7-key-metrics-a-restaurant-owner-cannot-ignore

7-key-metrics-a-restaurant-owner-cannot-ignore

7 Key Metrics a Restaurant Owner Cannot Ignore

7 Key Metrics a Restaurant Owner Cannot Ignore

A lot of hard work goes into running a restaurant successfully. If you are into the food and beverage business, then you might already know how hectic of a task it is to track the performance and ensure your business is profitable. The restaurateurs need to be aware of the performance and the effectiveness of their business. To get control of the complex restaurant business in the right track, the business owner needs to find out the KPI (Key Performance Indicators). These metrics determine how profitable your business is and gives you an idea about what all areas you need to improve.

The other day I ran into an old friend who is a chef turned restaurateur, opened a restaurant couple of months back. He had a hard time getting things right in the beginning. The food cost, labor cost, inventory management, spoilage, running out of food during the dinner rush has influenced his net profit until he realized that he was not paying much attention to tracking performance metrics.

So what is this (KPI) Key Performance Indicator anyway?

The Key Performance Indicator is a performance measurement that lets your business gather real-time data to evaluate whether your business is achieving its objectives effectively. In other words, KPI is an important metric that lets the restaurateurs track and find out how they can improve its profit margin with the help of business software. It provides an insight into the effectiveness of the management, operational costs, marketing efforts and the overall health of the business.

To tell you the truth, it is imperative for restaurant owners to track KPIs to identify the problems and improve its profitability. So, let’s find out how the restaurateurs figure it out:

Like I mentioned before, it is measured using a tool, an intelligence software where you can access real-time data on a dashboard. Which means you do not have to wait for annual or monthly reports to measure the financial health. In fact, everything can be measured on the go. These KPIs can reveal a lot about your business and help in decision making.The following are top 7 key metrics that restaurant business owners cannot ignore:

ROI and Break Even Point

ROI and break even points are two important metrics that helps you calculate how your sales are performing. It gives you insight data on how well you need to perform in sales to earn the money back which you have invested in your restaurant business. Basically, it tells you whether your business is profitable or not, but it can tell you more than that.

It gives you an opportunity to find out whether you can invest more. If you are planning to renovate your kitchen or buy new inventory or maybe invest a little more in marketing, these metrics are really helpful. I think the break-even point is probably the most important metric among the lot that you should consider as a priority.

So, how do we calculate the Break Even Point?

To begin with, you need to know your overhead expenses for the month (Choosing the time frame is up to you).

Let’s say your monthly sales is $10,000.

Your variable cost (which includes food supplies, labor costs, and other variable restaurant expenses) is $2,000

  • Your fixed cost (which includes rent for space, insurance, tax, internet, fixed salaries for your employees etc)is $3000
  • Then your break-even point for that month would be $3750

The formula goes like this:

Break-Even Point = Total Fixed Costs / ((Total Sales – Total Variable Costs) / Total Sales)  

Cost of Goods Sold (CoGS)

Cost of Goods Sold or CoGS refers to the cost incurred to prepare each of the food and beverage items that are on your menu. This KPI metric tracks and tells you the amount you need to spend on inventory and the food materials which is required to prepare the food and beverage items for you to sell. At times, tracking CoGS can be a headache for restaurateurs because it is expensive. So it is always better to do some local purchasing to increase your margins.

Let’s find out how the food cost percentage is calculated:

Let’s say your inventory is valued at $5000. Then you went ahead and added inventory worth $3000 in the beginning of the month and by the end of the month, you are left with inventory worth $4000. Then your Cost of Goods Sold (CoGS) would be valued at $4000.

The formula goes like this:

Cost of Goods Sold (COGS) = Beginning Inventory + Added Inventory – Final Inventory

Food Cost Percentage

This is another important key performance indicator metric that helps you gauge the profitability of your restaurant business and probably one of the easiest one to track. Simply put, it is the difference between the cost of preparing a dish and the selling price on the menu. By measuring the food cost percentage, you can easily figure out how much revenue you were able to generate by selling your food and beverage.

So let’s find out how the food cost percentage is calculated:

Suppose one of the bestselling dishes in your restaurant is priced at $15 and it takes $5 to prepare it, then your food cost percentage would be 34%. Most restaurants keep the average food cost percentage around 30% and it could vary depending on the owner’s strategic choices. With the help of a POS (point of sales software) you could easily track this metric.

The formula goes like this:

Food Cost Percentage = (Food Cost/Total Sales) x 100

Overhead Costs

Overhead costs cover your fixed costs and operational expenses. It includes expenses like rent or mortgage payments, taxes, utilities (water, gas, and electricity), insurance, marketing etc. Whether you like it or not, overheads are something that you cannot ignore. The rates might fluctuate a little every month depending on the number of days your business is open.

So how is it calculated?

Let us assume that your fixed cost for the month is $10,000 and you were open for 360 hours that whole month. Then you are paying an hourly would be $27.78

The formula goes like this:

Overhead Rate = Total Fixed Costs / Total Amount of Hours Open

Prime Costs

The prime costs of your restaurant are the sum of total labor costs and the cost of goods sold (CoGS). It accounts for the entire operations of your restaurant. This is a relatively fluctuating metric that the owner can optimize and at the same time can go out of control. Most restaurants try to maintain their prime costs at about 60% of its revenue.

So let’s find out how prime cost is calculated:

All you need to know is your monthly CoGS and labor cost and simply add them. If your monthly labor cost is $10,000 and the CoGS is $8000, then your prime cost would be $18,000.

The formula goes like this:

Prime Cost = CoGS + Labor Cost

Customer Retention Rate

If you make a sale, you can make a living. If you make an investment of time and good service in a customer, you can make a fortune.” ~ Jim Rohn

Despite all the effort, good food, amazing service, the restaurant which is set in a perfect location and great ambiance, many restaurateurs are still unable to retain their first-time visitors. Customer retention rate is an important metric that you can’t ignore. It helps you focus on improving the dining experience for your customers. Studies show that an increase in customer retention rate increases the revenue of your business.

Here is how the customer retention rate is calculated:

Customer Retention Rate = ((Total number of customers – Number of new customers) / Total number of customers)) x 100

Gross Profit

This is ultimately the metric that every restaurant owner focuses at the end of the day. Your gross profit is money which is left with you after deducting your CoGS. It tells you how much money is left with you so that you can pay off other expenses and meet overheads. To measure your gross profit, you simply need to subtract CoGS from your total revenue.

Gross Profit = Total Sales – CoGS

To find out the gross profit margin, divide your gross profit by total revenue and calculate the percentage.

The formula goes like this:

Gross Profit Margin = (Gross Profit / Total Sales) x 100

These are some of the essential metrics to ensure your business is profitable. But the list doesn’t end here and there are many more.

Try out some of the KPI calculators for restaurant businesses that are available online. Let me know in the comments below which Key Performance indicator worked best for your business.

 

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Bone Appetite & Happy Cooking!

 

2 Comments

  1. This is an awesome blog, very useful info. Everything one needs to know about the basics are very well explained. Looking forward to see more on the same line from you.thank you for sharing

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