How to Balance the Profit Equation

Too many restaurants focus solely on the bottom line – profits. We lose sight of everything else that is important and how we got there. Owners are so focused on profit that they become entangled in two objectives; increasing revenue and cutting cost. The most likely scenario, a combination of two methods is applied.

Methods to Increase Restaurant Profits:

  1. Reduce labor cost
  2. Reduce food cost
  3. Increase Price

Rule #1: Reduce Labor Cost

Managing your labor cost is part of effectively scheduling your staff. The other half is controlling total wages. Labor cost usually becomes a problem when a restaurant under or over staffs. The common belief is reducing labor cost will save you money.

As this may be true, owners/managers tend to forget that under staffing leads to unsatisfactory service which ultimately can affect a customer’s willingness to return which in affect leads to lower revenues. The rule of thumb based on a full-service restaurant, labor cost should run 28% to 30% of total sales. These percentages do not include employee benefits which normally run 5% to 6% of total sales.

Solution:

  • Forecast daily, weekly and monthly sales to schedule staff according to expected sales.
  • Shifts should be staggered to allow sufficient preparation time for anticipated busy hours.
  • Be familiar of the minimum and maximum number of staff required to operate efficiently on a daily basis.

Rule #2: Reduce Food Cost

Controlling a restaurant’s food cost is crucial to the survival of a restaurant. Understanding the actual costs of each food item can reduce unnecessary wastage and spoilage. Portion control is a major factor in controlling the restaurant’s overall food cost. Higher food costs can be due to over portioning, ineffective pricing, poor inventory control and food purchasing and receiving issues. On the other hand, lower food costs does not necessarily equal to better management. Food cost should remain reasonable and be + / – 1% to 2 % within the industry average. Managers/owners sometimes make the mistake of reducing the food cost too low and sacrifice the overall quality of food. Under portioning is also a major factor in lower food costs but customers will soon perceive this tactic as a decline in value.

While food cost generally runs at 28% to 32% of total sales, it is possible to have food costs as high as 40% or above. Higher food costs are often found in upscale fining dining establishments that focus on premium and expensive ingredients such as seafood and steak. On the other hand, food costs can be as low as 20% which can be found in lower cost foods such as pizza or pasta themed restaurants.

Solution:

  • Educate your staff on the affects of food costs to total sales. A large part of effectively controlling your restaurant’s food cost is training your staff.
  • Proper inventory control will allow you to stock items according to projected sales. More attention should be given towards higher priced food items on the menu.
  • Compare menu items and analyze the price versus the cost while compare this to the overall popularity of the menu item. High priced, low sale items should be reconsidered or completely removed.
  • Managers/owners should consistently review their current vendor agreements to ensure best prices are being offered.
  • At the same time, receiving goods that do not meet quality standards can significantly affect your food cost due to high wastage. Restaurants should be strict on quality control issues and immediately inform suppliers and bad shipments.

Rule #3: Price

Implementing price changes can be both positive and negative for the restaurant. If done correctly, the restaurant should see an improvement in sales.

Solution:

  • Identify and separate items on the menu based on popularity. The common mistake among restaurants is increasing a popular item too high too fast. Customers are price conscious and should not be regarded as unintelligent.
  • Price increases should be implemented in small increments over a longer period of time versus short term such as a month. Increasing prices by up to $1 can drive customers away who may have been your most loyal customers.
  • Involve your staff and don’t be afraid to ask them how much they would be willing to pay for a particular menu item.
  • Be sure whatever item you do decide to change that there is still value created through the quality or portion provided in comparison to the price.

Conclusions

A restaurant needs to spend money in order to make money. Cutting costs is only part of the solution to make more money. You need to understand the components of the profit equation and analyze the steps required to get the results you want. Until the proper steps have been determined then the appropriate methods can be applied.

A restaurant’s ability to achieve its profit target is greater when focus is placed in the right areas.

Photograph by [177]

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One Response to “How to Balance the Profit Equation”

  1. The Aries Says:

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