Food Cost is Important!

Food cost is very important to the operation of a successful restaurant.

The cost of the food you serve could be your largest cost, and the one cost that, if not managed closely, will destroy your profitability.  It is your key controllable cost.

Before you establish your restaurant, or purchase an operating restaurant, you will have a key budget number for your food cost.

Whatever you call it, Food Cost, Cost of Goods Sold or the financial term “Input Cost”, you must have an accurate projection and track your actual cost against the projection regularly. 

What is food cost?

Simply it is the cost of all the ingredients that you use to serve your menu.

It is simple to calculate:

The total value of the food on hand at the start of the accounting period,

plus the total value of all food purchased during the accounting period,

minus the total value of the food hand at the conclusion of the accounting period, which gives you the total amount of food used during accounting period. 

Then divide the total value of the food used during that accounting period by the total net sales to get the food cost percentage for the period.   

To recap: Beginning inventory + purchases – ending inventory = food used / total sales = food cost.

That calculation is the simple part.  Managing it is much more complex. 

Of course you start with a budget and projections of your operating revenue, expenses and profit.  As you build your menu, you calculate a “plate cost” for each menu item.  Finally, you regularly calculate your food cost to see if your actual food cost is in line with your projections or budget.   

The calculation starts with doing a complete inventory of all of your food and beverages.  When the inventory is complete, you have to determine the value for everything on hand. 

How often should you do an inventory?  Or put another way, how often should calculate your food cost?  If you are doing a monthly income statement, then you must do the inventory at least once per month to accurately calculate the monthly income and profit.  But you will want to monitor your operating costs more frequently to be sure that your restaurant is operating to your profit projections.

When all is new, or if you have been having food cost problem, you should be calculating food cost on a weekly basis.  If everything is under control you may decide to extend that to biweekly. 

While I know and have worked with managers and owners that only did a monthly inventory, I would not.  I don’t like to be surprised.  I just believe that if you let four weeks go by, you don’t have the time to react and impact the food cost.  A lot of stuff can happen in four weeks, and most of it is bad.

Food cost is the key cost that you have to keep a very close track on, so that you can keep your restaurant profitable.  Checking it weekly gives you the vital information you need to react to variations in your food cost and get it back on track to your projections. 

In the next installment of this food cost series, we will talk about ways to make your weekly inventory easier and quicker.  

Know your Break Even Point

Knowing your restaurant’s Break Even Point is the most fundamental number that you must know.  As you assemble your business plan and budgets prior to opening your restaurant, you must calculate your BEP so you know exactly when your restaurant will begin to show a profit.     

These steps, before you serve your first guest, will give you a very good idea of the revenue you must have to generate a profit for your restaurant.  The Break Even Point is literally the dollar amount that covers all the expenses and the profit begins.  If your BEP is $21,836, the first dollar beyond that amount is profit.

Knowing the Break Even Point will help your planning.  You will be able to make adjustments to your business plan, budget or your operating plan before you get your restaurant into a fiscal hole that will be difficult to get out of.  If your menu plan and day part plans will not generate revenue sufficient to get the restaurant to BEP, then you must reduce your expenses to generate profit.  It is better to know that before you incur long term expenses, than to try to increase revenue later to overcome your expenses. 

Restaurants are tremendous cash flow generators, and many owners get seduced by the cash flow, believing that cash flow is the same as profit.  Unfortunately using your cash flow to solve problems means that you risk spending beyond the revenue and you will lose your business.  Without sound fiscal management, cash flow spending can continue until a crisis exposes the cash flow short fall or the expenses over run the cash flow.  

 

So how do you determine the Break Even Point?

The formula is Fixed Costs / (1-(Variable Costs/Sales))

To calculate your Break Even Point you must know your total fixed expenses, your total planned variable expenses and your planned net sales.  You probably have these numbers already available in your budget or in an Excel workbook. 

If you don’t have these numbers available in a workbook, you can get one here:

http://www.docstoc.com/docs/82061341/Break-Even-Point-Calculation-Template-for-Restaurants

This template is easy to use, quick to fill out and does all of the calculations for you.  Just enter all of your expenses in the correct budget category, and then let the workbook do all of the calculations for you.  The second page shows all of your results and the BEP that you must hit to profit. 

If you don’t use the template, just get the total dollar amount for your fixed expenses, your projected variable expense and your projected net sales. 

Step 1)   Calculate the variable expense cost percentage (Primarily Food and Labor Cost of Sales) by dividing the variable expense dollars by the projected net sales.

  

                        Projected Variable Cost of Sales = $52,769

                       

                        Projected Net Sales = $91,489

                        $52,769 / $91,489 = .5768 (57.7%)

Step 2)   Determine the Variable Cost remainder by subtracting the Variable Cost Percentage from 100%

                        1.000 (100%) - .5768 (57.7%)  = .4232 (42.3%)

Step 3)   Divide the Fixed Cost total dollar amount by the Variable Cost Remainder

                        Fixed Cost Expenses = $31,659

                        Variable Cost Remainder = 42.3%

                        $31,659 / .4232 = $74,809

Step 4)   The Break Even Point is $74,809

Remember that the BEP is simple to calculate and will help you determine exactly the steps that you must take to make (and keep!) your restaurant profitable. 

You should keep the figures necessary for calculation handy so that you can effectively evaluate any strategic decisions regarding your operational plan or (adding day parts or menu changes) any capital expenditure decisions and how they will affect your BEP.  You will also be able to track any changes to your variable expenses and how those will affect your BEP.  If there are changes to your restaurant cost structure, you will want to be able to react quickly and preserve your profit.