The fundamental basis of any business is to make money. In order to be profitable, the business must bring in more revenue than it spends on costs. The bar and restaurant industry is no exception, but can provide a much more challenging road to success. Competitive by nature, the measurement of success tends to be much smaller on average than other industries. Like other industries and businesses, there are several key metrics that contribute to the success or failure of a restaurant and should be measured on a consistent basis.
With so many moving parts involved in running a restaurant, many different costs and revenue streams, changing one piece will very seldom produce noticeable results in operations and margins. Being able to adapt any part of the business plan to improve those metrics is a crucial component of efficient ownership/management. Below we will discuss the most important restaurant performance metrics and how to calculate them.
When starting a restaurant or if you’re just beginning to track your key metrics, the break-even point should be the very first number you calculate. This is especially important because it gives you a sales target that you need to hit in order to earn back your investment costs.
Calculation – Total Fixed Costs / ((Total Sales – Total Variable Costs) / Total Sales) = Break-Even Point
Cost of Goods Sold (COGS)
This metric can be thought of as your total food inventory cost at a specific time. The key to measuring this metric is accurately recording your inventory at the start and end of a given time period and accounting for any additional inventory purchases. The reason this is very important to track is that it is usually one of the largest expenses for a restaurant.
Calculation – Beginning Inventory Cost + Purchased Inventory Cost – Final Inventory Cost = Cost of Goods Sold
Usage is the quantity of product you went through during the given period of time. In contrast to quantity sold, usage takes into account everything used, including lost product due to spillage, non-compliance or even theft.
To calculate usage, you just need to subtract your ending inventory from your starting inventory plus any quantities received. The formula is as follows:
Calculation – Starting inventory + Received inventory – Ending inventory = Usage
In a perfect world, you would be selling exactly as much as you are using. But sometimes bottles break, cocktails are not done properly and someone might just be running off with a case of beer every other night.
Variance, also known as shrinkage, is the difference between your Cost of Goods Sold (COGS) and your inventory usage (in $). A simple formula to calculate variance is this:
Calculation – COGS – Usage ($) = Product Variance
While uncontrollable, fixed costs can be a valuable cost to understand how it plays into your restaurant’s overall profitability. Overhead rate is calculated to show fixed costs in a more practical way (hourly or daily basis). Often times fixed costs are paid on a monthly basis and overhead puts it into a better perspective.
Calculation – Total Fixed Costs* / Total Hours or Days Open* = Overhead Rate*Monthly basis
This is a fairly simple metric to calculate and track but extremely important to monitor and try to reduce whenever possible. Prime cost makes up a large portion of your restaurant’s controllable expenses, which are the ones that you can reduce.
Calculation– Labor Cost* + COGS = Prime Cost*This includes salaried labor, hourly wages, payroll taxes and benefits
Food Cost Percentage
This metric represents the percentage of the cost of creating one of your menu items (accounting for all ingredient costs) compared to the selling price of that menu item. To calculate for your entire restaurant, you just need to divide total food costs by your total sales during a defined time period. Ideally, you will want to shoot for somewhere between 28—35% for your restaurant’s food cost percentage.
Calculation – Total Food Cost* / Total Sales* = Food Cost Percentage*Within defined time period
When only looking at the food factor in your restaurant’s business plan, gross profit is important to understand because it is the money available to pay off fixed expenses.
Calculation – Total Sales* – COGS* = Gross Profit*Within in a defined time period
Unfortunately, one of the challenges of running a restaurant is keeping quality staff members month after month. This industry is very competitive when it comes to wages. This metric is important because a restaurant is a fast-paced environment and hiring new employees hurts efficiency and requires significant training time.
(Starting # of Employees + Ending # of Employees) / 2 = Average # of Employees
Lost Employees / Average # of Employees = Employee Turnover
Sales per Labor Hour
To help understand how your productive your staff is on a monthly or weekly basis, Sales per Labor Hour is a great metric to track. The national average $45.33 per hour. To calculate your staff’s productivity, it is best to use a POS system that can track an individual’s data and sales.
How to Build a Team That’s Responsive to Performance Metrics
One of the best methods is to bring the team along with you while studying performance metrics and follow a few simple rules.
- Make it fun for employees – Create a challenge to see who follows SOP best and include yourself in it. It is best when every member of the team participates and also learns in the process. Do small weekly bonuses for best SOP adherence of the week or other small gestures that let people see they are being rewarded.
- Don’t single anyone out – Make sure that for those that are struggling, you check in with them and find a way to bring them with you. Do they need additional training? Offer it quickly and happily. Making the same mistakes? Check to make sure they understand the SOP in question and, if not, walk them through the right method.
- Be realistic – Sometimes SOP adherence is so poor that a 20% increase is a big win. Take some time early on to understand where you are beginning, rather than focusing on where you should be. When you understand the benchmark, set realistic goals, long term if necessary, and begin working with the team on showing improvement. As the manager, you set the tone for the operation and are allowed to make mistakes. As the employee, you determine your worth with the effort you put into it. It will always be your job to ring orders up within X minutes, but don’t beat yourself up if you mess up one time.
While not everyone will understand the metrics and reasons for it at first, taking the right steps can get buy-in at a critical moment that can yield success for the team later on. Remember to think and act positively towards others because, at the end of the day, you are all working towards the same goals. No, it’s not about how quickly they can fold the napkins to prepare for a dinner service, but rather how they help the team reach its overall goal.