Restaurants. Restaurants are exciting places! Restaurants smell good; they serve good food (or we wouldn’t be there, right!); they are places to meet new people, conduct business meetings or relax and catch up with old friends. Restaurants are a social experience!!
I love restaurants. I always have! I have always wanted to start one!!! However, the one business I have never been able to convince my wife to let me open is said restaurant! “I want to go to the restaurant, order great food, be well taken care of! I want to love the restaurant, I don’t want to worry about the dishes, staffing, or food costs!”. And so went my dream of starting an Irish Pub or a Sports Bar and Grill!
During our marriage, we have started 30 companies. She’s rarely balked at any of them. That being said, she recalls the number of years spent managing at PepsiCo restaurants before they spun off Yum Brands! She remembers the time and energy it takes to build procedures at a restaurant or the hours working on financials and efficiencies to turn one around.
While owning a restaurant can be truly rewarding, it is a lot of work to start one and get it profitable or to turn a struggling restaurant around. The biggest hurdle to profitability is know where to focus!
The FIRST place of focus, when adjusting to the bottom line are you controllable costs. Controllable costs are those costs associated with your operations that you have the most control over for you restaurant. For a restaurant, your most controllable costs are your prime costs (the costs associated with delivering your product to your customer).
What are Prime Costs
Prime costs is a term typically associated with restaurant industries Cost of Goods Sold. By definition, prime costs are:
Prime costs are all of the costs that are directly attributed to the production of each product. Prime costs are direct costs, meaning they include the costs of direct materials and direct labor involved in manufacturing an item. Companies use prime costs to price their products. (Boyte-White C. 2021)
Prime costs, for a restaurant, are the food, beverage, and production/service labor required to make your food item.
Prime Costs are costs that should scale with Revenue. If sales are up, Prime Costs (Beverage, Food, and Labor should be up by the same % Sales is up…aka, they should scale to match Revenue).
Other Costs, like Rent, are fixed costs. These costs are the same regardless if there is no revenue or lots of revenue. As a fixed cost, their % of income will change with the change in revenue.
As viewable below, Prime Costs are considered controllable and SHOULD scale with Sales.
Food and Beverage
Food and Beverage are 2 of a restaurant owners/managers most controllable costs! The balancing act for Food and Beverage Costs average 25-35% for Quick Service Restaurants (QSR), Jordan Brydges points out.
While 25-35% are targets (based on national averages), they should NOT be your goal! Initially, your responsibility is to establish YOUR typical Food and Beverage costs! Your costs will vary depending on the quality, consistency, and expectations for YOUR restaurant.
Some restaurants operate with a very narrow, low cost menu and may be able to run Food and Beverage Costs as low as 15% of Revenue. High end restaurants typically have higher Food and Beverage Costs due to the higher quality of the items sold.
After a few weeks, your job becomes to improve the efficiency of your operations: limit waste, properly scale your food purchases to match busy and slow times, and dial in YOUR food and beverage cost percentage to match YOUR operations! Remember, the national average means approximately HALF of restaurants are performing better than that average!
Labor
Hmmmm…Labor. A seemingly impossible conversation in todays world of business. For a restaurant, controlling labor costs is likely THE SINGLE MOST important indicator of being profitable. While over ordering food and beverage can lead to a potential loss, a restaurant typically has time to sell over purchased goods before the perish date.
Labor, on the other hand, once spent, produces little to no future value. Mess up on ordering, you can order more or less in the days to come. Mess up on labor, and those dollars are gone! (Yes, I realize there are MANY other ways to lose money on Food and Beverage (over portioning, theft, spoilage, over production and waste, etc.).
Labor should be PLANNED! At a minimum, two to three bench marks should be observed daily and adjustments made to keep labor at the proper level (sales up = ability to hold staff to handle the increased workload. Sales down = reduction in labor hours to keep the labor % of revenue relatively matched to sales).
If Food and Beverages totals 25-35% of sales (Revenue) and Prime costs should be held to approximately 55-60% of Sales, labor should be 25-30% of sales (Revenue). Thinking about this number…on a $1,000 sales day, Labor should = $250-$300 for the day.
If the shift pay average = $10.00/hour, you have 25 hours to schedule and keep labor at the 25% level for $1,000 in sales.
Labor % of Sale = 25%
Labor For QSR Restaurants, labor should be approximately 25% of Revenue. (Hoare, 2021).
Setting weekly tracking of Labor Costs will help correct labor overspend four times faster than monthly monitoring! Tracking daily gives you THIRTY opportunities to correct labor for the month versus only one if tracked monthly!!
Food % of Sale = 25%
Food costs, for QSR, should be on the lower end of the Percent of Revenue (Sales) spectrum. Keeping Food Costs at 30% of Revenue or below is a great target for QSR.
Gross Profit = 40-45%
Controlling Labor and Food/Beverage Costs is the only way to hit your Gross Profit Target.
Net Profit = 6-9%
The National Average for QSR Net Profit is 6-9%. It should also be noted that the national average for QSR Prime Costs is 60-65%. If you are controlling Prime to 55%, this should result in 11-14% Net Profit
Inventory Turn
Will address in a later article of Restaurant Performance Indicators
Shrink
Will address in a later article of Restaurant Performance Indicators
Market! Market! Market!
While this will be address in later articles, if they don’t know you are there, they cannot come visit you! If you want to learn more about our accounting services for restaurants, check out our restaurant accounting page
Boyte-White, C. (2021, April 30). What Is the Prime Cost Formula? Investopedia. https://www.investopedia.com/ask/answers/052615/what-prime-cost-formula.asp.
Brizek, M. G., Frash, R. E., McLeod, B. M., & Patience, M. O. (2021, February). Independent restaurant operator perspectives in the wake of the COVID-19 pandemic. International journal of hospitality management. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7674148/.
Brydges, J. (2019, October 2). Average Restaurant Costs: Liquor, Food, and Labor. Backbar Academy. https://academy.getbackbar.com/average-restaurant-costs-liquor-food-and-labor.
Hoare, D. J. (2021, March 25). Restaurant Profit and Loss Statement – Best Format to Use. Value Investing – Business and Economic Principles. https://businessecon.org/restaurant-profit-and-loss-statement-best-format-to-use/.
Laube, J. (2017, April 7). Why Prime Cost Is the Most Important Number (that should be) On Your P&L. Restaurant Business Plans, Systems, Checklists & Training, POS, Startup Tools & Resources. https://www.restaurantowner.com/public/Why-Prime-Cost-Is-the-Most-Important-Number-That-Should-Be-on-Your-PL.cfm.
