What are key problems in a Restaurant financial ratio?

Answer 1

Key operating expenses too high relative to gross salesRestaurant food & beverage purchases plus labor expenses (wages plus employer paid taxes and benefits) account for 65 to 70 cents of every dollar in restaurant sales. The combined total of these two cost categories, referred to as your restaurant's "Prime Cost", are where the battle for restaurant profitability is truly waged. This is not simply because they represent the largest percentage of your total expenses, but also because you have the ability to control them. Unlike utility and insurance expenses that are relatively fixed, you can directly impact your food cost percentage by more effective purchasing, product handling and menu pricing. Similarly, hiring practices, scheduling, and even the layout of your kitchen and the way your menu items are selected can favorably impact labor costs. The bottom line is this, when I see a restaurants Prime Cost percentage exceed 70%, a red flag is raised. Unless the restaurant can compensate for these higher costs by having, for example, a very favorable rent expense (e.g. less than 4% of sales) it is very difficult, and perhaps impossible, to be profitable. While we are on the subject of rent expense it is useful to point out that on a national basis a restaurant's occupancy expense (this includes not only rent but also real estate taxes, property insurance and common area charges) is the single highest expense after its "Prime Costs", and averages around 6% of sales. As a fixed expense the only way that you can reduce this ratio is to increase sales. When I see this number exceeding 8% of sales another red flag is raised. In this case I divide the restaurant's annual occupancy cost by 6% to determine the sales level that will be required to keep occupancy expenses in line with industry norms. Menu items not accurately documented, costed and updated The most common method of menu item pricing that I have observed over the years is what I will call the comparative approach. Simply check a few other restaurants that you compete with, find a similar item on their menu, and then price your item accordingly. Now its one thing to document and cost out all your menu items and then to determine what your selling price will be by taking into account that of your competitors, but its quite another to price solely off of them. The truth is that it takes a lot of discipline and time to carefully and accurately document and cost (and re-cost periodically as your vendor prices change) your menu items. Moreover, you need to be well organized, and have some reasonable math aptitude to deal with detail required to convert product prices from the way you purchase them to recipe units for costing purposes. But how can you possibly manage your restaurants food costs if you do not even know what each and every item is costing you? All you are left with is the "Let's raise the price" mentality. And while that may work in the short run, there are unquestionably better ways to proactively manage your food costs than that! There are a variety of recipe costing software products on the market, but they are of no value if you are not committed to first learning how to use them and then to continue to maintain them day in and out. A simple Excel spreadsheet is often the best solution (a customized Excel workbook that includes links to your inventory items is available at www.rrgconsulting.com/recipe_costing.htm). Food & beverage inventory levels not counted and costed at the end of each accounting period or recorded in your accounting software Most independent restaurant operators confuse their monthly food and beverage purchases with their monthly usage. By this I mean that they review their monthly P&L (Profit and Loss) and assume that the food purchased during the month divided by the food sales for the same period equals the cost of goods sold for food! Not so. Without knowledge of the beginning and ending inventories you can never calculate an accurate food cost. For a restaurant with food sales of $50,000/month, an inventory difference of $1000 between the beginning and end of the month, can translate into a variance of 2%. This disparity represents half the total annual profit of a typical full service restaurant! You simply cannot manage your food costs if you do not know what they are, and you cannot know what they are if you do not count and record you inventory variances. Once again, use a simple Excel spreadsheet to document, price, and total your food and beverage inventories, and then make sure to account for the changes between periods by making an appropriate accounting entry (read Count and Account for Your Month Ending Food & Beverage Inventory To Produce Accurate Profit and Loss Statements and find a simple Excel tool for recording and counting your inventories at www.rrgconsulting.com/spreadsheets.htm) Food and beverage inventory levels too high relative to corresponding sales This red flag is not as obvious as some of the others but can be just as serious an obstacle to your restaurants profitability. A restaurant that carries too much food inventory will inevitably have higher food costs than it would otherwise. Too much food sitting in your walk-in cooler, your freezer and your dry goods shelves will result in excess waste, over-portioning, reduced product utilization, theft and will also tie up your most valuable asset….cash! But how do you determine how much inventory is too much or what the ideal amount of inventory is? A typical full service restaurant should have on average no more than 7 days of inventory (that number can be reduced by a few days for quick service restaurants). Follow this simple calculation to find out how many days of food inventory you have: Multiply your average monthly food sales by your food cost %. Now divide that number (your average monthly food usage) by 30 (days/month) $50,000 Food Sales/Month X 30% = $15,000 (Food Usage) $15,000 / 30 days = $500/day of food usage If your counted food inventory is $5,000 then divide that by your daily food usage to get the number of days of inventory on hand: $5,000/$500 =10 days Reduce your inventory appropriately and watch your food costs drop along with it. Follow the same procedure for your alcoholic beverage inventories and use the following as guidelines: Liquor: 15+ days (bars and clubs will carry more inventory than restaurants) Beer: 7-10 days Wine: 15+ days (more for restaurants that specialize in wine and/or carry many varieties)