollars is $11,428.57 for that month, meaning that you start earning profit after selling $11,428.57 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, $20,000 – $6,000 (sales minus variable cost) equals $14,000. $14,000 / $10,000 = 0.7, and $8,000 (fixed costs) divided by 0.7 gives you $11,428.57.
3 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.
How to Calculate Food Cost Percentage
If it costs $5.15 to prepare your swordfish dish and you sell it for $19, your food cost percentage would be 27.1%. There are a few other considerations such as, the presentation aspects of your dish, your customers’ expectations, and the type of restaurant service segment you are in (quick service, fast casual, casual dining, pizza, fine dining), but usually a restaurant’s food cost percentage should be between 28%-35%. The way you calculate your restaurant’s food cost percentage for all goods sold is by dividing your total costs by your total sales during a set period of time. Now as an owner, if you understand your food cost percentage for each of your dishes or plate items, you then can strategically choose to upsell or design your menu to promote the menu 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
4 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 your patrons. You can think of it as, COGS is really just a representation of your food business’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 monitor COGS because it is usually one of the largest expenses for restaurants. By identifying ways to reduce these costs, like negotiating lower pricing with your food distributor or selecting in-season ingredients, it’s totally possible to drastically increase margins. You must understand that every dollar you shave or cut off COGS is another dollar that gets added to the restaurant’s gross profit.
If you have $10,000 worth of inventory at the beginning of the month, you purchase another $4,000 during the month, and end the month with $8,000 worth of inventory left over, your cost of goods sold for that month is $10,000 (beginning inventory) + $4,000 (purchased inventory) – $8,000 (final inventory) = $6,000.
The equation for COGS is:
Beginning Inventory + Purchased Inventory – Final Inventory = Cost of Goods Sold (COGS)
5 Prime Cost
A restaurant’s prime cost is the sum of all of its labor costs (salaried, hourly, benefits, etc.) and its COGS. Usually, a restaurant’s prime cost makes up around 60% to 65% of its total sales. Some consider Prime cost as the number one metric because it represents the bulk of a restaurant’s controllable expenses. Since you can’t control fixed rent costs (unless you own the building) on a weekly or monthly basis, you can looks for ways to lower prime costs by managing your labor like a hawk. Therefore, a restaurant’s prime costs equals the perfect area for restaurateur to optimize in order to decrease costs and increase profit.
Calculating Prime Cost
Now that we have showed you how to calculate COGS, calculating your prime cost is simple. 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
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
Restaurant benchmarking: Key Performance Indicators
Besides knowing KPI’s, it is also critically important for restaurant owners to know and understand key industry benchmark percentages. Keep this article handy when analyzing your restaurant performance. Below is a summary of the general restaurant standards. These rules of thumb are discussed in more detail following the summary in order to assist with the assessment. Bookkeeping Chef understands that each restaurant is unique and that not every guideline will relate to every business.
Summary of Industry Standards
> Full-service – 65% or less of total sales
> Table-service – 60% or less of total sales
> Generally – 28% to 32% of total food sales
Alcoholic Beverage Costs
> Liquor – 18% to 20% of liquor sales
> Bar consumables – 4% to 5% of liquor sales
> Bottled beer – 24% to 28% of bottled beer sales
> Draft beer – 15% to 18% of draft beer sales
> Wine – 35% to 45% of wine sales
Nonalcoholic Beverage Costs
> Soft drinks (post-mix) – 10% to 15% of soft drink sales
> Regular coffee – 15% to 20% of regular coffee sales
> Specialty coffee – 12% to 18% of specialty coffee sales
> Iced tea – 5% to 10% of iced tea sales
> Full-service – 1% to 2% of total sales
> Limited-service – 3% to 4% of total sales
> Full-service – 30% to 35% of total sales
> Limited-service – 25% to 30% of total sales
> 10% or less of total sales
Hourly Employee Gross Payroll
> Full-service – 18% to 20% of total sales
> Limited-service – 15% to 18% of total sales
> 5% to 6% of total sales
> 20% to 23% of gross payroll
Sales Per Square Foot
> Losing Money Full-service – $150 or less
>Limited-service – $200 or less
> Break-even Full-service – $150 to $250 Limited-service – $200 to $300
> Moderate Profit Full-service – $250 to $350 Limited-service – $300 to $400
> High Profit Full-service – More than $350 Limited-service – More than $400
Rent and Occupancy
> Rent – 6% or less of total sales > Occupancy – 10% or less of total sales
Sales per square foot are the most reliable indicator of a restaurant’s potential for profit. To calculate sales per square foot, divide annual sales by the total interior square footage including kitchen, dining, storage, rest rooms, etc. This is usually equal to the net rentable square feet in a leased space.
Sales Per Square Foot = Annual Sales/Square Foot
- Under $150/square foot = little chance of generating a profit
- At $150 to $250/square foot = break even up to 5% of sales
- At $250 to $325/square foot = 5% to 10% of sales
- Under $200/square foot = little chance of averting an operating loss
- At $200 to $300/square foot = break even up to 5% of sales
- At $300 to $400/square foot = 5% to 10% of sales (before income
Rent and Occupancy Cost Standards
Rent = 6% or less
Generally, the goal is to limit rent expense to 6% of sales or less, exclusive of related costs such as common area maintenance (CAM) and other occupancy expenses.
Occupancy = 10% or less
Occupancy cost includes rent, CAM, insurance on building and contents, real estate taxes, personal property taxes, and other municipal taxes. Many operators want to keep occupancy cost at or below 8% of sales, however, 10% is generally viewed to be the point at which occupancy cost starts to become excessive and begins to seriously impair a restaurant’s ability to generate an adequate profit.
Percentage of Cost Standards
Food cost equals 28% to 32% in many full-service and limited-service restaurants.
Alcohol costs vary with the types of drinks served:
> Liquor – 18% to 20%
> Draft beer – 15% to 18%
> Bar consumables – 4% to 5%
> Wine – 35% to 45%
> Bottled beer – 24% to 28%
Standard practice is to record non-alcoholic beverages sales and costs in Food Sales and Food Costs accounts:
> Soft drinks – 10% to 15%
> Specialty coffee – 12% to 18%
> Regular coffee – 15% to 20%
> Iced tea – 5% to 10%
When looking at a restaurant’s overall cost structure, the prime cost can be very meaningful, particularly in the cost of sales and payroll cost. Some restaurants, such as steak and seafood restaurants, may carry very high food cost and yet be extremely profitable.
In limited-service restaurants, paper cost should be classified as a separate line item in “cost of sales.” Historically, the paper cost has run from 3% to 4% of sales. In full-service restaurants, paper cost is usually considered to be a direct operating expense and normally runs from 1% to 2% of total sales.
Payroll & Salaries
Payroll cost as a percentage of sales includes the cost of both salaried and hourly employees plus employee benefits, which includes payroll taxes, group, life and disability insurance premiums, workers’ compensation insurance premiums, education expenses, employee meals, parties, transportation, and other such benefits. Total payroll cost should not exceed 30% to 35% of total sales for full-service operations, and 25% to 30% of sales for limited-service restaurants.
Generally, you don’t want management salaries to exceed 10% of sales in either a full- or limited-service restaurant. This would consist of all salaried personnel.
Hourly Employee Gross Payroll
> Full-service – 18% to 20%
> Limited-service – 15% to 18%
Limited-service restaurants generally have lower hourly payroll cost percentages than full-service restaurants. In limited-service restaurants, managers often perform the work of an hourly position in addition to being a manager. In some cases, however, hourly workers may also perform management roles on some shifts, which could lead to higher hourly payroll costs in these restaurants.
Employee Benefits Overview
> Employee benefits 5% to 6% of total sales
> Employee benefits 20% to 23% of gross payroll
Employee benefits can vary somewhat depending primarily on state unemployment tax rates and state workmen’s compensation insurance rates. Restaurants that are new or have had a large number of unemployment claims may have state unemployment tax rates that could cause their employee benefits to be higher than the standard.
Earnings, Before Interest, Taxes, Depreciation, Amortization, and Rent
So Earnings, Before Interest, Taxes, Depreciation, Amortization and Rent are also known for short as “EBITAR” represents the amount of cash available to cover your fixed charges – rent and debt service. When expressed as a percentage of sales, it indicates the overall efficiency of your operations by measuring the cash flow generated per sales dollar without regard to your financial leverage or your investment in property and equipment.
CPAs and financial analysts find using this metric helpful in industries with significant rental or leases expenses such as restaurants, retail, casinos. This bottom line metric can be used by restaurant owners to determine the landlord’s share of your restaurant profits. To find this, put base rent (and any percentage rent) in the numerator and the EBITDAR (EBITDA + Rent) into the denominator. Say a Brooklyn restaurant is doing pretty well, and pulling in a 20% EBITDA margin overall, making a profit of $160,000 each year for an EBITDAR of $208,000. Thus, the profit going to the landlord is 23.07% of all EBITDA.
Now, if the restaurant suddenly loses some sales and that contractual rent bump goes into effect, the profits can change fast and drastically. If rent went up to $5,000 and EBITDA margin came down to 15%, all of a sudden, the landlord is taking one-third (33.33%) of the restaurant profit. Restaurant owners can use this metric to negotiate with a landlord when the lease gets out of line.
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. A cash flow analysis is also helpful utilizing EBITDAR as an evaluation criterion internal steps such as identifying and implementing appropriate operational changes, (including sales and marketing efforts), strategic and tactical initiatives, as well as operational efficiencies.
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