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Updated: March 27th, 2020
Let’s get this out of the way. There is no such thing as a yearly restaurant budget check.
When it comes to your bar or restaurant budget, you can’t set it and forget it. Constant tracking and analysis is essential for a profitable business: from calculating your prime cost each week, to keeping tabs on marketing every month. By monitoring the following seven items, you can optimize your business budget—maximizing opportunities for profit, and minimizing threats to your bottom line.
If you’ve been ignoring your restaurant budget over fears that tracking takes too long, there’s one tool that can help immediately: a point of sale (POS) system. A POS system can automatically collect a good portion of the data needed for accurate budget tracking. You’ll join the 81 percent of restaurants who utilize a POS system according to the National Restaurant Association (NRA) Mapping the Restaurant Technology Landscape 2016 Report.
Get in Prime Position: The Most Important Number to Track
WHY TRACK IT: Prime cost should be your primary focus. This number quickly reveals the health of your restaurant through a ratio of sales to costs. Costs include what your business pays for food, beverages, and labor. To obtain your prime number, divide your total cost of goods sold (also known as COGS) by your total sales. Ideally, your prime cost percentage will fall around 60 percent, the industry standard. That means your gross margin on sales is roughly 40 percent.
WHEN TO TRACK IT: Once your restaurant budget is set, track your prime number early and often…at least once a week. Many restaurants calculate prime on Sunday nights or Monday mornings as inventory is typically at its lowest point (making it easier to track) and sales have ceased.
Only checking your prime number annually is a no-no. If your average margin was 25 percent all year, you can’t take action after the fact. Maybe your sales were down for an entire season, or your distributor raised costs on the steaks you’ve been ordering for years. You could have launched promotions to bring in more foot traffic, or asked your distributor to source steak from a different vendor, switch to a less expensive cut, or informed servers to push other menu items. What you don’t know can hurt your bottom line…
Keep Your COGS Running Smoothly…
WHY TO TRACK IT: Otherwise known as “Cost of Sale” and “Cost of Revenue,” your COGS (Cost of Goods Sold) is a critical number to track. COGS refers to your costs: what you purchase from your distributors as well as your inventory (see #4) and it should be broken down into food (and non-alcoholic beverages) and alcoholic beverages. Not only is COGS needed to compute prime cost, well-tracked COGS can pinpoint where food or beverage costs are eating into your margin.
If you know your COGS, you can adjust your restaurant menu to ensure items are priced high enough to maintain the margin set in your budget. You’re also in a power position to negotiate with your distributor if you notice increases in their costs.
WHEN TO TRACK IT: Like your prime cost, COGS should be tracked weekly at the same time on a set day. Industry experts estimate that regular COGS monitoring can result in up to 4% savings.
Divide COGS into Categories to Conquer Rising Food Costs
WHY TRACK IT: While tracking COGS gives you a total cost for food and beverages, it’s worth tracking costs by category to spot any rising food costs—or to take advantage of a dip in pricing. Ask your distributors to provide you with invoices divided into food categories such as produce, seafood, beef, dairy, and so on. This saves time for your bookkeeper and sends a subtle message to your foodservice distributor that you’re watching costs.
You should also track commodities in the market, such as meat and eggs, in the news and at the USDA website. For example, in March 2017, beef costs were down nearly 5% from March 2016 – you could have adjusted your menu to include more beef and increase your margin.
WHEN TO TRACK IT: Tracking category costs and commodities should be done monthly and should be compared to previous months, and previous years. That way you’ll spot any increases and can adjust your menu or next month’s order accordingly to stay within budget.
Power Accurate COGS with Perpetual and Periodic Inventory
WHY TRACK IT: Knowing your exact inventory is essential for correct COGs and it’s as easy as 1,2,3. First, obtain your inventory at the week’s start. Second, add your purchases. Third, deduct your inventory at the week’s end. You now have an accurate COGS number.
Accounting for inventory when calculating COGS reveals valuable restaurant budget insights: If you keep ending the week with extra produce, maybe your salads aren’t selling and the recipes need to be re-worked. Or, you’re simply ordering too much so you should adjust your budget. If you run out of produce midweek, is it because your kitchen staff isn’t following portion control standards? When you know your inventory, you gain insight. But how do you track inventory? Perpetual or periodic?
Most POS systems empower you to keep a perpetual inventory. When a menu item is sold and when deliveries arrive, inventory is automatically adjusted. But don’t rely solely on perpetual inventory; there’s no substitute for a weekly physical inventory (periodic). Periodic inventory will uncover discrepancies beyond data entered through your POS. Unfortunately, 75% of restaurant employees steal at least once from their employer. The thief won’t enter that “sale” into your POS. Taking a physical inventory also shows if food spoilage or kitchen errors are to blame for a drop in inventory levels.
WHEN TO TRACK IT:Take periodic inventory each week prior to performing your COGS calculation. Instruct your staff to manually enter any food loss into your POS to make your perpetual inventory more accurate. Also, by alerting your staff that you’re taking inventory each week, you’ll encourage them to be more vigilant with food waste—and you may deter any would-be thieves.
Identify Trends and Opportunities with Sales Specifics
WHY TRACK IT: One of the biggest mistake restaurants make when tracking a budget is neglecting to create sub-categories under sales. Without sub-categories, you can’t track trends. For example, if you simply track “food sales”—but don’t differentiate between dine-in, private parties, delivery/takeout, and catering—you’ll miss pivotal restaurant budget factors. Maybe takeout sales are getting stronger each month, while dine-in business is stagnating. You could then look to trim labor costs at the front of the house, while ramping up kitchen staff to accommodate a boom in takeout orders.
For example, in sales, separate out the type of sale into the following categories, each divided by daypart:
Food: Dine-in, Private Parties, Delivery/Takeout, Catering
Beverage: Wine, Liquor, Draft Beer, Bottle Beer
Merch: Apparel, Sauces, etc.
WHEN TO TRACK IT: By setting up sub-categories in your POS, you can track sales specifics on an ongoing basis.
Get Smart About Staffing
WHY TRACK IT: According to the NRA’s 2016 Restaurant Operations Report, labor costs ate up 1/3 of sales last year— and labor costs are on the rise for 2017. Watch for creeping labor costs in your restaurant budget and see if you’re overstaffing. Or, perhaps you need to hire more servers, to avoid costly over-time hours and an overworked staff. To make tracking labor costs easier, deploy a digital scheduler, now used by a third of today’s restaurants according to the 2016 Mapping the Technology Landscape Report from the NRA.
When calculating your prime cost, you need to know labor costs beyond just payroll. Be sure to include benefits such as health insurance. To offset rising labor costs, you could shop around for better rates on restaurant insurance and payroll fees.
WHEN TO TRACK IT: Take a good look at your labor costs each week to see if you’re going over budget since it’s likely your biggest cost along with COGS. A bump in labor costs could be a good thing if your sales are also rising. If not, you could lose thousands in a month by paying for more employees than you need.
Is Your Marketing Hitting the Mark? Track It and See…
WHY TRACK IT: Most restaurants spend three to six percent of their sales revenue on marketing, and nearly double that if they’re opening a new location. If the thought of tracking your marketing induces a headache, you’re not alone: In 2016, 43% of marketers stated that proving the return on investment (ROI) of their marketing activities is their top marketing challenge, second only to the challenge of getting quality leads.
But the rise of automation in digital marketing (nearly 7 in 10 businesses are using it or plan to use it) is making it easier to track performance while trimming manual marketing costs from your restaurant budget. With software like Marketo, automation can be set up for emails, text messages, and social media marketing. For example, automation can make it easier to collect emails with a quick, automatic request to subscribe as soon as someone visits your website. When subscribing, automation tools collect very basic information such as their birthday or if they’re interested in knowing about special events. Then, you can create email templates complete with special offers like a free appetizer on their birthday or an invite to an event—and in a few clicks, trigger these emails to go out automatically. Now, you’re able to compare event attendance or redemption rates of the coupon to the amount of emails sent to get a percentage of effectiveness. Even if you don’t use automation, you can still track percentage of effectiveness by comparing promotional spend against redemption of the offer. If you run a radio ad or direct mail campaign promoting a special 3-course prix fixe menu, use your POS to track how many orders were placed against what you spend on the campaign.
WHEN TO TRACK IT: You should track the performance of your promotional marketing offers each month by comparing promotional spend against redemption of the offer. Other marketing strategies such as content marketing (blogs and newsletters) are trickier to track, but still powerful ways to attract new business. To measure blog or newsletter effectiveness, you could include a link to a special offer, then compare redemption of that offer against your spend.
This article is from our friends at Buzztime.
Michael Jones is a Senior Editor for Funding Circle, specializing in small business loans. He holds a degree in International Business and Economics from Boston University's Questrom School of Business. Prior to Funding Circle, Michael was the Head of Content for Bond Street, a venture-backed FinTech company specializing in small business loans. He has written extensively about small business loans, entrepreneurship, and marketing.