Thinking of Opening a Restaurant. Part four

The cost of running a restaurant is not a strict formula but there are some standards that you can apply that are accepted as a guide, but as all guides it is not the carved in stone, but you would be silly to ignore them. And here they are as an Industry Average

Cost of Goods Sold: 26% to 36%

Payroll & Benefits: 30% to 40%

Operating/Controllable expenses: 7% to 12%

Occupancy expenses: 5% to 10%

General and administrative expenses: 1% to   5%

Earnings Before Interest, Taxes Depreciation & Amortization: 0% to 19%

There are so very many variables that impact restaurant costs that it is impossible to set out what the costs should be as every case is different but I think the following is true.

One your big two expenses, that being cost of goods sold, food and drink and labour costs, should not exceed 60% of sales. If they do then you are starting to get into a place where you cannot get back from and will inevitably fail. Or try to borrow more and fail latter. Theas cost must be controlled every day, not just at the end of the month.  Ideally you do not want to be spending any more than 58% and to 55%. Since food cost is determined by your purchase price, portion size and selling prices, it will not vary too much due to your sales volume fluctuations.  Labour cost, however, is a direct function of sales.  The higher your sales volume the easier it is to run lower labour costs.

Second Occupancy expenses, or mortgage, rent or leasehold must never be and more than 10% of your sales. Now this will vary depending upon the quality of your location, how large the site is, how many covers you can do in one day. The more prime the site normally the more the cost.   Here your target is no more than 5% of sales are best but no more than 10%.

So what can you do to keep the cost down?

First stock. First know what you opening stock is and then record what you purchase for the rest of the month , deduct you opening stock and see what you have sold at the end of the month. Then keep recording what you perches daily and divide cost of perches to total revenue

£150.25 purchased, £392.89 daily take.

(150.25/392.89)*100 = 38.24%

If you use the food flash sheet on this site you can add every day you stock purchased add what you take every day and it will give you a running daily cost percentage that will be in real time.  Another thing is not carrying too much stock. If your food and beverage stock levels are too high it will result in excess waste, over-portioning, reduced product utilization and theft. Not only that but you are tying up money in stock that you could use on other things. To know how much stock you should carry simply take your monthly sales divided them but by one hundred and multiply buy the best stock figure

£50,000.00/100*30 = £15,000.00

So if you take £50,000 a month you should never be carry any more than £15,000.00 in stock. And the best way to think of this is, never carry any more than

 7 days stock in food

 15 days stock in spirits

7 to10 days stock in beer

And 15 days stock in wine

If you keep you stock low and under control you win part of the battle.

Second are labour costs. Now you have to staff a restaurant, so you will have a fixed cost. Now all depending on what kind of restaurant you are operating I would say that one chef can cook for twenty covers every hour, if properly organised. And one waiter for every twenty covers, along with a kitchen porter, bar person and manager.  So if you are looking at a one hundred covers at best five waiters, four chefs,  one kitchen porter, one restaurant manager, one bar person and one , wine waiter. But this is all dependant on what you are serving and the level of service you are giving. The higher end the level of service and food the more staff.  The longer you are open the business you can do , but the more staff you need.  So it is getting the balance right. And like anything that all depends on what you are trying to do.

At the end of the day if you are not sure if you have the controls in place or you are just looking at buying a business then simply do these two calculations

Sales – Cost of Goods Sold – Expenses = Profit/Loss

£50,000.00 - £19,000.00 - £28,000.00 = £3,000.00 profit

Or

£50,000.00 - £20,550.00 - £29,550.00 = - £100 loss

Then work out your current assets to current liabilities ratio is. In the accounts you will have a balance Sheet and divide your current assets, cash, credit card receipts in transit, accounts receivable, food and beverage inventories,  by your current liabilities, bills, rent, lease payments, loans.

Current Assets= £52,000

Current Liabilities = £48,000

Current Ratio = £52,000/£48,000 = 1.08

This means that there is £1.08 of current assets for every £1.00 so you have more coming in than you have going out. Now you can go to 1.00 and that is fine but if you go below this for a long period of time then alarm bells should start to ring.