Food Cost Analysis

If you have been reading the past few posts about food cost, you probably have deduced that I do not like to be surprised.  I especially do not like to be surprised by a bad bottom line result.

I entered my career in restaurants in the days of paper and pencils, and calculators. 

I spent lot of time studying food cost and how to manage it successfully.

No surprises meant that I had to have a very good handle on the factors that contributed to managing my food cost: pricing menu items, watching waste, managing yields, tracking inventory and monitoring team activities.

And I got very good with a calculator and pencil.

If you are using the tools that we discussed in the earlier posts, inventory and plate costs, you will have the tools for analysis of your food cost.  

I always had my inventories set up so that I could compare each food cost category group to both projections and previous results.  For instance, I broke out meat as a category and a subtotal so that the “meat cost of sales” could be tracked as a component of the total food cost. 

If my food cost ran higher than projection, I could go back over each category subtotal and review what the problem might be.  This allowed me to hard target the problem, rather than “swagging” (Scientific Wild A** Guess) to my team. 

For “Plate Cost” I knew the cost of each menu item, what it costs to produce the item and what margin I needed for each item.  I also know the menu mix for each

Item, so I can assess the impact for both my food cost and my bottom line. 

Using that information, I could react very quickly if the cost of the ingredients changed, if my yields changed or if the pricing of the menu item changed. 

For example, in one job that I worked, my General Manager approached me about “my high food cost” on my shifts. His advice to me was “to get my portions and waste under control or he would fire me” and hire someone who would not blow up his food cost.  I didn’t know whether to laugh or swear at his ignorance, but I certainly wasn’t going to take his challenge lightly.  Using my knowledge of inventory and plate cost, I prepared a report for him that clearly demonstrated that I WAS NOT the problem, that his discounting and coupons were the cause of the food cost problem.  Quite simply, he was not charging enough for his food!

Even more interesting, the Area Manager got wind of my little project and asked me to expand my report for the entire last accounting period.  He wanted to share the discounting and coupon revelation with his boss and his entire team.  While I reflected in amazement that the entire organization seemed clueless about the impact of the mandated discounts and coupons, I welcomed the opportunity to bring some common sense to the process. 

I prepared the requested report, for an entire accounting period that clearly demonstrated that our unit had excellent portion control, minimum waste and effective yield management.  The food cost problem was the menu discounting and coupons, something that was corporate mandated. 

While a good case can be made for the coupons driving top line sales, the discounts was used, targeting low margin entrees, hurting the food cost because they did not take into account the high redemption rate by our guests that used the discounts and the price of the food that was used to create the menu items. 

My report certainly did stir things up, from the unit level right up to the regional level.  I gathered several new “friends” in the company, and got labeled the “smart guy”, because I understood Food Cost and could figure it out.   

Of course, being labeled the “smart guy” was also a pretty good career move for me, earning me several promotions, from unit to area to regional within that company, and then beyond.   

They definitely got smarter when they changed the coupons to drive top line sales by “packaging” multiple entrees and appetizers into a special deal, and keeping a very profitable margin while focusing our guests on higher perceived value.  

Still, my goal has always been focus to be very smart about my food cost. 

Food cost is a variable cost, but remember it always tracks with your revenue.  It should remain the same percentage of revenue, no matter what direction your revenue heads, either up or down.  As with labor cost, it is much easier to manage as your revenue goes up, because you have more offsets for errors. 

But you still must have very tight control over the costs for food and the revenue it generates, so it doesn’t impact your bottom line.   

Cheers! Here’s to building profits!

10 Tricks and Tips to Make Your Food Inventory Easier and Quicker.

Do your food cost every week.

Unless you work for a chain where the weekly inventory and food cost is mandated, most owners and managers treat the weekly inventory as an “optional” exercise.  Believe me, it is not. 

I always enjoyed doing the inventory because I like to see the result, and make sure that I was meeting my profit goals.  I can’t have a big impact on my Fixed Costs every week, but I can really make sure that my food cost is in line with my projections and goal.  It is a first key step to make sure that your inventory is making you money.    

There is a variety of things that can happen to your food before is turns into revenue, and most of them are bad.  Delivery errors, waste, theft, reduced yields, spoilage, over portioning, recipe mistakes, and comps are adding to your usage without bringing revenue, thus increasing your operating costs and reducing your profits.  Careful inventory management helps you spot the problems, before the costs drive you out of business.

I crave success and thus spent a lot of time making sure my inventory was turning into revenue.  I took ownership of the food from the time I placed the order until I scraped the “leftovers” into the trash can.  Food Cost awareness was a part of my job that I really enjoyed. 

The calculator part is easy.  The handling, arranging, counting and calculating can be just as easy with some planning.  Establish your routine and it becomes very easy.

1)  Review your food inventory every shift.            

            I started every shift touching and checking all of the food.  I always knew what I had “on hand” and what it was going to yield.  I knew what we were going to sell that shift and what we needed to have prepped.  My kitchen staffs always worked from a large white board.  You can’t sell what you don’t have!

2)  Watch what is being used.  Watch prep, item sales and ending counts.

            I always watched what is being prepped and how closely the recipe cards are being followed.  An experienced cook can hit the ingredient measure very close, but for costly food items make sure the recipe is followed, using all the proper measurements.  I do not like waste in the kitchen!  

3)  Watch for the leftovers and “doggie bags”. 

            What is being scrapped off the plate by your bussers and dishwashers?  It is smart to make sure that your guests are getting what they paid for, but are your portions the right size for your guests?  Too small and guests feel cheated, too large and they waste it or take it home to "finish" later?   I don’t want my customers to waste food, and I don't want my menu items "re-served" under less than optimal conditions, so I made sure my portions were right.

4) Be consistent about what you count and when you count it. 

            It makes the most sense to count your inventory when your food stock is lowest, just prior to reordering most of your stock.  Typically, that is going to be Sunday, Monday or Tuesday.  You must decide if you are going to count food items that are “in use”, such as spices that are opened on the spice rack, or menu ingredients that are already prepared.  Prepped and in use ingredients are usually consistent enough to not affect food cost week to week.

5)  Place your food order carefully and check it in carefully.

            Make sure you order everything you need and get everything you are charged for by your purveyors.  Mistakes rarely happen, but it’s very smart to get errors taken care of at the time of delivery.

6) Keep accurate records of purchases and on hand inventory.

            It really doesn’t matter if your food cost bookkeeping is paper based, using a pencil and calculator or if it uses electronics and software, keep accurate records for both this week’s calculations and for your long term records.     

7) Train your team to store the same items in the same manner every day.

            To keep your records accurate, your whole team needs to be on the same page with you about how the food stock is handled and stored.  I kept my rules simple, only unopened, full cases in the stock room, open and partials in back stock, and units in the production and service lines.  It saved me a lot of time to have my team work smart.  

8) Go thru your stock once a day to keep order and know what is on hand.

            Every shift tour included time in all storage areas, opening all doors, and checking in all cabinets.  Part of this is following up on the team, and part of it is to previewing all stock to make sure everything is where it needs to be.  

               

9) Precount your inventory, check units, arrange stock for fast counts.

            Before you start the actual inventory, do a walk through to assure everything is ready for counting.  To do the inventory in the shortest time, you must have everything ready to count, you do not want to have to move items or open boxes to do the count.  Your focus must be on the count and writing it on your ledger sheet.  

10) Count by location, and count the same way at each location each time.

            Door to left, right to left, top to bottom, frozen to dry, it doesn’t matter.  What does matter is the routine.  Routine helps focus you on the count and working through it quickly. 

If you have done your steps, everything is ready, and inventory will go very quickly.     Plan, organize and control your food cost system to insure accuracy and efficiency, as well as profitability.  It will pay off for your restaurant. 

In the next post we are going to talk about food cost for each individual menu item.  Stay tuned!

Three Key Performance Indicators

Every restaurant operator needs to monitor the key performance indicators, to evaluate the fiscal health of their restaurant and to make strategic operational decisions.

We tell operators if they keep track of nothing else in their restaurant they need to keep track of these three key performance indicators, because they are critical to understanding your revenue stream and predicting what steps you must take to keep revenue on track. 

If you combine these three Key Performance Indicators with your Break Even Point, you will have the very fundamental information to make strategic decisions on your revenue. 

These three key performance indicators are essential to evaluating restaurant revenue performance. 

            1) Net Sales

            2) Guest Count

            3) Guest Average

These three key performance indicators are usually easy to validate and the source numbers are usually close at hand.  If they are they are not easily available from your point of sale system, make sure that you have the paperwork in place to make it easy to track and harvest these numbers on a daily and weekly basis.

If your restaurant is using a computer POS system, this information will be readily available from the POS system.  It may be in a report format that is different than what you will need but usually the hard numbers can be used and reformatted into an informative system for your monitoring and evaluation.

If your restaurant is not using a computer POS system, it may take a little more time to assemble the three Key Performance Indicators, but it is still possible using the paper trail that usually exists in some degree in almost every restaurant.  If you don’t have this critical paper trail, start it TODAY! 

Additionally, these three KPI numbers are usually easy for a restaurant operator to track and share.  You may not be willing to share detailed income statement information, but these key performance indicators should be shared with your entire team. 

Your service team should be tracking their contribution to the daily and weekly restaurant KPI numbers, because you certainly will be tracking their contributions to the success of the restaurant.  While your production team may have other targeted numbers to evaluate their contribution to the success of the restaurant, they also should be aware of these KPI numbers because these numbers are so critical to the evaluation of the revenue.  Basically, the more people on your team that are working to move the numbers, the better your restaurant will be.    

Ideally, you should be able to assemble a report of the three Key Performance Indicators that covers at least the last year of restaurant operations.  A shorter period can be used, but it may not demonstrate a full range of variances of seasons and operating conditions.  The longer the time period you obtain, the better you can evaluate and analyze the trends in reports that you generate. 

First – Net Sales 

The first key performance indicator that you must gather for your evaluation is Net Sales.  Net Sales is all revenue from sales of food and beverage minus tax that is collected on behalf of a government entity.  The Net Sales is frequently obtained directly from the POS system, usually in the end of day or end of week report.   

Second – Guest Count

The second key performance indicator that you should gather for your evaluation is the Guest Count.  The Guest Count is the number of people that are served in the restaurant.  This key indicator is usually available from the POS system, again in the end of day or end of week report.  Occasionally the POS system will not track the Guest Count, by not requiring the input of that information as each check is opened.  Contact your POS vendor to make sure the POS system is set up so that your service team can enter the number of guests for every guest check that they open.     

Third – Guest Average

The third key performance indicator that you should gather for your evaluation is the Guest Average.  The Guest Average is the amount that each guest spends in the restaurant.  The per Guest Average is sometimes available directly from the POS system however we have noted that many POS systems track the Guest Check Average.  

Again, you may have to ask your POS vendor to adjust the programming in your system so that you can get the information to output correctly.  For some odd reason most computer programmers believe that Guest Check Average is the same as Per Guest Average.  They are wrong!  It is also helpful if the vendor will format the information into the individual server reports so that they can track their personal contributions against the group average and against your established team goals and expectations. 

If the POS vendor cannot adjust the information in their system, you can fall back on a paper tracking system.  It would make most sense to require your servers to track each Guest Check that they open and tracking the number of guests for each check.  At the end of their shift, they can turn in the report to management for entry into a tracking spreadsheet, that will calculate the Guest Check Average for your due diligence tracking. 

How to Evaluate the Key Performance Indicators

These three Key Performance Indicators can be used to determine a lot about the operation of the restaurant.  Using these numbers you are able to track the business of the restaurant and critical trends of the business.  They are also the primary source of many of the other numbers used in the fiscal analysis of your business.  As we said earlier, if you track nothing else, these KPI numbers can provide some of the very fundamental information that will serve you very well.

As you gather these numbers, you should be able to put them into a system (i.e. computer spread sheet) so that you are able to do some analysis and manipulation of the information.  You should begin gathering at the daily level and then use the spread sheet to gather the information into larger blocks of time for your analysis.  

The first KPI number is Net Sales.  You should know this number for every business day, with a time span of at least 3 months, if not longer, for valid trend analysis and decision processing.  It is helpful to be able to break the net sales number into dayparts, if that is essential for your restaurant.  The daily net sales must come from the POS or cash handling system.  The number should be validated by checking it against the daily bank deposits or the guest check register.

The second KPI number is Guest Count.  You should know this number for every business day, for a minimum of 3 months for valid trend analysis and evaluation.  This number can also be broken into dayparts, if that is required for certain decisions.

The third Key Performance Indicator is per Guest Average.  You should know or be able to calculate this number for every business day, for a minimum of 3 months to make effective decisions.  Of course this number can also be broken into dayparts, to make effective evaluations of the business going forward. 

Once you have this information on hand and you are getting used to evaluating it and using it to drive your every day operations decisions, your restaurant will get easier to manage.

Let’s review three decision examples:

You note that net sales are off by 5% each of the last three weeks.  This downward sales trend is very alarming and you need an action plan to reverse the trend.  But an effective action plan requires knowing why net sales are trending down.  The Key Performance Indicators will help you hard target the problem. 

If Net Sales is down because the Guest Count is falling, you can do traffic builder marketing to get the Guest Count back up.  The problem is quite different if the falling Net Sales trend is from a declining Guest Average, you must action plan to get each guest to spend more, usually by focusing your service staff on upselling and adding on to each guest. 

Either way, you can make a decision that hard targets the problem and makes the most effective use of your time, your action plan and any marketing that you do.   

In the second decision, you must evaluate who are the contributors are on your service staff.  By tracking and monitoring the Key Performance Indicators for each server you can focus your coaching for each server on the challenges that each server must concentrate on to improve.  You can use the information as an opportunity to reward your high performing servers, and use the information to get the servers with lower numbers back on track. 

Again, you can target your feedback to each server.  The message is going to be different to a server that has the highest Guest Average on your service team but has handled the fewest guests.  They may be stuck with a lot of deuces or they might be working their tables for too long and not turning them.  The server that has a lower Guest Average but has a higher Guest Count may be missing sales opportunities by turning tables too quickly or by taking a section that is too large, with the mistaken belief that the table handles or table turns are their key to earning better tips. 

In the third decision, you must make your marketing decision for the next Quarter.  You might see the opportunity to build your lunch day part, because of certain market factors you have identified.  You should find a menu special that will attract enough guests so that your promotion is revenue neutral marketing. 

Your goal should be to build Guest Count at a smaller Guest Average, with a carefully planned sales effort that sells the convenience of your location, the speed of your service, your great tasting menu and friendly atmosphere.  If you handle the promotion correctly, you will retain Guests after the promotion.  Properly managed, the after promotion Guest Count remains at promotional levels, but the Guest Average returns to pre-promotion level.  This means that you have effectively increased sales in the lunch day part. 

In each of these scenarios, it is critical to have the Key Performance Indicators so that you are able to examine trends and make valid decisions that will impact your restaurant’s revenue and fiscal management. 

As a restaurant owner you have a lot to keep track of every day but you must be aware of these three Key Performance Indicators, because they tell you so much about your revenue and give you information necessary to plan for effective sales and profit increases.  Restaurant owners know that these Key Performance Indicators are the very foundation of running your restaurant By The Numbers!