from an article by Christine Aldridge, Demand Media
As an owner or operator of a restaurant, there are several key pieces of financial information that you will need to understand. Net-profit margin, and what directly affects this financial ratio, is probably most important. The net-profit margin directly correlates to how much money the restaurant receives and makes over the course of a period of time.
You calculate net-profit margin by dividing net income by sales. Each of these variables are found on the income statement for a restaurant, or chain of restaurants. This financial ratio shows how much sales remain once all expenses of the restaurant are paid. Therefore, if your restaurant operates with a 30 percent net-profit margin, then $.70 of each sales dollar goes toward paying expenses and $.30 goes toward profits.
There are two primary types of expenses that greatly affect the net-profit margin of a restaurant; food costs and labor expenses. Food costs include the purchase price of all food and beverages. Waste and theft are big concerns within the restaurant industry. Food-safety measures and spoilage can cause food costs to soar, as can theft of expensive foods or alcohol. The weather and economy also play significant roles in determining what your foods are in your restaurant. A bad storm, drought or rising gasoline prices can cause food prices to climb, which translate into increasing food costs for a restaurant.
The second expense that is of great concern to managers and owners of restaurants is labor. Labor costs include the wages and salary of management, chefs, cooks, dishwashers, hostesses, servers, bartenders and any other person that the restaurant employs. Reducing these expenses by "cutting" people, letting them clean up and go home, after the restaurant's rush can help to increase the net-profit margin of the business.
Increasing menu prices can help to offset rising food or labor costs. It can also aid in increasing the net-profit margin of a restaurant. However, if you increase your prices by too much or do not keep them in line with the quality of the food, the demand for your restaurant will decline. This will actually cause the net-profit margin to decrease over time since many of your overhead costs will not go down despite less food being sold. This is important to keep in mind when considering ways in which to increase the overall profits of the business.
I'm convinced that a lot of operators don't do them, or do them inaccurately because of the hassle factor. I gathered a dozen recent invoices, a pad of accountant's columnar work sheet paper, a calculator, a scale and a dozen corrugated pizza circles. I then went through the task of making every pizza I had on the menu and weighing out every topping. I recorded that data and converted the price per pound/case to cost per ounce, and finally cost per pizza.
I opted to include the cost of the pizza box into the total rather than have it show up somewhere else in my accounting. Since more than half of my sales derived from carryout and delivery, this seemed prudent.
I then itemized every pizza and determined how much money it cost to build the pie. Then, I multiplied that number times the food cost percentage I was trying to hit. No one hates number crunching
more than me. This was eight hours of drudgery. Yet, it had to be done, it was a management function. The results were frightening.
On paper, I was supposed to be at a certain percentage, but in reality, according to my P & L statements, I was way off. How could this be? The answer was in inconsistent portioning. Some of my cooks had a heavy hand and some light. I needed to provide them the tools they needed to do the job right. Then, wouldn't you know it; prices went up across the board. Instead of re-calculating the entire analysis, I cheated. I simply jacked up the prices by nickels, dimes and quarters until I got back to a profitable food cost.
I lost track of doing it the right way because I didn't want to repeat the whole drill again. Time goes on and, pretty soon I lost control of food cost. Profits suffered and I was forced to do the entire study again. All of the previous data was pretty much outdated, so I started from scratch. Then, along comes my first computer. I transferred all of my data to a crude spreadsheet program and after a couple of days of algebra configuring the spreadsheet, I had done it! From then on, all I had to do was update the new grocery prices once a month and every cell changed. It was magic. Now I had no excuse not to have an iron grip on food cost. Laziness really is the Mother of Invention. Now, if I didn't hit the number on the end of the month statement, it was for another reason other than food portioning and proper pricing. That was a load off my mind. After the launch of the Windows OS, specifically Excel, the rough-around-the-edges program I created has been updated to a slick, user friendly, powerful tool.
I enlisted the help of a computer guru to set up the macros and install buttons and drag down menus for speed and ease of use. Besides computing food cost, it suggests a menu price based on whatever percent you want to hit as well as gross profit (contribution margin). I have also analyzed my competitor's menus on this program and asked hundreds of "what if" questions.
Assembly: Being Right on the Money
Part Two of an article by Dave Ostrander www.bigdaveostrander.com
You own the assembly portion of the profit triangle totally.
All too many operators let their employees free throw topping on their pies. This is not the way to get rich and famous. Is there a right way? There is no one right way, but anything other than free throwing will dramatically improve your bottom line.
My personal experiences have resulted in a reduction of cheese usage by 20% and protein and veggie toppings by 10 to 15%.
So, ways to achieve ideal food cost are using:
The next system will use spoodles that are sized by the ounce. These guys are either solid or perforated, depending on the topping and are very handy for veggies. Right along the same thought would be using small plastic soufflé cups. Either one of these systems will make a difference, but are flawed because of over and under filling the cups. If you really want to do it right, invest in a great scale. The payback will be, depending on volume, almost immediate.
Read Part One Below if you haven't already...