Cost Controlling in Restaurants

From Virbus

[edit] 1 SUMMARY

Every restaurant must operate from a sound basis of costing, using standard recipes and control of costs in relation to sales. There are many variables in the restaurant business than can affect different costs; salaries, food ingredients, beverages, equipment and its maintenance, linen services, cleaning, rent, food wastage, etc. The sales may be varied as well according to season, weather, holidays, etc. The service quality and the quality of products affect customers' satisfaction, which will determine whether they come back or whether they recommend the restaurant to others. The location of the restaurant in relation to the traffic flow of people also has a significant impact on its success. Because of the many variables, cost control is crucial to ensuring the profitability of the restaurant operation.

[edit] 2 WHY SHOULD YOU USE IT?

Costs or expenses are usually classified either as direct costs or overheads. Direct costs can be clearly associated, for example, with the production of meals, the departmental payroll or the maintenance of kitchen hygiene. Overheads are costs that cannot be charged to production, such as property insurance, rent and utility rates. Costs can also be divided into those that can be controlled by the kitchen staff and those that cannot. Uncontrollable costs have to be paid whether the restaurant is open or closed. The focus must be on controllable costs: weekly wages, overtime, food ingredients, laundry, cleaning materials, etc. Changes in the cost of ingredients and the amount of wastage can have a huge impact on the food cost percentage and thereby can either reduce or increase profit.

[edit] 3 WHY HAS IT BEEN DEVELOPED AND WHEN SHOULD YOU USE IT?

Chefs and restaurant managers use cost control to keep track of the history of sales in order to predict the future of sales. The past records of seasonal activity may give a better picture of future seasonal activities in order for chefs and managers to order the correct amount of food and beverages and thereby avoid over ordering and food wastage. If the restaurant has too much food on hand, the quality of products will suffer and money will be lost. As in most, if not all, businesses, cost control is an intrinsic part of day-to-day operations that is necessary to ensure the restaurant's profitability. Financial statements, inventory lists, purchasing and history of sales are all important components of cost control.

[edit] 4 HOW DOES IT WORK?

[edit] 4.1 Pricing the Menu

Pricing the menu involves calculating the price to be charged for the various dishes and beverages served. This price is influenced by such things as the amount of table service provided, the cost of the table settings and décor, as well as the actual cost of the food in the recipe. This same applies to beverages and alcoholic beverages as well. One way of pricing is to calculate the cost of food and then add an amount to cover wages, overheads and profit. A better method is using the food cost percentage.

[edit] 4.2 Food Cost

Food cost (cost of sales) is the actual cost of purchasing the raw food products and related ingredients. It is the amount spent on food in a food service operation. (Beverage costs could be included in the food cost or they may be separated as beverage cost / beverage cost percentage.) The costs are measured and expressed in terms of a percentage, which is referred to as the food cost percentage. The percentage can be achieved by the following formula: (Cost of Food Sold / Total Food Sales = Food Cost Percentage). The estimate of daily food costs in the best control you have because it is up-to-date information. The field averages can be also used to determine the average costs for different types of restaurant cuisines.

FOOD COST PERCENTAGES:

[edit] 4.3 Sales Price

The sales price for the item can be then achieved by the following formula: Cost of food / Food Cost Percentage = Sales price before tax.

[edit] 4.4 Median Purchase Price

In the first phases of restaurant planning, it is good to determine the estimated median purchase price. This can be achieved by collecting the entrée and beverage prices and their sales distribution from all the restaurant sales.

For Example:

Food Sales is 45% and Beverage Sales is 55%. The sales price of food is 14€ and the sales price of beverage is 6.50€.  (45% x 14€ + 55% x 6.50€) / 100 = 9.875 = 9.88€ Median Purchase Price

[edit] 4.5 Gross Profit

The Gross Profit can be determined by the following method: Gross Profit % = 100% - Food Cost% The median gross profit can be then determined by the following method:

For Example: 45% x 65% + 55% x 68% = 66.5% Median Gross Profit

[edit] 4.6 Sales Forecast

By using the median purchase price, chefs and managers are able to forecast the sales per week or month. First, the flow of customers or purchases needs to be determined. Second, the number of purchases per day or per week is then multiplied by the median purchase price. This gives the estimated sales amount for a day, per week or per month.

[edit] 4.7 Labor Cost Control

Payroll cost is the total cost of employee labor. These costs can have a huge impact on the overall profit of the restaurant operation. If there are too many employees and not enough customers purchasing the meals, the labor cost could quickly reduce the overall profit. Controlling labor costs is an everyday activity of a restaurant operation.

Labor Cost Percentage can be achieved by the following method:

Cost of Labor / Total Sales = Labor Cost Percentage

Employees receive their regular hourly or salaried wage. However, the restaurant operation has to add on non-wage labor costs, such as social security and holiday pay, to the regular hourly or salaried wage. The amount varies between countries and cities; from 20% to 60%. The restaurant operation has to include non-wage labor costs in its calculations in order to be able to establish accurate labor cost statistics. In some countries, working on Sundays and major holidays may increase employees' wages by up to 100%. This variable also needs to be taken into consideration.

In labor planning, it is good to calculate median hourly wage and then add other labor fees to receive the total hourly labor expense. This number can be then used to calculate daily, weekly and monthly labor expenses. Another major duty of a chef or manager is to determine the required hours for production and service; kitchen labor hours and dining room labor hours. Once these hours are determined, the labor expenses can be then calculated.

The minimum required turnover to cover labor costs can be then achieved by the following formula:

Labor expenses / preferred labor cost percentage = Minimum required turnover

For the minimum required sales, generally the sales tax is added and the minimum required sales amount can be then achieved. (Minimum required turnover x (100% + VAT [value-added tax]) = Minimum Required Sales) The Minimum Required Sales can be then compared to the estimated sales from the Sales Forecast to see if there are enough sales to compensate the labor costs or vice versa.

[edit] 4.8 The Restaurant Sales Statistics

The restaurant sales statistics are an important way to compare the sales activity with the industry averages to see if the operation meets industry standards. This is helpful when trying to determine the relative profitability of the restaurant operation.

[edit] 5 LINKS / SOURCES

Dodgshun, Graham & Peters, Michel (2004): Cookery For the Hospitality Industry, Fifth Edition. Cambridge University Press.

Dopson, Hays & Miller (2008): Food and Beverage Cost Control, Fourth Edition. Wiley. Chapters:1, 2, 7 & 8.

Jones, Terry (2004): Culinary Calculations. Wiley. Chapters: 6, 7 & 8.

Sanders, Edward E & Hill, Timothy H (2001): Foodservice Profitability, Second Edition. Prentice Hall. Chapters 1, 2,8 & 13.

Walker, John R (2008): The Restaurant From Concept to Operation, Fifth Edition. Wiley. Chapters: 1, 3, 7 & 14-16.