Understanding the Cost Breakdown in Your Establishment
No matter the size, shape, or format of your establishment, you must maintain a regular insight into your budget. While this seems fairly obvious, it’s absolutely that you maintain a firm grasp on where, when, and how your money flows.
You must develop a nuanced understanding of your expenses if you want to first break even on your initial investments and then start generating regular profits. Let’s start this discussion by identifying the places your money goes on a regular basis:
And this doesn’t even count paying off loans and other expenses related to opening a brand-new establishment. This is just the day-to-day stuff that you’ll see in any average balance sheet or Profit-and-Loss Statement. Luckily, those above items can be lumped into three basic categories:
- Food and Beverage Costs
- Operating Costs
What matters most is maintaining a healthy ratio between these three and the profits you should earn if you hope to build and sustain success. Most food service industry experts recommend keeping your Prime Costs (Food + Labor) between 60-65%. You should keep your operating expenses well under 30% if you have any hope of breaking even, much less earning a profit.
Ready to get into the numbers behind your money a bit?
Food and Beverage Costs
This one is straightforward. You have to pay for the materials that you’ll then shape, cook, and prepare into the items you sell. The tricky part is determining how much to sell a dish or drink for compared to what you spent to purchase the components.
In restaurant accounting parlance, this concept is called “Food Cost Percentage.” It’s calculated by dividing the Cost of Food by Total Sales. For example:
- Your food and beverage sales were $3,000.
- You spent $1,000 to buy the goods for the items you sold.
- $1,000 / $3,000 = 0.33 = 33%.
What your establishment sells can directly impact those percentages. Some expensive items will be loss leaders, as it costs you as much to purchase that tasty steak or rare fish as it does to sell it. This can be made up in the sale of beverages and desserts, which historically have much higher margins.
Having a firm grasp on these specifics will help you learn exactly what items you need to push at which times of day. It will be especially helpful if you need to strike a firmer balance on your Food Cost Percentage.
Unless you’re running a food cart where you’re the only employee, you will have to pay the people who work for you. And even in that instance, paying yourself a salary needs to be tracked separately from your profits.
Labor costs include items like payroll, tips, benefits, and anything else directly related to your employees (including training, but excluding supplies). To determine the Labor Cost Percentage, you divide Labor Costs / Total Sales. Extending our earlier example:
- Your food and beverage sales were $3,000.
- You spent $900 on your employees.
- $900 / $3,000 = 0.3 = 30%.
Labor might be a more pronounced variable cost than food and beverages, because your employees have a voice. While food costs have risen slowly but consistently over the past few years, labor costs have increased at a higher rate. This is especially true when you factor in benefits like health care and the push for higher minimum wages.
As you’d imagine, this category comprises everything else in your establishment: rent, overhead, toilet paper, napkins, cutlery, utilities, marketing, your Point-of-Sale system, your bookkeeper, your accountant, and more. However, this is not a place to nickel-and-dime the money you spend in hopes of dramatically cutting costs. For example:
- Rent might be high, but you might be in a great location that generates more sales than a cheaper place one neighborhood over.
- Marketing your business is important, especially in the age of the smartphone.
- Paying your utility bills keeps your doors open.
- People want to visit a restaurant or bar that’s clean and has a specific aesthetic.
These categories represent a prime opportunity for you to lose track of what’s happening – and quickly. While an individual cost might be small compared to payroll or liquor, you need to keep them collectively under 30%, especially if you’re struggling to keep Prime Costs under 65%.
The Tabulate Difference
Running a restaurant or bar is not all fun and games, despite what Cheers might have taught us in the ‘80s. So, as much as you might objectively love your menu and customers, you’re still operating a business. And that means constantly paying attention to your money.
This is what sets Tabulate apart from its competitors – and your friendly neighborhood accountant. We integrate directly with your POS system to examine your sales, costs, expenses, profits, and margins in great detail. Our job is to crunch your numbers and then provide you with accessible and understandable reports laden with suggestions and recommendations you can use to make your business succeed.
To learn more about what we can do for your establishment – from franchises and high-end restaurants to dive bars, coffee shops, food trucks, and everything in between – visit Tabulate.com today!