If you’re a restaurant owner, there are performance metrics you must track and evaluate over time to understand the health of your business. By regularly calculating performance metrics, restaurant owners can spot negative trends and identify areas that require improvement before they get out of hand.
Increasing a business's efficiency and profitability doesn't happen overnight. Lots of moving parts are involved in operating a restaurant, including fixed costs and revenue channels that ultimately influence net profit or loss. You simply cannot make one change and improve your operating margins.
Instead, operating a profitable enterprise requires constant tinkering and testing until you find the best practices for your business. Below are seven metrics you can use to measure the success of your restaurant:
Your break-even point is one of the first numbers you should calculate. This pinpoints 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 reach that goal. A break-even point is a must-have if you're seeking investors or opening a new restaurant.
You can also use break-even to justify a big expense. Saying something will cost $20,000 is one thing, but saying it will pay for itself in 3 months is a better way to put that number in perspective.
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 start earning profits after selling $5,714.29 worth of food & drink.
The equation for the break-even point is:
Total Fixed Costs ÷ ( (Total Sales - Total Variable Costs) / Total Sales) = Break Even Point
In this scenario, $10,000 - $3,000 (sales minus variable cost) equals $7,000. $7,000 / $10,000 = 0.7, and $4,000 (fixed costs) divided by 0.7 gives you $5,714.29.
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 is one of the largest expenses for restaurants. By identifying ways to minimize these costs, it's possible to significantly increase margins. Every dollar you shave off COGS is another dollar added to the restaurant’s gross profit.
If you have $5,000 worth of inventory at the beginning of the month, you purchase another $2,000 during the month, and end the month with $4,000 worth of inventory left over, your cost of goods sold for that month is $5,000 (beginning inventory) + $2,000 (purchased inventory) - $4,000 (final inventory) = $3,000.
The equation for COGS is:
Beginning Inventory + Purchased Inventory - Final Inventory = Cost of Goods Sold (COGS)
Fixed costs are good to know because they are straightforward. One bill, one price. But it's helpful to know how much those fixed costs are on an hour-by-hour or day-by-day basis. An overhead rate allows you to do that. 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.
Let's say your fixed costs for the month were $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 and $357.14 per hour and day, respectively.
The equation for overhead rate is:
A restaurant’s prime cost is the sum of all of its labor costs (salaried workers, hourly workers, benefits, etc.) and its COGS. Typically, a restaurant's prime cost makes up about 60% 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 the price of rent, you can find ways to decrease prime costs by managing labor carefully. A restaurant’s prime costs represent the area an owner can target to decrease costs and increase profit.
Now that you know how to calculate COGS, figuring your prime cost is straightforward. Add up all of your various labor-related costs. These costs include salaried labor, hourly wages, payroll tax, and benefits. Then, simply add the sum of your labor costs and your COGS to find your restaurant’s prime cost.
The equation for the prime cost is:
Labor + COGS = Prime Cost
Food cost percentage represents the difference between the cost of creating a specific menu item (cost of all ingredients in a dish) and the selling price of that item.
If it costs $3.28 to prepare your salmon dish and you sell it for $15, your food cost percentage would be 21.9%. 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 land between 28% and 35%.
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:
Food Cost / Total Sales = Food Cost Percentage
Gross profit shows the profit a restaurant makes after accounting for its cost of goods sold. The resulting gross profit represents the money available to put towards paying off fixed expenses and profit. 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).
If 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) - $5,293 (COGS) or $9,814.
The equation for gross profit is:
Total Sales - COGS = Gross Profit
Turnover rate is the percentage of employees that need to be replaced during a specific time period. The restaurant industry has a notoriously high employee turnover rate compared to other industries. 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.
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 and divide the number of employees who left by the average number of employees.
The equation for the employee turnover rate is:
If you have 10 employees at the beginning of a given month and 8 at the end the equation would look as follows:
(10 + 8) / 2 = 9
2 / 9 = .222
To calculate your turnover rate, simply multiply the quotient (.222) by 100 to get the turnover percentage. So, in this example, the turnover rate is .222 * 100 or 22.2%.
In order to gain true business insight and value from these metrics, restaurant owners should get in the habit of calculating and recording them on a weekly or monthly basis. At that point, you can compare your business' current performance to historical data to identify problem areas and trends.
Many POS systems for restaurants calculate these metrics automatically, so you don't have to. Learn more by comparing POS systems and choosing the right one for you.