By Sam Kusinitz, Toast
Maintaining a healthy business is no small feat, especially if you’re a restaurant owner or manager.
In an industry marred by overwhelming staff turnover, and a 26 percent failure rate for new restaurants in the first year, it’s hard to keep your head above the boiling water.
Tracking and evaluating performance metrics
is imperative to both sustain and grow a healthy business. Let’s be real: Change won’t happen overnight, but by setting your sights on the bigger picture and listening to what your data tells you, you’ll be able to increase both the efficiency and profitability of your restaurant.
Get your goggles ready, we’re about to dive deep into some data. There are six key restaurant performance metrics restaurant owners need to track, and how to calculate them.
1. Your break-even point
Your break-even point is one of the first numbers you should calculate. This number lets you pinpoint how much you must make in sales to earn back an investment. The number can then be used to forecast how long it will take to earn that money back. Your break-even point is a must-have if you're looking for investors or opening a new restaurant.
You can also use the break-even point to justify a new or big purchase, like a commercial kitchen redesign or a new marketing campaign. Saying something will cost $20,000 is one thing, but saying it will pay for itself in three months is a better way to put that number in perspective.
Calculating the break-even point
If your restaurant does $10,000 in sales one month, pays $3,000 in variable costs and $4,000 in fixed costs, your break-even point in dollars is $5,714.29 for that month. That means you’ll start earning a profit after selling $5,714.29 worth of food and drink. The equation for break-even point is as follows:
Total Fixed Costs / ( (Total Sales - Total Variable Costs) / Total Sales) = Break Even Point
In this scenario, $10,000 (sales) minus $3,000 (variable costs) equals $7,000. And $7,000 divided $10,000 is 0.7, and $4,000 (fixed costs) divided by 0.7 gives you $5,714.29.
2. Your cost of goods sold (COGS)
The cost of goods sold refers to the cost required to create each of the food and beverage items that you sell to guests. In this way, COGS is really just a representation of your restaurant’s inventory during a specific time period. In order to calculate COGS, you need to record inventory levels at the beginning and end of a given period of time, plus any additional inventory purchases.
It is important to track COGS because it’s typically one of the largest expenses for restaurants. By identifying ways to minimize these costs, like negotiating better rates with your food distributor or selecting in-season ingredients, it's possible to significantly increase margins. Every dollar you shave off your COGS is another dollar added to the restaurant’s gross profit.
Calculating the cost of goods sold
Let’s say you have $5,000 of inventory at the beginning of the month, you purchase another $2,000 during the month, and you end the month with $4,000. Your cost of goods sold for that month is $5,000 (beginning inventory) plus $2,000 (purchased inventory). Subtract $4,000 (final inventory) to get $3,000. The equation for COGS is as follows:
(Beginning Inventory + Purchased Inventory) - Final Inventory = Cost of Goods Sold (COGS)
3. Your overhead rate
Fixed costs are good to know because they are straightforward. One bill, one price. But wouldn't it be helpful to know how much those fixed costs are on an hourly or daily basis?
An overhead rate is a form of cost accounting that helps you understand how much it costs to run your restaurant when looking only at fixed costs.
Calculating overhead rates
Let's say your fixed costs for the month are $10,000 total and your restaurant is open 80 hours per week in a 31-day month. Assuming you are open every day, your overhead rate would be $28.23 per hour and $322.58 per day.
However, these numbers would go up if you were calculating for a shorter month, like the 28-day February, because you are allocating the same amount of money over fewer working hours. In that case, costs would go up to $31.25 per hour and $357.14 per day. The equations for overhead rates per day and per hour are as follows:
Per Day: Total Indirect (Fixed) Costs / Days in the Month = Overhead Rate
Per Hour: Total Indirect (Fixed) Costs / Total Number of Hours Open* = Overhead Rate
*Calculate your hours open by multiplying your hours open per week by the number of weeks per month.
4. Your prime cost
[caption id="attachment_27714" align="alignright" width="410"]
Learn more about TSheets shift scheduling software.[/caption]
A restaurant’s prime cost is the sum of all its labor costs (salaried, hourly, benefits, etc.) and its COGS. Typically, a restaurant’s prime cost makes up about 60 percent of its total sales
. Prime cost is an important metric because it represents the bulk of a restaurant’s controllable expenses. While you can't control fixed rent costs on a weekly or monthly basis, you can find ways to decrease prime costs by managing labor carefully.
For instance, smarter shift scheduling software
and accurate-to-the-second time tracking can help restaurant owners lower their prime costs exponentially. Thus, a restaurant’s prime cost represents the primary area an owner can optimize to decrease costs and increase profits.
Calculating the prime cost
Now that you know how to calculate COGS, calculating the prime cost is straightforward. Add up all your various labor-related costs. These costs include salaried labor, hourly wages, payroll taxes, and employee benefits. Then add the sum of your labor costs and your COGS to find your restaurant’s prime cost. The equation for prime cost is as follows:
Labor + COGS = Prime Cost
5. Your food cost percentage
Food cost percentage represents the difference between the cost of creating a specific menu item (the cost of all of the ingredients in a dish) and the selling price of that item.
Calculating food cost percentage
If it costs $3.28 to prepare your salmon dish and you sell it for $15, your food cost percentage would be 21.9 percent. Although it depends on the novelty aspects of your dish, your guests’ expectations, and your restaurant’s service type, typically a restaurant’s food cost percentage should be between 28 and 35 percent
You can calculate your food cost percentage for all goods sold by dividing your total food costs by your total sales during a set time period. If you understand your food cost percentage for each of your menu items, you can choose to upsell or design your menu to promote the items that contribute the most to your revenue and bottom line. The equation for food cost percentage is as follows:
Cost to Prepare an Item / Sale Price for That Item = Food Cost Percentage
6. Your gross profit
Gross profit shows the profit a restaurant makes after accounting for its cost of goods sold. The resulting gross profit represents the money available for profit and for paying off fixed expenses. To calculate gross profit, subtract the total cost of goods sold during a specific time period from your total revenue (the total sales of food, beverages, and merchandise).
Calculating gross profit
Let’s say a restaurant's total sales number for the month is $15,107, and its cost of goods sold is $5,293. The restaurant's gross profit for the month is equal to $15,107 (total sales) minus $5,293 (COGS), or $9,814. The equation for gross profit is as follows:
Total Sales - COGS = Gross Profit
7. Your employee turnover rate
Turnover rate is the percentage of employees who leave or are fired and need to be replaced during a specific time period. The restaurant industry has a notoriously high employee turnover rate
compared to all other industry segments.
In the fast-paced food service environment, high employee turnover can hurt operational efficiency and require a lot of time and attention to get new hires up to speed.
Calculating employee turnover rates
Start by adding the total number of employees at the beginning and end of a given period of time. Then divide the sum by 2 to find the average number of employees during the set period. Take the difference between the number of employees at the beginning and end of the set time frame (the number of lost employees) and divide it by the average number of employees to get the turnover rate.
For example, if you have 10 employees at the beginning of a given month and eight at the end, the equation would add 10 and 8 to get 18. Eighteen divided by 2 is 9, and 2 divided by 9 is .222. To calculate the turnover rate, simply multiply the quotient (.222) by 100 to get the turnover percentage. So, in this example, the turnover rate is 22.2 percent. The equation for employee turnover rate is as follows:
(Starting Number of Employees + Ending Number of Employees) / 2 = Average Number of Employees
Lost Employees / Average Number of Employees = Employee Turnover Rate
Need a hand with these calculations?
To gain true business insight and value from these metrics, restaurant owners should get in the habit of calculating and recording them regularly, on a weekly or monthly basis. Over time, this allows restaurant owners to compare their establishment's current performance to historical data to identify problem areas and trends.
Many restaurant POS systems, like Toast POS
, calculate these metrics automatically, so you don't have to. Learn more by comparing POS systems
, and choose the right one for your business.