Originally posted by pscott2268
I was recently selected to the Board of Directors of our local Country Club. We have recently determined that our expenses are out of control. Not being familiar with the restaurant business, I have come searching for answers. Our food costs last year were 43.7% and are bar costs were 36.8%. Both of these numbers seem really high to me. Am I out of line?
Pscott2268 ... The answer to your question is not simple.
Actually, there are a few questions.
One has to do with food and beverage cost ratios/percentages.
The other is the idea that your "expenses are out of control".
Possibly a third one involves problems in overall profitability from your food and beverage operations.
I'll make a few comments on each.
My points are not all-inclusive but hopefully some of it might prove useful. Regarding the idea that "expenses are out of control"
... this is often a strong indication that other standards and controls are missing from operations; and/or that appropriate analysis and planning is not being carried out.
Many restaurateurs respond to a lack of profitability by cutting expenses when they haven't fixed the problems in the rest of the business. This is a mistake.
Cutting comes later ... first you stop "bleeding out" elsewhere.
When it comes to actually cutting anything, the two kinds of expenses ... ones that change with your volume of business and those that do not ... are handled differently ... there are separate reasons you might eventually cut items in either category ... but cutting either is *never* a replacement for having sound operations in all other areas ... unfortunately, cuts are often implemented as a band-aid to symptoms from more extensive problems.
Note that I am *not* talking here about avoiding cutting brazen, obvious inappropriate expenditures ... I am talking about not making cuts such as, for example, in fixed expenses; reducing otherwise necessary insurance coverages to get lower premiums; or in variable expenses, cutting kitchen labor (or labor in the front of the house) to levels which compromise operations and quality ... or eliminating your advertising budget, and so forth. Cost percentages
(cost per dollar of sales)
While it's true that the country club factor might "cover" higher food and beverage costs through membership dues etc., that does not mean out-of-line costs are ok. If higher food costs are because of poor controls ... then that is not ok. Not ok in any kitchen.
Nor does it mean that your board is relieved of figuring out whether and why those ratios are higher than they should be.
Especially the "why" ... cost percentages are merely a tool and not a goal in and of themselves. Profitability is a goal ... and one that shows the overall health and integrity of operations.
You will not know the appropriateness of higher food and beverage cost percentages unless you know *why* you have them. ...... And conversely, when you know you run a tight ship, well planned and managed and by-the-numbers, then you have a very good indication that your food cost percentages are in-line.
It is true that your (Prime) cost ratios can be useful to compare your operations to other establishments with similar operations ... but that is a very careful comparison ... you must be *very* substantially similar, including in business volume ... otherwise it is comparing apples to oranges and will be misleading.
Cost percentages will
be notably valuable to compare how you are doing "period over period" (one period compared with another) ... particularly handy as you institute tighter controls.
Cost percentages can be affected by a number of factors ... some examples of these could be: overly expensive suppliers, unusually expensive ingredients, inappropriate portion control, overproduction, spoilage, returns to the kitchen and employee consumption, theft, and many other factors. To put it more simply, these are mostly issues of control ... purchasing control, inventory control, storage control, and production control ... and the constant ongoing monitoring of those items
This is the most significant thing you can do to improve costs ... and is much too involved to illustrate in this post ... but someone will have to know it well enough to affect that change. As far as overall profitability ...
Correcting a lack of profitability is like constructing a house.
You start with the foundation and build successively on top of each correction ... and they must be in an order that generally allows each correction to affect subsequent analysis and subsequent corrective action ... Here is a very general example of a schedule of corrections and their order of implementation
... this is not written in stone and the reality is certainly more nuanced and involved than what I've written here ... but it gives you the general idea:
1) Correct inadequate or problem employees ... hiring and training personnel including management. Training people to follow the rules. ALL the rules and procedures ... and without exception.
2) Re-instituting controls - rock solid purchasing, inventory, storage, and production controls. Also re-instituting sound standard operational procedures
in all areas.
3) Develop a stable period of operations (including menu mix) so that baseline numbers can be established. (necessary for factors in CVP analysis such as breakeven, covers required, turnover, and so forth.
4) Re-do all analyses regularly and revise constantly ... particularly Breakeven Analysis (Covers to Breakeven, etc) .... understand how a desired level of profit is "plugged in" to give various profit scenarios (how to actually run all the financials is a bit too involved really for this post.)
Establish an Operating Budget and do regular Budget Deviation Analysis ...
As far as the Operating Budget, the IMPORTANT thing to understand about it is that unlike a household budget, Operating Budgets use *forecasts* of sales indexed expenses. Specifically this requires you to forecast sales and estimate the expenses that might be incurred to *get* to those sales levels.
Consider using a Cash Flow pro-forma if you need a tighter grasp of cash flow ... cash flow problems sink more businesses than any other single factor.
Use an Advertising Budget which allows us to determine the cost of advertising to generate a specific level of sales ... read: plugging up the slack periods ...
A strong game of offense is just as important as a good defensive game.
5) Next determine how badly deficient your volume actually is and why.
There are a number of Cost/Volume/Profit calculations (as an example, those relating to the number of covers for given periods etc), that are a flag, indicating that corrective action may be effective in areas such as Sales per Cover, slack in Average Covers for a particular day/time/event/promotion/etc; and Turnover restrictions due to menu items and customer handling etc etc.
This volume analysis is the part of the "process of elimination" that will lead you to exactly what you can do to address critical breakevens right away.
It tells you whether you can just focus in the immediate term on modifying sales patterns or whether other things such as costs, menu mix and pricing will have to be modified
so that you are meeting breakeven. (THIS is where more drastic cutting of expenses and modifying your menu comes in!!) (You don't want to go the route of changing the menu and pricing right away if you can help it ... much of your "baseline" data and calculations are subject to what is on your menu ... frequent, significant changes in the menu throw off other analysis that relies on a stable sampling period.
Basically, it's just unsound to jack your menu and prices around when the superceding problem is other stuff.)
6) So finally NOW you can re-cost/price the menu. Profitability involves a lot of interrelated, "circular" analysis. Your calculations to this point lead you "backwards" (so to speak) to the pricing and mix for your menu.
As you might imagine there is a lengthy list of corrections along the entire process, both to the way you handle expenses and the way you increase sales and revenue.
The actions I've touched on are in-depth and require specific know how. People who manage to stay afloat on the basis of good revenue, without having a tight ship are missing out on substantial profitability ... and if revenue dries up for whatever reason ... they are finished.
You mentioned that you are not a restaurant person by background ... that's OK because it is the job of either the Executive Chef and his/her staff ... or the staff and the Kitchen Manager (or the hands-on owner) to know this stuff and if they don't ... people have to be brought on board who do.
In the final analysis ... your highest activity is to be a great employer of people ... being able to find them, verify their abilities and incorporate them into your operations. It all comes down to the employees.
If there is one solution ... that is it. (Yes, I used to do this for a living)