HOW TO MANAGE YOUR RESTAURANT'S CRITICAL NUMBERS AND AVOID FINANCIAL LOOSE ENDS

by Chris Tripoli and Jim Laube

When looking to open your restaurant, most people will emphasize the importance of three things:
location, location, location. Once you have opened, everyone will tell you that the three things you need
to master to succeed are numbers, numbers, numbers.

It is hard enough to operate well in today’s competitive restaurant market considering the time
commitment, quality control, customer service standards and labor management. It becomes much
more difficult to succeed if you cannot “tie” your numbers together in a way that helps you plan
effectively, manage costs more efficiently and increase profits.

And what numbers are we talking about when there are so many to track? There are annual plans, sales
forecasts, operating budgets, daily sales records, inventories, cost of sales, controllable expenses,
occupancy costs, shareholder value, sales-to-investment ratios and more.

So what numbers do we need to track regularly and consistently? Why are they so important? What do
they tell us? When do we need to know them? And how do we use them to increase sales and maximize
profits?

If you were Ron Shaich, CEO of Panera Bread, you might answer with:

1. Same-store sales comparison.

2. Number of new restaurants scheduled to open.

3. Stock value.

In a recent interview Shaich said that Panera’s numbers tell the tale. The company’s same-store sales
results for restaurants open at least a year were up 3.4 percent last year and up slightly this year. Its
stock value was up 50 percent last year, ranking among 2008’s most successful restaurant stocks, and it is
the best-performing major restaurant stock in the past decade, with an annualized growth rate of 31.5
percent. Sales in 2008 topped 2.6 billion and shares are off less than 1 percent in 2009 (source: USA
Today).

But since you are most likely not the CEO of a public restaurant company with more than 1,260 stores in
40 states and 80 more opening this year, you are not likely to use this information to better manage your
restaurant operation. The “triple play” of numbers for most independent restaurant operators is simply
sales, expenses and profit.

We have found that too many owner/operators are not tracking sales accurately, not posting costs by
category correctly, and/or viewing a cash balance at the end of the month as profit. These errors and
misconceptions prevent us from managing our operations profitably. Unless you know how to interpret
your financial data and identify relationships between various financial reports, you really don’t know
how your business is performing. Let’s start by taking a look at a good sample monthly reporting method
and determine what items belong to what category.

First, Tie in the Monthly Report

The “Profit and Loss Summary” on the right provides an outline of the kinds of information you want to
be able to track at a glance monthly. Please refer to it as you read the following:Sales. Begin by recording
sales by category. Food typically includes nonalcoholic beverages (tea, coffee, juices and soft drinks).
Separate the alcoholic beverage revenue by liquor, beer and wine. Some restaurant operations that sell a
large amount of beer prefer to separate that category into draft and bottle sales. In some cases where
retail items are offered for sale (e.g., T-shirts, gifts, sauces) it is recommended to add a retail or
miscellaneous sales category.Cost of sales. This is a category where accuracy is definitely required and
yet many operators make the same common mistake. It is important that the cost of sales be calculated
as a percent of their corresponding sales category and not by total sales. Food cost should be divided by
food sales, beverage cost by beverage sales, and retail cost by retail sales. The diagram “Properly
Calculating Cost of Sales,” below, provides an example of the percentage cost difference you receive
when calculating these items correctly and incorrectly. As illustrated in the lefthand column, using the
total sales as the denominator results in a deceptively low cost of sales for both food and beverage. In
the righthand column, the cost of sales is derived by dividing the cost of each category by the respective
sales of each category.
Payroll. In most cases this category represents the single largest cost item. It is important to track payroll
cost by separate departments – store personnel (hourly employees) and management (salary personnel).
Payroll taxes and employee benefits are to be included in this category of your restaurant P&L.

Controllable expenses. These categories include each of the items required to operate your restaurant
that are controlled by decisions made by ownership, management or staff. Categories within this section
are direct operating expenses, music and entertainment, marketing, utilities, general and administrative
expenses, and repair and maintenance costs.

Direct operating expenses. This includes uniforms, laundry-linen, tableware-glassware, kitchen utensils,
cleaning supplies, paper, bar supplies, menus-printing, contract cleaning services, decorations-flowers,
and miscellaneous.

Music and entertainment. Includes payment to professional musicians if appropriate to your concept, as
well as annual fees-permits to ASCAP, BMI or other music licensing agencies. Marketing is the correct
category for any/all advertising-related expenses such as print ads, coupons, promotions and research.

Utilities. Includes the charges for electricity, gas, water and trash removal.

General and administrative. These expenses include the fees and service charges required (and often
overlooked) when budgeting for you restaurant. Examples include bank charges, cash over-short, credit
card charges, postage, printing-office supplies, professional fees (accounting-legal-consulting), security
services, license permits, telephone and fax.

Repair and maintenance. This category includes costs associated with building repairs, equipment repairs
and maintenance contracts.

Occupancy costs. This section is for the cost of rent (base and percentage) common area maintenance
fee (CAM) property taxes, insurances and other taxes.
Logic would tell you that you can’t begin to make sense of your numbers if you do not have accurate
reporting of the numbers. You need to get your accounting house in order from the very beginning;
otherwise you are flying blindly from one month to the next. That said, if the first step to tying numbers
for a better restaurant operation is proper monthly reporting of sales and costs, the second step is
accurate management practices.

Second, Tie in the Monthly Inventory

Taking a physical inventory at the end of each reporting period is a basic practice and one that is
mandatory to the maintenance of accurate cost numbers. Relying on par levels or inventory averages will
distort the cost of food and beverage items. An accurate physical inventory is needed to correctly
determine your cost of sales. Accurate cost-of-sales figures are a prerequisite to controlling food and
beverage costs.In the example illustrated in “The Importance of a Proper Physical Inventory” below. The
restaurant without an inventory is figuring its cost of sales on purchases rather than usage. This is
inaccurate and creates a cost number that doesn’t tie into the operation and cannot be correctly
compared with the industry standard.Fluctuations in inventory levels do not affect food cost, provided an
accurate beginning and ending inventory is taken. An inaccurate ending inventory means a dollar-for-
dollar misstatement of your true food cost.

There is a 37-year-old family-operated seafood restaurant in Columbus, Ohio, that just

started preparing complete inventories at the end of each month. The operators had maintained a
relatively constant inventory level and divided sales into purchases to figure cost of sales. This was
inaccurate and created an incorrect monthly profit. After reviewing current food cost figures they are
better able to tie the numbers together and take steps based on accurate information. They have since
updated their menu item cost and for the first time are able to compare them with the item sales reports
to complete an ideal food cost projection. Tying numbers together accurately shows us the true picture
of things so we can make decisions and plan accordingly.

In regard to comparing your numbers with industry standards, for many years we have recommended
the use of the National Restaurant Association’s (NRA) “Uniform System of Accounts for Restaurants.”
This book shows you how to put in place an accounting system designed for the food service industry. It
provided a comprehensive listing of accounts for assets, liabilities, revenues and expenses along with a
complete description of the types of transactions that should be classified in each account.

Using the uniform system of accounts allows the preparation of financial statements into industry-
standardized formats, which makes it possible to compare your operation’s operating statements with
industry averages.

In addition, the NRA annually publishes food service industry operating averages from data provided by
NRA members in the “Restaurant Industry Operations Report.” Many state associations also publish
similar reports from participating operators in their respective states.

The Uniform System of Accounts for Restaurants is out of print; however, if you can find the most recent
edition, published in 1996, it is still useful. (We understand that the NRA is considering printing an
updated edition in the future. We will keep you posted as this develops.) The Restaurant Industry
Operations Report may be purchased by calling the National Restaurant Association at (800) 424-5156,
ext. 5375. Restaurant operators who use the “Uniform System of Accounts” get a better understanding
of what their operating numbers are telling them.

Three, Tie in the Audit Trail

For owners and managers to use operating numbers for our benefit, we must first be able to locate the
numbers, and then understand what they represent.Each shift a manager reads the register and posts
the sales amount. At the end of the day a daily sales report is usually completed with total sales, paid-
out expenses, tips paid and other items. These entries form a sales journal. Just as with sales, each day
purchases are made, deliveries received and amounts posted on a journal by cost category (e.g., meat,
seafood, grocery). These entries form the purchase-disbursement journal. Each time payrolls are
completed (weekly, twice monthly) the payroll journal listing each detail by person and by department is
created. At the end of the reporting period a complete inventory of all food and beverage items is
entered into the general ledger by category. This inventory amount becomes the beginning inventory
amount for the next period. Knowing where the numbers come from makes it so much easier to manage
by the numbers, and to find the right numbers when you need to review a particular cost.Managers and
their key staff should review their restaurant’s monthly profit-and-loss statement as soon as it is
available. The P&L is the unit’s monthly report card. For many who track sales, labor cost and purchases
each week, the P&L may be more confirmation rather than information. In any case there are typically a
few items that appear questionable and deserve further review and attention.Where do we go when we
have cost questions? You ask the restaurant audit trail, as illustrated below.

For example, if the profit-and-loss statement indicates a meat cost of 11.3 percent and your restaurant
normally runs an 8 percent you would check the general ledger to see that the beginning inventory and
ending inventory were correct. You would review the purchase journal to confirm that purchase
transactions were recorded properly. In this case there was a meat purchase posted twice. This
artificially increased the meat purchase total, which led directly to high cost percentage on the P&L.

In another example, all food and beverage costs looked higher than previous months. A check of the
sales journal showed that neither of the catered private parties had been recorded. When the sales were
adjusted, the cost percentages for each food and beverage category appeared to be in line with budget.

Tied and True

Michael Passalacqua, owner of Angelo’s in Washington, Pennsylvania, ties together selected numbers
each week for his managers’ meeting. He learned that by taking inventory of key items and totaling food
and beverage purchases each week, managers could estimate a food cost at each meeting. This kept
them better educated and more aware of lost-of-sales trends. By tying weekly staff schedules to recent
payroll journals, Michael is also able to estimate hourly labor cost each week.

In Austin, Texas, Mark Fleming, manager of Chez Zee American Bistro, prepares weekly numbers each
Monday for their restaurant managers’ meeting. Mark breaks out sales records by day, compares them
with plan, and the most recent six-week average. By listing per-person check averages and daily
customer counts, managers can better tie sales trends together. Goals are set and specials developed to
maintain check averages and sales levels. This has proven to be a successful tool in keeping the
management team focused and sales levels maintained.

Tying it All Together

Whether it’s for sales forecasting or cost confirming, knowing where your numbers come from and how
to find them when questions are asked is a necessary first step to properly tie your numbers together
and manage your restaurant more effectively.

Case in Point:

The Value of a Proper Inventory

A popular catfish restaurant noticed a spike in the cost of seafood on their recent profit-and-loss
statement. This was particularly disturbing considering that the price of most seafood had been lower
than previous months. A disturbed management team reviewed the purchase journal carefully,
confirming each transaction. They became more confused when each delivery, quantity and price
checked out. A closer look at the ending inventory showed the dollar amount to be much lower than
usual. Further review of the inventory showed one storage refrigerator was not included in the count.
Once the inventory was adjusted, the seafood cost appeared to be in range.

Tying in Your Prime Cost

Almost without exception, the most successful independent operators we see today not only deliver a
quality dining experience for their customers, but also keep a constant watch on the financial
performance of their restaurant. As one of our readers recently said, “If you don’t know your numbers,
you don’t know your business.”

In a low-margin business in which sales can fluctuate and controlling costs requires constant vigilance,
operators of consistently profitable restaurants don’t wait until the end of the month to learn how their
restaurant performed. While their monthly or four-week financial statements are important, they’re
used mainly to confirm what they already know. As another operator said, “If I waited until the end of
the month to know how my restaurant was doing, it would be too late.”

To get meaningful, timely information on how their restaurant is doing, many get a “Prime Cost” report
at the end of each week.

A “Prime Cost Report” includes cost of sales (food, beverage and paper goods in quick-serve restaurants)
and all payroll costs, including the gross wages of management and hourly staff plus payroll taxes and
employee benefits such as workers’ compensation and employee insurance. (RestaurantOwner.com
members can access a Weekly Prime Cost Worksheet at www.restaurantowner.com/public/189.cfm.)
The goal in most table-service restaurants is to keep Prime Cost, as a percentage of total sales, at 65
percent or less. Quick-serve restaurants often shoot for a Prime Cost at or below 60 percent of sales. The
reason Prime Cost is such an important number is that it provides feedback on how well a restaurant
manages its largest and most volatile costs: food, beverage and hourly labor. These three costs often
represent 90 percent of the costs in most restaurants that are controllable in the short term.

Calculating prime cost weekly, 52 times a year, versus monthly gives operators a good shot at nipping any
problems in these areas quickly.

Many smart operators also know their sales break-even point based on monthly and weekly sales
volumes. Knowing their sales break-even and understanding the relationship between sales volume and
their restaurant’s operating costs, they can quite accurately peg how much profit their restaurant should
make per week or month based solely on the amount of sales generated.

These operators develop profit expectations based on knowing just their sales volume. If the actual
numbers on their profit-and-loss statement (P&L) differ from this by much it usually means either their
P&L contains errors or they have an operational problem to deal with.

10 Tips to Keep Profit by Good Restaurant Management

Aida Management

10 Tips to Keep Profit by Good Restaurant Management

Does your restaurant has good restaurant management plan? If you want to know how your restaurant is
going, you got to look at your numbers.

OK, you have smiling faces in your restaurant, kitchen is clean and everybody are in good movement,
your waiters having good tips and they are satisfied too, but is that the real picture of your restaurant
business?Why you may think you get sense of how you are doing by the atmosphere.

If you really want to know what is going on with your key margins profitability and financial condition,
you have got to look at your numbers. And if you want to be one of those who has been on highly
successful operators possess, you need to understand and pay attention to key or critical numbers.
Key or critical numbers gives a sense of how profitable is your restaurant before your accountant tells
you that. This way you are on track, and you can be more proactive when managing your business, and
able to identify potential problems on time and solve it.

Smart restaurateurs always start with good defined annual plan and operating budget. After this they
separate it into periods and make a reasonable revenue goals. And when you convert revenue and
operative objectives into effective daily numbers, they becomes realistic revenue goals for a certain time
period. There are three stages of examination of key numbers. What numbers should be checked daily,
weekly and monthly?

Numbers which has to be examined daily – Daily reports

Daily reports means using important daily information which helps that you operate each shift more
efficiently. This reports helps managers to manage restaurant inventory, labor cost and meet their shift
sales goal. Numbers which has to be examined daily are: Daily sales report, Menu item sales report and
Hourly staff labor report.

Daily sales report is not just recording of information for bookkeeping and it is used for weekly revenue
tracking and revenue monthly projection. This report provides valuable information for measuring daily
activities to meet weekly goals. At first it is valuable planning tool.

Menu item sales report tells you more what your customers like. It is daily record what your customers
prefers. This is very useful planning tool for chefs and kitchen managers. Menu item sales report gives
them more detail and allows them to plan better daily specials and preparation of favorite and best-
selling dishes and their recipes. It also help to management to decide what items to place on which
menu to increase sales. Once placed in the guest’s hand, menu can directly influence not only what they
will order, but ultimately how much they will spend. Properly design menu directly influences sales
revenue. An example of it might be a popular steakhouse that was also known for very good hamburger
offer. They separate hamburgers from their steak offerings at dinner until they reviewed the daily item
sales report and found that the majority of hamburgers were sold between 11 a.m. and 3 p.m. by
working days. They created hamburger steak for the dinner menu and offering the hamburgers at lunch
time only. The hamburger steak sold at higher price point with great gross profit than the burgers,
creating a small sales increase in dinner sales without increasing guest counts.
The hourly stuff labor report give you information which can be used for help to maintain labor cost.
With this tool your staff scheduling can be improved. And your labor is the greatest cost you have in
operating your restaurant, right?It allow you to track total hours worked by person, category and part of
the day. That gives you opportunity to know when you will go over restaurant budget of hours as well as
staff member may go over his scheduled hours creating overtime hours.

The fact of understanding daily reports is very important because it is much easier to successfully
menage smaller numbers then the large one. If we make more our period goals for revenue and
expenses into weekly goals and check our daily numbers against them, we have more chance to hit
the target.

Prime Cost Calculation Should Be Done Weekly

Prime cost is the best indicator of profit potential and how well your costs are being managed. Caterers
who do not have control over prime costs often has very poor restaurant management system. It is one
of main indicators how well has been one business managed.

Those caterers who want to maximize their profit want to know their costs at the end of every week. So
how to calculate Prime Costs? Actually, it is very easy.

Calculating prime cost once a month is not enough. When you calculate your prime cost weekly, your
manager or you do not have to wait your monthly profit and loss statement to find out what happened
in important cost areas. And if there is some problem weekly prime cost control get you information in
time and you can react quickly. There is no space for lost of money.

Weekly prime cost reporting also makes managers more cognizant of the effect of their labor scheduling.
Connection between labor cost and the weekly schedule is highlighted and makes more obvious to
managers. In this manner managers can be much more diligent in modifying schedule which make more
business activity. This is also very important for team building in your restaurant.

Also weekly prime cost reporting changing way of work in your kitchen. If you tell your kitchen manager
or chef just a monthly costs of food, this numbers become abstract to him. But when you say that their
food costs has this week increased for 500 $ then usual there is a very good chance to get more
attention and that your chef or kitchen manager will think about possible reason for this changes. What s
going on in the kitchen? It is very possible that the problem will be solved by the following weekly costs
calculations. It s all about the time of respond.
When the prime cost is calculated at the end of every week the numbers become much more believable
and when something is out of line you are in much better position to investigate it quickly, cut your
losses and get the problem resolved.

Most important and revealing numbers in any restaurant or bar is a Prime Cost. You got better
understanding of your cost structure, potential profit and how well your restaurants key cost area has
been managed.

Restaurants often end their week on Sunday night and have the report prepared by Monday noon.

In some restaurants managers prepare this entire report while in others restaurant owner have a
bookkeeper or clerical person who assist in some way in bookkeeping and making weekly reports.

Restaurants Prime Cost Should not Run No More Then 60%

Generally accepted rule for table-service restaurants is that prime cost should run no more than 65
percent of total sales. Larger chains of restaurants are able to keep their prime cost 60 percent or less
but for most achieving a prime cost of 60 – 65 percent of sales still provides the opportunity to get
healthy net income.

When prime cost exceeds 65 percent of sales and gets closer to 70 percents of sales profitability issues
generally arise. And when this happens, it s very difficult for any restaurant to make adequate profit and
investment return. In quick –service restaurants

the goal is to keep prime cost at 60 percent of total sales or less.

The Profit and Loss (P&L account)

The most important objectives of every business is to make a profit. The Profit and Loss account shows
the extent to which it has been successful in achieving this objective. Companies are expected to keep
their P&L accounts in certain formats. Typically the P&L account will show the revenues received by a
business and the costs involved in generating that revenue. In simple terms:

Revenues – Costs = Profits

Monthly Profit and Loss Analysis

The daily and weekly numbers are an integral part of management which gives predisposition to
successful business restaurant or bar operation and profitability. Complete financial statement package
that includes an income statement and balance sheet should be prepared and reviewed monthly. Many
caterers prefer to receive a summary version of their profit and loss analysis so they can quickly scan the
key numbers and get a sense of how the restaurant or bar is performing. Some of them only delve into
the more detailed reports if something appears to be out of line or does not make sense.

When you make profit and loss analysis you have to highlight following key numbers: Prime Cost, Other
controllable expenses, Controllable income, Non-controllable expenses and Restaurant operating
income.

Prime cost

Prime cost include cost of sales and payroll. It is recommended to calculate prime cost weekly, but prime
cost should also be included in the profit and loss analysis.

Other controllable expenses

Other controllable expenses are manageable in some way by management. These expanses can be
grouped into categories like direct operating expenses, marketing expenses, utilities etc. On profit and
loss analysis should be clearly showed monthly and year – to date amounts in the individual accounts
that are included in these summary categories.

Controllable income

If you separate controllable expenses from non-controllable expenses it is possible to calculate one of
the most important margins on any restaurant profit and loss analysis, „Controllable income“. It is a key
indicator of management effectiveness in driving sales and cost and expenses controlling. Those
numbers reflects only those line items over which they exert any influence or control.

Non-controllable expenses

Those expenses include occupancy cost such as property taxes, building insurance, rent and other
expenses. Over this expenses managers have a very little control or influence.

Restaurant operating income

Restaurant operating income is generated by restaurant without regard to corporate overhead, financing
costs, nonrecurring income and expenses and income taxes. It is good for comparison with other
restaurants or bars and operating results of restaurant industry averages.
Restaurant income are enhanced through the use of comparison with budgets, prior periods and trend
analysis over several periods.

Business accounts packages automatically produce profit and loss accounts. Problem may occur if wrong
data has been entered, some data has been lost or corrupted.