For more than just bean counters
The restaurant industry has a very bad reputation as being a place for unintelligent people to work. Also, it is home for for addicts and slackers that cannot hold jobs. Don’t forget the trolls that feel no thinking is involved in this business. They are wrong, thinking and problem solving are paramount to understanding the restaurant numbers for a successful business.
Both statements are false, there are addicts and slackers that wear suits and make $5,000,000 a year. Shockingly, not all restaurants employee a team of addicts, slackers and other undesirables. Plenty of intelligent people wait tables or tend bar. These people are not athletes and music stars that come to mind. Also included is the more modern celebrity, influencer/content creator.
However we are not referring to these people. The people we are thinking about today are their neighbors. The people that live in the 6500sqft house that looks like a hotel. This is the person that no knows what they do, yet have a palatial estate. People like this tend to do something really well. Understand restaurant numbers.
Magical numbers that do incredible things is our topic today.
Why are Restaurant numbers important?
Thanks for asking, well everything runs on numbers, especially if the numbers say there is profit. Restaurants that pay all bills and employees with cash leftover are profitable.
Operating or event working at a restaurant is a numbers game. Shitty service and bad food can cause bad restaurant numbers, so can good food and incredible service.
Get familiar with your new not cool BFF’s. Boring numbers!
P&L: Profit and Loss statement, did you make money or not?
COGS and COGS %(cost of goods sold): ((starting inventory+purchases)-ending inventory). This provides the data on how much the product cost that was sold. Then to get the percentage (most important for profitability) you divide by sales. This is done by category, example: start March with $5,000 in wine inventory. Then assume March ends with $7,000 in wine inventory. During March $5,000 in wine was purchased and finally $10,000 in wine was sold. (5000+5000)-7000= $3,000 COGS $3,000/$10,000=30% COGS. Some might have heard COGS referred to as food, beverage or liquor cost.
In this case 30% means that for every dollar of revenue, 30 cents went to cover the cost of product. That 70 cents, well it is gross profit, another important restaurant number to be aware of.
A Few Restaurant Numbers to Know:
Gross Profit: Revenue (sales)- Cost of product= gross profit or gross margin.
Net Profit: The “bottom line”, what is left everyone gets paid.
Loss: how much extra it cost to run the business for the month. No profit was made.
Labor %: percentage of labor according to sales. Assume the following: 10,000hrs of labor at an average pay $12 or $120,00 . There were $500,000 in sales.
$120,000 divided by $500,000 or 24% labor
Inventory: this is an asset for a restaurant, the value of different inventories. Plates, equipment, cutlery, table cloths, tables, chairs, the building itself (if the restaurant owns it) are all inventory.
Comp/Promo: Giving something away that was made and left the kitchen, this counts as a sale with no revenue. Example: buying a high-performing employee dinner
Void: Voids are as if something was never made. Voids can be a misring of the POS. The other popular void is, guest changed mind. Example; when grandma Joan decides she cannot get a discount on the chicken caesar, only the chicken entree and changes her order.
Discounts: That 50% Karen gets off the meal for throwing a fit for a ridiculous reason.
Costs That Affect Restaurant Numbers
Theft: a loss when people steal stuff, both guests and employees
Fixed costs (overhead): costs that cannot be avoided and do not vary by month (utilities). Fixed costs can berent, leases on equipment, loan payments, manager pay and maintenance contracts.
Variable Costs: costs that change by the month; electricity, gas, water, credit card fees.
Expense: the dollars spent that can be avoided or are optional. Expenses may not directly generate revenue: marketing agency, pest control, depreciation (tax deductible), operating expense, uniforms, janitorial/cleaning crew.
Wow!
That is a lot and this list is not everything that contributes to the numbers in a restaurant. This is only the tip of the iceberg.
Why Are Restaurant Numbers Important?
Its a lot to discuss, these are the ones we feel are most important and will give examples of them below.
These are a few terms that really make restaurants tick, especially the smaller non-corporate restaurants. Think of chains as corporate/franchised restaurants; Applebees, Friday’s and Olive Garden; the dying breed of those types of restaurants. We are not including fast food or QSR and intentionally, those are generally real estate and distribution businesses.
A manager at Outback Steakhouse doesn’t think too much about all of these costs or gather them. Managers that work/ have worked worked in small restaurants and restaurant groups, have to always be thinking about said costs.
There is a good reason that a quality steakhouse charges $65 for a ribeye. First and foremost it is not to rip someone off. They charge that much cause it costs a lot of money to put the delicious steak in front of you.
The USDA offers a grading service for beef, everyone is familiar with choice and prime meats. This can raise the price of the carcass depending on the grade and where it sits on the scale. Any chef worth their weight knows what to look for in good meats.
These chefs like to purchase and continuously stock quality products that demand the high prices. Hence the $73 steak.
The sad part is that $65 steak in terms of profit, food cost, yield and waste would make any savvy investor or numbers geek cry. Steaks are usually some of the smallest contributors to profit.
When Restaurant Numbers Reveal the Truth
A nice ribeye at your local, high-end steakhouse probably costs about $30 to serve.
Where does this come from?
- There are a few factors to consider:
- Price of beef
- Cost to store it
- Cost to cook it (have to pay someone to)
- How much weight is lost during cooking
- Waste (shelf-life)
The last place I worked was paying almost $24 per ribeye!
This was a high-end steakhouse in a casino on the Las Vegas strip.
How do Restaurant Numbers Justify Quality and High Prices?
Why so much for a steak?
Simple, get the best producer of steak, at the top of the grading scale. Then prepare and serve to guests with high expectations. The product has to match the expectation.
Yes, the local supermarket has a ribeye for $15. Unless it is coming a from a producer such as Creekstone Farms, it will not likely compare to what we served. Creekstone Farms is selling steaks to some of the top steakhouses in Las Vegas. Several of these steakhouses exclusively serve Creekstone Farms. They are not cheap, but the quality is top-notch. This isn’t always good for restaurant numbers.
So, we are $24 in the hole, before even taking delivery of the steak. Other costs include delivery fees/charges (asshole distributors), storage (variable cost), cooking it (labor cost) and yield (the secret killer). Now the cost jumped $11 to $35!
Now, still, it is nice to make a $30 profit or 50% margin on the steak!
This is awesome and great!
When The Restaurant Numbers Meet Reality!
Reality hits when a steak gets overcooked.
Then another $30 steak goes out…FREE.
Cut a steak out of the cryovac aging bag and it smells like rotten eggs, $24 gone.
Chefs have to price in how often they will be wasting food.
How long can a capital intensive business keep the doors open on a 50% margin?
A business can sustain for a while, however it might not stick around long, if sell 250 steaks in a night. Awesome! Do not forget to add in the 10 steaks that produced ZERO revenue. Gross profit is only 240 of them. Doesn’t sound like a huge number, until you add in all the other costs of running a restaurant.
When Do the Restaurant Numbers Show Profit?
So then where do restaurants make more than 50% profit?
Ever have an appetizer, salad, side dish, or dessert at a steakhouse? Ever have the 1 pasta on the menu with shrimp?
That $14 Caesar salad probably cost about $2 to make for 600% profit. The math is 14-2=12, 12 divided by 2 is 6 or 600%). Even that king crab mac and cheese is its own little money tree!
Why is this?
The king crab meat does not come from the legs itself, it comes from the knuckles and claws. Claws are do not have sexy presentation. Chefs get this meat by the bag and love to use it. Not only does the claw and knuckle meat taste the same, but it also costs significantly less as well. Diary is expensive, thankfully cheese sauce is made by the gallon. That spreads the costs around pretty evenly. Even if the pasta is Rustichella d’Abruzzo pasta at $7/lb, the $24 dish makes money.
What Does This Brief Lesson in Menu Economics Mean to Restaurant Numbers?
First, we didn’t even talk about the bar and the rest of the restaurant.
Secondly, without understanding the restaurant numbers and terms mentioned above, its hard to think about running a business. Even more important, making sure the doors stay open.
Thirdly, we are not covering this all in detail now. Many of these topics will get their day in the spotlight. Keeping NO More Sidework policy, it will be fun and educational (most likely involving drinking/eating).
Furthermore, all this can be applied to any business or organization on Mother Earth. Learning and understanding them while not having to, gives you a huge advantage when that day comes.
Godspeed, make money and don’t learn too much or kill too many brain cells.
Make Money
Cheers Friends