Category Archives: Questions
These are questions that have been asked of me in the past, and my replies. They are from one on one conversations, food service industry discussion forums, and questions that have been answered by email.
Many new owners think that running a restaurant will be easy if they’ve worked in the retail world. While all their retail skills do help, there are major differences between owning and operating a retail shop, and operating a restaurant.
In the food biz, you are also the warehouse and manufacturer of the product you are selling, which together both make up more work and require much more managing than a business that just sells the product. This is the major difference.
In the food biz, your product is perishable. After it is manufactured, it has to make it to the customer within a few short minutes in order to be satisfactory. A retail stores product isn’t worthless 5 minutes after it goes on the shelf.
In the food biz, you are also managing a distribution system. Whether it’s only coming from the kitchen to a tray on the counter, or all the way to a table, or even all the way to their home, you have to have a system for getting a highly volatile product to your customers before it’s ruined. They aren’t just plucking something off the shelf and bringing it to your register to pay.
There are a LOT more expenses involved in a restaurant compared to retail. The line items of things you must manage in a restaurant dwarf that of a retail shop.
Inventory procedures and control are much more complicated for a restaurant than a retail shop. While both types of businesses require you to track your cost of goods sold, the process in a restaurant is MUCH more complicated, as you will likely have more items on your inventory in more various stages of prep that all have to be counted, tracked, and ordered more often. These items are also much easier to waste and steal than in most retail settings.
Managing a food business and managing a retail business just aren’t the same thing. Not even close. While managing a food business requires all the skills used in managing a retail business, those skills are only a fraction of the skills you need.
The most difficult transition isn’t going from retail to food, not if you have worked production in the food business, it’s going from employee to owner. Managing in a business and owning a business are not the same thing. Not to say that people don’t successfully make that transition because some do. Most need experience running a business with someone else’s money first though, in a structure with support and mentors to teach you what you don’t know.
I would suggest reading a couple books to give you some insight on being an owner that you may not have considered. Any book on opening and operating a restaurant will help. One that I think is good is “The Everything Guide to Starting and Running a Restaurant” by Ronald Lee, a guy who owns and operates restaurants. I would also suggest “The E-Myth Revisited” by Michel Gerber, and any and all books by Al & Laura Ries or Dan Kennedy. They are real world marketing gurus.
While you can’t realize it until you open your business, the toughest part of the restaurant business isn’t making and serving great food. Doing that is relatively easy. The toughest part is creating a concept that speaks to people, and creating a system of marketing to get people into your business.
The biggest mistake new restaurant owners makes is thinking that all they have to do is “build it and they will come”. They believe their food is so good, or their idea so revolutionary that people will flock to them. They talk about building their business by “word of mouth” instead of having a real marketing plan, and more often than not, they fall flat on their faces. Don’t make these mistakes. If you do nothing else, study restaurant marketing. I think everyone who owns a restaurant will tell you they greatly underestimated how important marketing is. Remember, word of mouth marketing can’t work if no one knows who you are.
Hello everyone. Thank you for tuning in to the web log for O’Dell Restaurant Consulting. We have decided to move our blog from WordPress to our own web host! Please make note of the new address. You can follow links on the top right of the page to subscribe to this new address.
We hope to see you at our new address. All new content will be coming to that address, and not to this one, so don’t miss out! Please join us there.
Calculating how much the food you sell costs you to sell is a very important practice in running a profitable restaurant. Knowledge is power, and knowing your food cost compared to your sales and your ideal food cost is very empowering information. By figuring your food cost percentage, you have an early warning system to alert you to potential theft and waste.
Before we get into the process for calculating food cost, it’s good to talk about how often this should be done. I suggest calculating your food costs at the end of every week. If you happen to have a cost control issue, it’s best to know as close to the time the occurence happened as possible. The farther you get away from an occurence that caused a cost problem, the harder it is to determine what that occurence was.
You are going to need to track a few pieces of information to calculate your food costs. You will need to know:
- How much is my starting inventory for the period I am evaluating?
- How much is my ending inventory for the period I am evaluating?
- How much food did I purchase during that period?
This is all the information necessary to calculate actual food costs for any given period. How long that period is depends on you. As I said, I suggest evaluating food costs every week.
In addition to knowing your actual food costs, you’ll need a couple other pieces of information to compare the actual food cost to:
- What is your ideal food cost for the period being evaluated? (we’ll discuss how to calculate ideal food cost also)
- What are your total sales for the period being evaluated? (you’ll also need to track your sales by item to calculate your ideal food cost)
Now let’s go one step at a time to get these powerful pieces of information.
Calculating actual food costs
Calculating your actual food cost starts by taking an inventory of all your food items at the same time every week. Choose one time as the starting and ending time for all your reporting for that week. I suggest ending your reporting after the end of business on Sunday, but before the beginning of business on Monday. Inventory levels are usually at their lowest on Sunday, so inventory takes less time to count and calculate.
The inventory that you take every week will serve as the starting inventory for the week to follow, but also the ending inventory for the week that is concluding. It will be used in both capacities to calculate food costs depending on whether the calculations are for the past week or the coming week. By counting your inventory, and using a spreadsheet to multiply out the value of all your items on hand, you will come up with a dollar amount that shows you how many dollars in inventory you have on hand.
This starting inventory is the beginning to the food cost equation. The equation looks like this:
starting inventory + purchases – ending inventory = cost of food for period
By taking a physical count of all your food on hand, you’ll have the starting inventory and the ending inventory parts to this equation. From there, you simply have to track your purchases within that time period. For this number, you’ll use dollar amounts from invoices received in the period being evaluated. It does not matter to the equation when that food is actually paid for.
Start with an inventory you took on the Sunday before a week started. Add all the dollar amounts for food received during that week. Subtract the amount of your inventory counted on the following Sunday. The resulting number is the cost of goods sold, or food cost, for the week.
Calculating ideal food costs
Ideal food costs are the amount of money the food you sold during a given period should have cost you. Compare your ideal food cost to your actual food cost to help you identify when there is a breakdown in your system. If your actual food cost goes up for a period, your ideal food cost should go up too. If it doesn’t, then you’ve just identified a problem, possibly theft or waste. If your ideal food cost does rise with your actual food cost, then you know your food cost is high not because your staff did something wrong, but because of the sales mix of your menu items for the period. This is important to know, because most high food cost menu items also contribute more gross profit dollars to your bottom line, so a high food cost for that period is not be a bad thing. The only way to know whether it is bad or good, is to compare it to your ideal food cost.
Here are the equations to figure your ideal food cost:
recipe cost for menu item × number of item sold = ideal cost for item
ideal cost for all items added together = ideal food cost
In a perfect world, your ideal food cost should match your actual food cost exactly. Since it’s impossible to perfectly measure every piece or food, or track every piece of waste, you will see some variance between your actual and ideal food costs. You have to decide how large a variance is acceptible. I believe you should expect to keep your actual and ideal costs within .5% of each other. Variances larger than this tend to point to problems in your system. These problems could include theft, waste, under-portioning, over-portioning, poor prep procedures, bad food receiving procedures, or other problems.
What we haven’t covered yet is the “percentage” part of food costs. I’m sure you’ve noticed that other restaurateurs express their food costs in a percentage. I also suggested your ideal and actual food costs stay within .5% of each other.
Food cost percentages
A food cost percentage is an expression of what your food cost you to serve compared to the sales you made during the period you’re evaluating.
The simple formula for figuring this percentage is:
actual food cost ÷ total food sales = actual food cost percentage
ideal food cost ÷ total food sales = ideal food cost percentage
The resulting percentage is the percent of your sales that go to pay for the food you sold, whether it’s actual or ideal. These percentage make it easy for you to compare your actual and ideal costs to each other, but also make it easy to compare food costs from different weeks, months, quarters or years to each other.
I hope this explanation helped you learn how to calculate your food costs. Calculate them every week, along with your ideal costs, and you’ll find that the extra attention you are paying to your costs will open your eyes to many opportunities to save money in your restaurant or food service. If you need some tools to help you calculate your actual or ideal food costs, please visit the webstore on our website.
That’s an important question. There isn’t enough reporting and record keeping in the restaurant business. Many chain restaurant can see by the end of the week whether they made money or not. Most independents have to wait until their accountant returns the monthly numbers anywhere from 4 days to 4 weeks after the end of the month. In my opinion, this is too late. If you don’t know how you did in the first week until the end of the month, you’re not managing proactively in my opinion. You need to be on top of a problem as close to when it happens as possible to solve it.
Minimum reports I suggest for every restaurant owner:
Sales by item – day/week/period
Purchases & Expenses – week
Inventory – week
Ideal cost of sales – week
Prime cost – week
Budget – week/period
Preliminary P&L – week/period
Actual P&L – period/year
Guest counts – day/week/period
Gross profit per customer/item – week
Labor – day/week/period
Cash reconciliation report – server/shift/day
Each of these reports should include the necessary comparisons to sales, budgets, etc. Reports have to be designed properly, and include all the information needed. With just the budget, labor, purchases, inventory and sales reports, you can generate about anything you need, most importantly a preliminary P&L. If your reports aren’t enough to build a preliminary weekly P&L or cash flow statement out of, most POS software don’t, they aren’t enough in my opinion.
Of course there are other useful reports to have, but most I think can be ran on an “as needed” basis. There are also shift reports that are necessary to the operation of your business, but those aren’t included here.
When you work in an excuse-driven culture, how do you change the mindset and teach others to become accountable?
Unfortunately, the most effective method for me to implement quick changes in attitude is through forcing it. That almost always requires “executing a hostage in front of the firing squad”.
Words are the first step. Accountability has to be taught as an expectation. You tell employees that your business expects them to be accountable, which means doing everything THEY can do to fix a situation rather than concentrating on what someone else should have done to avoid it.
I teach that they only have control over themselves, and they will get the most accomplished by concentrating on what they DO have control of (themself) rather than what they DON’T have control of (others).
Once they know you expect them to be accountable, you have to hold them accountable. That means no exceptions to the rules, no favorite employees who get away with things, and unequal punishment. It also means having pre-determined punishment for violations to documented rules, and making sure employees are taught those rules and sign an agreement to follow them.
Once the rules and the punishments are in place. The only thing left is equal and fair enforcement. Even a tough boss will be seen as fair if everyone is playing by the same rules. The bad attitudes most often come when there isn’t enough accountability, and people are allowed to break the rules. Then, employees who follow the rules are the ones who feel slighted, and they end up being the ones who leave. When rules are fair, and enforced consistently, the bad employees are the ones who leave.
Any time a situation gets bad, I’ve found it’s often necessary to fire someone to get compliance from the rest. This is especially necessary when there has been an extended lack of rule enforcement.
When I observe an “excuse-driven” culture, it almost always means there is a lack of consistent enforcement of the rules.
Slow economies have traditionally been very good for quick service restaurants. Eating out is usually the last part of the budget that a family sacrifices on. They do however change where they are eating out. Restaurants that offer exceptional value benefit from the increased consideration of value in the decision making process of a family or individual.
More important to the potential success of a restaurant than the national economy, is your local economy. While the national news bombards us with doom and gloom messages of recession and job loss, some cities still have economies that are thriving. In our country, there is opportunity to make money out there in the restaurant business. The industry will grow this year, as it always does.
There are restaurants that won’t make it through the year. There always are. They will blame the economy, cheap customers, thieving employees, greedy vendors, gas prices, and everything else you can imagine, except themselves. You can’t base your opportunity on the experience of others. We all have our own individual challenges within our businesses. You have to evaluate your situation seperate from anyone else and determine if there is still opporunity there for you, and whether or not the risk is worth it.